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Tempest in a Teapot – New Ground for Setting Aside Construction Arbitration Awards in Hungary

Tempest in a Teapot – New Ground for Setting Aside Construction Arbitration Awards in Hungary

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In June 2023 Hungary introduced a new ground for annulling construction arbitration awards, which applies where arbitrators fail to deliberate the opinion of the Performance Certification Expert Body. Will this amendment affect so negatively Hungarian construction arbitrations as believed by many commentators? This article argues that paradoxically, the new law can even strengthen the position of arbitration as alternative dispute resolution method in construction matters.

New Ground for Setting Aside Construction Arbitration Awards

With effect from 5 June 2023, the Hungarian legislator introduced a new ground for setting aside arbitral awards.  According to the new Section 47 (2) bc) of the Arbitration Act, the court may set aside an arbitral award in case it considers that the tribunal failed to assess in its award the opinion of the Performance Certification Expert Body (PCEB) exhibited by either party, including the reasons for its assessment or exclusion as evidence.

The new ground for setting aside cannot be opted-out of, it shall be applied in “ongoing cases”. and it can be examined by the court ex officio, similarly to the breach of public policy or non-arbitrability of the dispute.

An awkward legislative step in a Model Law jurisdiction

In the field of arbitration Hungary is a so-called “Model Law jurisdiction” since it harmonized its arbitration law with the UNCITRLAL Model Law on International Commercial Arbitration in 1994 and in 2017.

Since the provisions of the UNCITRLAL Model Law relative to the grounds of setting aside of arbitral awards were carefully harmonized with Article V of the New York Arbitration Convention, it cannot be disputed that deviating from this unified legal framework is an awkward legislative step in a model law jurisdiction, like Hungary. At the same time, the fears in relation with the potential effects of the new law are at least partially unfounded.

Fewer Surprise Decisions

In case PCEB-based litigations and arbitration are compared, an asymmetric legal regime had been in place for PCEB opinion-based construction disputes in Hungary until the recent amendment.

On the one hand, the asymmetric regime allowed arbitral tribunals to fully disregard a PCEB opinion, by rendering an award even without mentioning it, without any consequence. On the other hand, in a PCEB-based litigation the same amounted to a substantial procedural breach, justifying new first instance court proceedings.

Watching the above asymmetry from the perspective of the users of dispute resolution services, it is easy to see that under the former regime the risk of surprise decisions was higher in case of PCEB-based arbitral proceedings than in PCEB-based litigations.

If there is something which can deter parties from arbitration it is certainly the risk of a so-called surprise award, rendered in a case which was started based on a supporting PCEB opinion, and which was finally lost by the claimant for unknown reasons.

Since for the users of dispute resolution, arbitration is always an alternative to state court litigation, it is easy to see that the recent amendment, trying to eliminate “surprise arbitral awards” rather strengthens the status of the former.

More Well-Reasoned Arbitral Awards

From the perspective of a would-be arbitral tribunal, the new law does not seem to be so dangerous. A prudent arbitral tribunal that faces a PCEB opinion exhibited by any party during the proceedings will presumably give at least some reasons in the award for accepting or disregarding it as evidence.

Since the reasons given by the tribunal, be they logical or not, cannot be reviewed by the annulment court, the new provision will not be a real threat for arbitrators who find the time to draft a well-reasoned award.

The Role of the European Convention in cross-border cases

When it comes to the recognition and enforcement of Hungarian arbitral awards abroad, the picture is not as daunting as some commentators points out, since the European Arbitration Convention considerably narrows down the grounds for rejecting the recognition and enforcement of arbitral awards by reason of being set aside in the country of origin.

According to the European Arbitration Convention, the grounds that can be considered as basis of annulment of the foreign award by the state court acting in the recognition and enforcement phase are almost the same, like the grounds in Article V (1) of the New York Convention.  Of course, the failure of deliberating a PCEB opinion is not on that list.

Situated in the heart of Europe, the most important commercial partners of Hungary are states that are also parties to the European Convention. In these jurisdictions, the potential annulment of the Hungarian award based on the new law cannot be relied on as an obstacle for recognition and enforcement.

Potential Retroactive Effect – Not a Real Risk

Last but not least, some critics highlighted the potential retroactive effect of the new law. It is true that the pure grammatical interpretation of the text opens the door for an expansive construction allowing the retroactive application of the new provision.

However based on the logical and systemic interpretation of the text, the better view is that arbitral awards rendered before 5 June 2023 cannot be set aside for not respecting a legal provision entering into force on that day.

Conclusion

To sum up the above, even if introducing a new ground for setting aside is an awkward step in a Model Law jurisdiction like Hungary, the amendment presumably will not cause problems in ongoing annulment proceedings. In addition, it will not be an obstacle to recognize and enforce Hungarian arbitral awards in jurisdictions that are parties to the European Convention.

When it comes to the potential positive effects, due to the new law, the risk of surprise arbitral decisions is decreased, and there will be presumably more well-reasoned arbitral awards in Hungarian construction arbitrations.  Is that such a big problem? I do not think so.

By Richard Schmidt, Managing Partner, Smartlegal Schmidt & Partners

Hungary Knowledge Partner

Nagy és Trócsányi was founded in 1991, turned into limited professional partnership (in Hungarian: ügyvédi iroda) in 1992, with the aim of offering sophisticated legal services. The firm continues to seek excellence in a comprehensive and modern practice, which spans international commercial and business law. 

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