Finland: Arbitrator’s Liability on Quashed Arbitral Award by the Supreme Court of Finland

The claimants had in 1993 sold their shares in a limited liability company to a construction company Puolimatka Oy ("Puolimatka") under a sale and purchase agreement that contained an arbitration clause. After the transaction a dispute arose and a three-member arbitral tribunal was convened for the purpose of resolving the matter.

After the arbitral award was made, the claimants became aware that the chair of the tribunal ("Arbitrator X") had prepared expert opinions for both Puolimatka and to banks owning shares in the company. The opinions drafted for Puolimatka were made prior the arbitral proceedings but four of the opinions written on the banks’ instruction were prepared during the proceedings. The banks were not actual parties in the arbitral process but rather acting as interveners on Puolimatka’s behalf.

This knowledge prompted the claimants to initiate proceedings to revoke the arbitral award, in which attempt they succeeded as the Helsinki Court of Appeal issued its judgment in 1997.

After the award was revoked, the claimants initiated another court case, this time for the purpose of obtaining compensation from the Arbitrator X whose disqualification had made the first arbitral process, de facto, gratuitous.

Several questions of law arose, e.g. could a member of an arbitral tribunal be held personally liable for costs and expenses of an arbitration process that has been revoked due to that arbitrator’s disqualification? If the arbitrator could be held liable, how and on what grounds should his liability be assessed?

As a starting point, the Supreme Court held that an arbitrator’s liability should arise only under extraordinary circumstances, as a risk for liability might compromise the integrity of judicial proceedings. Nevertheless, the finality of an arbitral award presents additional requirements for the arbitrator’s impartiality and integrity and the possibility of personal liability cannot be precluded altogether.

The connection between a party in arbitral proceedings and an arbitrator must be deemed analogous with a contractual relationship. Accordingly, the potential liability (if any) should be assessed under the rules governing contractual rather than extra-contractual liability. The general Tort Liability Act (412/1974, as amended) is then generally applicable in assessing the existence and extent of such liability. Notably, the Arbitration Act (967/1992, as amended) does not contain any provisions on the liability of an arbitrator.

Arbitrator X had an obligation to disclose that he had accepted assignments from entities involved in the arbitral proceedings. The Supreme Court held that such a disclosure would have prevented damages to claimants, as they then could have made a process claim on the arbitrator’s incapacity. The Supreme Court interpreted the lack of notification as an indication establishing clear causal connection between the Arbitrator X’s default and ensuing damages.

Overruling the lower courts in a split 4-1 vote, the Supreme Court held that Arbitrator X is liable to compensate claimants’ for damages caused by the revocation of the arbitral award. As the lower courts had not assessed the validity of the presented monetary claim (some EUR 170,000.00), the Supreme Court transferred the case back to the Vantaa District Court as the first instance to rule on the appropriate amount of compensation.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.