Articles and Interviews
1. 6. 2018
Authors: Dušan Sedláček, Adam Forst
In general, the law of associations is not in the focus of legal professionals, yet its importance cannot be underestimated. There are over 80 thousand associations in the Czech Republic, a number of which manage extensive asset portfolios or decide on important rights for their members (e.g. sports associations, industry organisations of entrepreneurs, influential publicly beneficial organisations, etc.).
So far, much fuss has been made over the new Civil Code (Act no. 89/2012 Sb.), which not only transformed the rather non-extensive regulation of civic associations from the beginning of the 1990s into the standard regulation of corporate legal entities (associations) but also introduced a number of new features. One of them is the re-introduction of an arbitration committee in associations, a concept which was known in our country until 1951 (as a court of arbitration or conciliation for associations), allowing associations to decide their internal disputes upon a binding enforcement title.
This article aims to present the basic characteristics of this new body and summarises key advantages and disadvantages associations should take into account when introducing it.
What’s actually new?
Traditionally, the internal structure of the bodies of an association is not bound by any strict rules. Apart from the executive body (such as the committee of an association) and the supreme body (such as the members’ meeting) which must be established in all cases, associations are authorised to create basically any body of any designation and scope of competence. Thus, in this respect the provisions of Section 265 of the new Civil Code, which enshrine the possibility of creating an arbitration committee in an association for resolving “contentious matters falling within the scope of an association’s self-governance defined by its statutes”, do not seem to be radical at all; as a matter of fact, many associations (in particular sports associations) were creating similar bodies a long time before the new Civil Code took effect without leaning on any explicit legal ground. However, the potential effects of a decision delivered by this (optional) body can be seen as radical, as such decision is now deemed to be a directly enforceable arbitration award. So far the decisions of arbitration bodies of an association have been enforceable only inside the association by means of the association’s own tools (e.g. by prohibiting participation in events organised by the association), but now they can be enforced directly without the necessity of conducting prior proceedings. Thus, if a member of an association owes membership fees to the association, the decision of an arbitration committee of the association in this matter may become an enforcement title, based on which the court bailiff will collect such debt on behalf of the association.
But there are many more advantages. Filing an action with the arbitration committee of an association has the same effects as filing an arbitration action. Based on that, limitation periods are suspended, and an obstacle is created preventing the commencement of judicial proceedings in the same matter (plea of lis pendens) or preventing a court from dealing with the same matter after it was previously decided upon by the arbitration committee of the association (plea of res judicata). Similarly, if a party to a dispute decides to file an action directly in the court, the defendant may object (similarly as in the absence of an arbitration clause) to the lack of the court’s jurisdiction to hear the matter, and such proceedings would have to be stayed. Another unquestionable advantage is the limited possibility for a court to review a decision made by the arbitration committee. While a decision of any other body of an association can be reviewed (and subsequently cancelled) by a court for its compliance with the law and the statutes only for procedural reasons (e.g. if the matter was decided by a biased judge), such decision can be cancelled only exceptionally with regard to its merits, if it is in contradiction with the principles of ethical behaviour (in Czech: dobré mravy) or public order.
How to distinguish an arbitration committee of an association
Although some legal professionals are of the opinion that with the entry into effect of the new Civil Code all bodies of associations having the same (or similar) name or a similar function became arbitration committees, we find this interpretation incorrect.
The basic condition for creating an arbitration committee of an association (if its decisions should have the above-described effects) is that this body is explicitly enshrined in the statutes of the association. At the same time, the text of the statutes may not raise doubts about the creation of an arbitration committee pursuant to Section 265 of the Civil Code. Where such doubts may occur it is always necessary to support the opinion that an arbitration committee in this sense has not been established. The reason for this restrictive interpretation is the fact that the creation of an arbitration committee substantially limits the constitutional rights of the association members in their access to the courts; their consent to such limitation by means of the statutes must be granted unambiguously. Therefore, basically all bodies of associations having a similar function or designation after 1 April 2014 created at a time when it was not possible yet to envisage the creation of an arbitration committee can be excluded from the classification of an arbitration committee (pursuant to Section 265 of the new Civil Code).
