1. Introduction

On 24 August 2017, the Regional Court in Prague handed down a ruling, under reference number 28 Co 263/2017-103, halting enforcement procedure pursued by a finance company against one of its debtors. As explained below in this article, the judgment could pave the way for the discontinuance of tens of thousands of enforcement orders that, until now, had been impossible to contest.

In this particular case, the crux of the matter was the validity of the arbitration agreement or, more specifically, the issue of whether the arbitrator had the jurisdiction to settle the dispute. On taking evidence, the court found that, in the case in point, the award had been rendered by an arbitrator who – the court concluded – had been economically dependent on the finance company. They had an understanding that he would always rule in favour of the finance company in return for a stream of further cases, subject to payment of a fee. It was then found that the finance company had established this practice with multiple arbitrators, who would deal with a non-stop series of thousands of arbitration agreements under which the company sought unreasonably severe penalties and interest from debtors.

In this case, the court decided that the arbitration agreement was incurably void as contra bonos mores because, in these circumstances, the arbitrator’s business relationship with the finance company made it impossible for him to be independent and impartial.

2. Unscrupulous and immoral

In the case at hand, a client borrowed CZK 50,000 at interest of 126.6% per annum, requiring her to pay CZK 138,924 over three years. After repaying most of her debt, she fell into arrears, triggering an extra 0.25% penalty per day on the outstanding principal. The finance company forwarded this claim to the arbitrator, who instantly pandered to its request and commissioned a bailiff to recover the debt.

After scrutinising the prevailing circumstances of these cases, the court arrived at the following conclusions:

• The arbitrator was not independent, as a sizeable share of his income came from the finance company (i.e. he was economically dependent on it)
• The debtor had no say at all in the choice of arbitrator
• At the time she entered into the arbitration agreement, the debtor did not know that the arbitrator was economically dependent on the finance company
• The choice of arbitrator worked to the detriment of the consumer (the debtor)

For the reasons outlined above, the court concluded that the arbitration agreement was incurably void as contra bonos mores. Consequently, the court found that the arbitrator was not competent to hear the case, prompting it to halt the enforcement procedure and award the debtor costs.

3. Those who paid larger sums may seek the return of their money

By excluding its debtors from the process of selecting an arbitrator, the finance company breached the principle of the requirement to protect the weaker party – the consumer. Before the credit contract was even signed, the finance company would make its clients sign a pre-prepared arbitration agreement preventing debtors from intervening in the contract in any way. On top of this, debtors were misled as they were only presented with a limited set of arbitrators (13 people in all) and were not advised of their right to play a role in the choice of arbitrator or of the option not to sign the agreement.

In this light, further clients of this company may come forward to seek the return of their money or the discontinuance of pending enforcement procedure.

4. Conclusion

In view of the above, it can be concluded that, if a dispute is heard by an arbitrator who is economically dependent on one of the parties, the Regional Court in Prague is of the opinion that the independence of such an arbitrator cannot be guaranteed and, as such, he should be excluded from the proceedings.

Such an arbitrator who is not excluded is still rendered incompetent to hear the case due to a lack of independence. If, nevertheless, this arbitrator does rule on the case, there is a subsequent risk that the enforcement procedure will be halted on grounds of a fundamental defect in the enforceable title – the absence of jurisdiction.

If you find yourself in a similar situation, or if you have a feeling that the arbitrator has not been independent, seek qualified legal advice for an assessment of your case and a recommendation on how best to proceed.

For the sake of completeness, please note that in the above case the finance company as lodged an appeal on a point of law, which remains pending before the Supreme Court. It will be interesting to see what stance the Supreme Court takes on the case and whether it will uphold or rebut the Regional Court’s conclusions.

For more information, please contact our office’s partner, Mgr. Jiří Kučera, e-mail:jkucera@kuceralegal.cz ; tel.: +420604242241.