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Wrongful Refusal to Enforce Arbitral Award: BTS Holding v. Slovakia

In its judgement rendered on 30 June 2022 in the BTS Holding v. Slovakia case, the European Court of Human Rights (the “ECHR”) held that Slovakia violated BTS Holding’s (“BTS”) right to property when its courts arbitrarily refused to enforce an arbitral award against the Slovak National Property Fund (the “NPF”).

The ECHR reached this decision by applying the principle of protection of the right to property set forth in Article 1 of the Protocol to the Convention for the Protection of Human Rights and Fundamental Freedoms dated 20 March 1952 (“Protocol No. 1”), which reads as follows:

Every natural or legal person is entitled to the peaceful enjoyment of his possessions. No one shall be deprived of his possessions except in the public interest and subject to the conditions provided for by law and by the general principles of international law.

The preceding provisions shall not, however, in any way impair the right of a State to enforce such laws as it deems necessary to control the use or property in accordance with the general interest or to secure the payment of taxes or other contributions or penalties.

Refusal to Enforce Arbitration Award

Background

Original Dispute

The original dispute arose out of the rescission of a Share-Purchase Agreement (the “SPA”) concluded in 2006 between BTS and the NPF for the purposes of acquisition by BTS of a majority shareholding in the Bratislava Airport. Following the payment by BTS of the first tranche of the purchase price, the NPF rescinded the SPA on the basis that the Anti-Monopoly Office failed to approve the transaction within the time limit set forth in the SPA. Upon the rescission, the NPF reimbursed BTS the amount of the first tranche of the purchase price (BTS Holding v. Slovakia, paras. 6-9).

In 2008, a settlement agreement was concluded by BTS, the NPF, and one of the ministries whereby it was agreed, inter alia, that the rescission of the SPA was valid and effective as of 21 September 2006, that the parties’ obligations were terminated, and that there were no outstanding claims for damages. The settlement agreement expressly excluded from its scope all matters related to the return of the purchase price, as well as to relevant interest (BTS Holding v. Slovakia, para. 10).

In 2009, the NPF made another payment to BTS that was meant to cover interest regarding the first tranche, calculated for the period between the rescission of the SPA and the effective repayment of the first tranche.

However, a dispute arose between the parties about the nature of the repayments made by the NPF. As stated in the judgment, “The essence of the dispute was whether the amounts paid by the NPF constituted, first, a payment towards repaying the principal amount of the first tranche and, then, payment of interest that had accrued, or the other way around” (BTS Holding v. Slovakia, para. 14).

BTS initiated an ICC arbitration against NPF in 2010 pursuant to an arbitration clause contained in the SPA.

Arbitration

The arbitral tribunal, constituted under the ICC Arbitration Rules, rendered an arbitral award on 8 June 2012 according to which the NPF was to pay BTS “(i) a principal amount of 1,894,597.52 euros (EUR), and (ii) interest of 14.25% per annum on EUR 1,853,584.45 for the period from 13 March 2009 until full payment of the award” (BTS Holding v. Slovakia, paras. 15-17).

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Refusal by Slovak Courts to Enforce Arbitral Award 

In February 2013, BTS applied for the enforcement of the ICC award in Slovakia. In 2014, the Bratislava II District Court began enforcement proceedings by authorizing a judicial enforcement officer to enforce the arbitral award.

However, the NPF objected to enforcement arguing, inter alia, that (BTS Holding v. Slovakia, para. 21):

  • there was no arbitration agreement as, arguably, the settlement agreement containing no arbitration clause superseded the SPA; and
  • the enforcement of the arbitral award would be contrary to Slovak public policy.

In August 2014, the Bratislava II District Court allowed the objection. In March 2015, the Bratislava Regional Court upheld the decision of the Bratislava II District Court and, in October 2015, terminated the enforcement proceedings (BTS Holding v. Slovakia, paras. 23 and 29).

In August 2015, BTS lodged a complaint against the above-referenced decisions with the Constitutional Court of Slovakia arguing that its rights to a fair hearing and protection of property had been violated. In November 2018, the Constitutional Court declared the complaint inadmissible (BTS Holding v. Slovakia, paras. 31-36).

BTS then seized the European Court of Human Rights in July 2017.

Judgment of the European Court of Human Rights

Claim to Enforce Unchallenged Arbitral Award Amounts to a “Possession” as per Article 1 of Protocol No. 1

Slovakia’s first challenge to BTS’ application related to the ECHR’s jurisdiction ratione materiae. It argued that an award that was held to be unenforceable by Slovak courts could not amount to a “possession” within the meaning of Article 1 of Protocol No. 1 (BTS Holding v. Slovakia, para. 47).

