The Arbitration Agreement – New Solutions and New Questions

03_The Arbitration Agreement New Solutions and New Questions[english]

The Amending Act to the Code of Civil Procedure (the CCP Amending Act) which introduced amendments also to the International Commercial Arbitration Act (ICAA) was promulgated earlier this year. The amendment to the CCP refers to arbitration agreements, envisaging a broader scope of non-arbitrable disputes for the purposes of consumer protection. The previous exemption from the scope of arbitration covered disputes relating to rights in rem or possession of real estate, alimonies and employment relationships, whereas the amendment has added disputes to which one of the parties is a consumer within the meaning of § 13(1) of the Additional Provisions of the Consumer Protection Act (CPA). For the purposes of the CPA, the term “consumer” means “any natural person acquiring goods or using services which are not intended for carrying out an economic or professional activity, and any natural person who, being a party to a contract within the meaning of this Act, acts outside the scope of his or her economic or professional activity”.

The amendment does not contain any explicit wording on how it would apply to the current practices of banks to conclude arbitration agreements in their mortgage loan contracts with natural persons. That type of loans was regulated in the Real Estate Consumer Credits Act (promulgated in The State Gazette, No 59 of 29 July 2016; amended, The State Gazette, No 97 of 6 December 2016). Similarly to the CPA, that law contains a definition of the term “consumer” (§ 1(20) of the Additional Provisions). For the purposes of that law, “consumer” means “ay natural person acting outside the scope of his or her commercial, economic or professional activity”. Although the amendments to the CCP does not make any reference to the term “consumer” within the meaning of the law concerning mortgage loans, the comparative analysis of the two definitions leads to the conclusion that the disputes concerning mortgage loan contracts, too, are non-arbitrable and that the arbitral awards on such disputes would be null and void.

The amendment to the CCP entered into force on the third day following the date of promulgation in The State Gazette, i.e. on 28 January 2017. Pending arbitration proceedings will be completed in accordance with the earlier provisions, except for proceedings on non-arbitrable disputes which will be dropped. The relevant arbitral authority should drop the case ex officio, without any explicit objection by either party to the proceedings. Where the arbitral authority fails to drop pending proceedings on such a dispute, the arbitral award would be null and void.

The nullity of the award is explicitly set out in the amendment to the ICAA as a penalty resulting from the arbitration hearing of a non-arbitrable dispute.

Another essential amendment to the ICAA relating to the changed scope of arbitrable disputes is the removal of one of the legal grounds on which it was possible to request the Supreme Court of Cassation to repeal an arbitration agreement. It is no longer possible to repeal an arbitration agreement on grounds of claims that the subject-matter of the dispute is not arbitrable or that the arbitral award is contrary to the public policy of the Republic of Bulgaria (Article 47(1)(3) ICAA). The deletion of the first part of the grounds for repeal, i.e. where the subject-matter of the dispute is not arbitrable, could be explained with the insertion of the new paragraph 2 in Article 47 which reads explicitly that any arbitral awards on such disputes shall be null and void. It should be noted at this junction that the nullity of arbitral awards will not be upheld by the Supreme Court of Cassation. Instead, it would be the competent court requested to issue a writ of execution on the basis of such an award that would be in charge of that action. In accordance with the amended CPP, the competent court is no longer the Sofia City Court but the regional court within the area of which the debtor’s permanent address or the principal office of business is located.

Following up on the issue of repealing an arbitral award on grounds of its being contrary to the public policy of the Republic of Bulgaria, it should be noted that the amendment does not cover these cases. Neither the explanatory memorandum to the bill nor the verbatim reports of the deliberations on the floor of the National Assembly make it clear why it was decided to remove the option for challenging an arbitral award on grounds that it would be contrary to the public policy of the Republic of Bulgaria. Moreover, in accordance with Article V(2)(b) of the Convention on the Recognition and Enforcement of Foreign Arbitral Awards (the New York Convention), the recognition or enforcement of an arbitral award may be refused if the competent authority in the country where recognition and enforcement is sought finds that the recognition or enforcement of the award would be contrary to the public policy of that country. As a result, the legal framework would allow the refusal of recognition or enforcement of a foreign arbitral award by a Bulgarian court on grounds of its being contrary to the public policy of the Republic of Bulgaria but it would not be possible to repeal an arbitral award given in accordance with an on the grounds of the ICAA. We expect this issue to be re-regulated in the existing legislation or resolved in the case law of the Supreme Court of Cassation.