The ECHR disagreed with this reasoning. It first held that “a ‘claim’ can constitute a ‘possession’ within the meaning of Article 1 of Protocol No. 1 if it is sufficiently established to be enforceable, for example by virtue of an arbitration award” (BTS Holding v. Slovakia, para. 49).

It then ruled that this was the case regarding BTS’ claim as:

  • the ICC award was for payment of an amount of money in BTS’ favour;
  • the ICC award was not challenged by the NPF before the courts of the seat of arbitration, i.e., France;
  • the ICC award had become final and binding; and
  • as recognized by Slovak courts, there was no requirement under Slovak law for a separate decision for recognition of the ICC arbitration award as “legal recognition in Slovakia was implicit in the appointment of a judicial enforcement officer to enforce” (BTS Holding v. Slovakia, paras. 50-52).

Slovak Courts’ Refusal to Enforce Arbitral Award Was Arbitrary and Unjustified

Since BTS’ claim constituted a “possession”, the ECHR concluded that “its non-enforcement amounted to an interference with it.” The ECHR further noted that, for such interference to be compatible with Article 1 of Protocol No. 1, it must be “lawful, with the [ECHR’s] power to review compliance with domestic law being limited to instances of manifestly erroneous application of the impugned legal provisions or arbitrary conclusions being reached” (BTS Holding v. Slovakia, paras. 64-65).

In the present case, the ECHR ruled that the refusal by Slovak courts to enforce the ICC award was unjustified under Article 1 of Protocol No. 1, inter alia, for the following reasons:

  • Settlement Agreement Did Not Supersede the SPA

The ECHR noted that, under Slovak law, and as acknowledged by Slovak courts, the rescission of a contract does not have any impact on the validity of the arbitration clause contained therein. Therefore, it found the Bratislava II District Court’s ruling that the settlement agreement superseded the SPA and, thus, that there was no agreement to arbitrate, although this specific point had never been raised by the NPF during the arbitration, to be arbitrary (BTS Holding v. Slovakia, para. 67).

  • Slovakia Did Not Establish That Refusal to Enforce the Arbitral Award Was Proportionate to Alleged General Interest
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Slovakia also raised an objection relating to public policy, arguing that the arbitral tribunal awarded amounts of money which were concerned with rules on competition given the implication of the Slovak Anti-Monopoly Office.

The ECHR did not follow Slovakia’s reasoning and ruled that there was no indication that “the intended transaction [that underlined the ICC award] was contrary to the rules on competition. Moreover, and irrespective of that, the transaction was effectively rescinded, the payment to be made under the award concerned claims related to that rescission, and there has not been any suggestion that the satisfaction of those claims would in any way impact on competition” (BTS Holding v. Slovakia, para. 70).

Finally, the ECHR held that, even if the non-enforcement of the ICC award was to serve a general interest, Slovakia had not shown that the non-enforcement was proportionate to the interest sought. It noted that “the Government have advanced no arguments on this aspect of the case and that, while focusing on elements which purportedly precluded the enforcement by reason of public policy or procedural formalities, the domestic courts took no account of the requirements of the protection of the applicant company’s fundamental rights and the need for a fair balance to be struck between them and the general interest of the community rights” (BTS Holding v. Slovakia, para. 71).

Damages

The ECHR first reaffirmed that a breach of Protocol No. 1 imposes a legal obligation for the State to “put an end to the breach and make reparation for its consequences in such a way as to restore as far as possible the situation existing before the breach” (BTS Holding v. Slovakia, para. 84).

It then concluded that BTS’ right to compensation concerned the value of the ICC award as “it essentially corresponds to what the applicant company would have asserted at the national level, where it is prevented from doing so by the fact that the enforcement proceedings have been terminated.” However, it reserved the quantification of the amount for the subsequent procedural stages noting the “possibility of an agreement between the respondent State and the applicant company” (BTS Holding v. Slovakia, paras. 85-87).

Costs

BTS claimed several costs incurred during the proceedings before the ECHR – EUR 33,257.79 for legal and translation costs at the domestic level and EUR 287,316.79 for its legal fees (BTS Holding v. Slovakia, para. 89).

Slovakia objected, arguing that these costs were speculative and there was no evidence that these sums were effectively paid (BTS Holding v. Slovakia, para. 90).

In ruling on BTS’ claim, the ECHR applied two conditions – whether the costs “were actually and necessarily incurred” and whether they were “reasonable as to the quantum” – and allocated the sum of only EUR 30,000 to BTS (BTS Holding v. Slovakia, paras. 91-92).

* * *

The decision of the ECHR represents a welcome contribution to the regime of enforcement of arbitral awards by member State courts, especially when such enforcement is arbitrarily refused. Proceedings via the ECHR may constitute another remedy for an injured party to enforce its rights.

Reference Article: https://www.international-arbitration-attorney.com/wrongful-refusal-to-enforce-arbitral-award-bts-holding-v-slovakia/

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