If the arbitration committee is sufficiently embodied in the statutes, it is necessary for its due creation to enter its name, members and mailing address in the register of associations. Although such registration is only of a declaratory nature and does not pose a condition for the creation of the arbitration committee, the potential inexistence of this registration in contentious cases can be interpreted as an expression of the association’s will not to create an arbitration committee pursuant to Section 265 of the new Civil Code.
The last prerequisite for the creation of the arbitration committee is appropriate staffing. The committee must consist of at least three persons who have reached the legal age, have full legal capacity and moral integrity and are not members of an executive body of the association. Pursuant to the Arbitration Act, persons that have not been sentenced for criminal offences upon a final and conclusive decision (and/or persons regarded as such) are persons deemed to possess moral integrity. From the practical perspective, it is necessary to take into account certain qualifications of the members of the arbitration committee, as in their decision-making they must be able to consistently apply the rules of proceedings following from the statutes and from the Arbitration Act; their work must then result in a decision which should in general contain a reviewable reasoning, advice on remedies and – most importantly – an enforced statement. If it fails to comply with these requirements, an association may face the risk that these decisions will be cancelled at a later point by a court and that such dispute resolution method will become ineffective.
As apparent from the foregoing, the introduction of an arbitration committee is not an ideal solution for all associations. In contrast, for a large majority of associations, the introduction of such a body would involve an unnecessary risk, as it would substantially limit their access (and/or access of their members) to an impartial court and set high-level requirements for them for the selection of suitable members (in particular from the viewpoint of their impartiality and professional qualifications). Another particular group of associations would not benefit in any manner from the introduction of this body: they only deal with a minimum number of disputes and/or are able to enforce their decisions in a sufficiently efficient manner with the use of their own internal tools.
However, even those associations which may find the introduction of an arbitration committee advantageous should duly consider their decision. This is primarily because of the lack of practical experience with the application of legislation regulating this concept. Although to a certain extent inspiration can be found in this respect in the extensive case-law from the times of the First Czechoslovak Republic, the approach to be taken by judges in the future is completely unpredictable. On the other hand, there are many interpretation questions. For example, the borderline of competencies pertaining to the association’s self-governance defining what matters can or cannot be decided by the association’s arbitration committee is unclear. If, for example, an association fines its member for failing to show up at a sport match (relating to a sport in which the association is involved), it is apparent that the matter can be covered by the association’s self-governance. However, if the same association fined the same member for their failure to fulfil an advisory agreement (relating to a sport in which the association is involved), it is not quite unambiguous whether such a matter should fall within the association’s self-governance. Furthermore, it is not completely clear to what extent the courts will insist on the transparent and impartial appointment of the arbitration committee members. Thus, if such members are appointed (and removed) without any limitation solely by the association’s executive body, it is questionable whether their sufficient impartiality could be guaranteed when disputes are decided between the association and its members.
In our opinion, the legal uncertainty as to questions of this kind increases the risk that a decision of the arbitration committee will be cancelled at a later point and consequently decreases the efficiency of this dispute resolution method. At the same time, it is necessary to take into account the fact that cancellation of these decisions may be sought for almost an unlimited period of time (although only for limited reasons; see above), as a motion for the cancellation of a decision of the arbitration committee can be filed not only within three months from its delivery to the party to the proceedings but also at a later point during enforcement proceedings. Thus, decisions issued by the arbitration committee could be also threatened at a later point by changes in case-law as was the case of arbitration clauses concluded in the past in favour of ad hoc arbitration centres.
As follows from the foregoing, it is without question that the creation of an arbitration committee in associations substantially strengthens the autonomy of associations and provides them with an instrument combining the advantages of independent decision-making in internal disputes with the possibility of enforcing such decisions. However, if associations decide to introduce such a body, they should expect rather high-level requirements for the quality of its management (and decision-making), but also some uncertainty regarding the future application of the relevant legislation. Thus, we are of the opinion that the introduction of such a body should be based on a thorough analysis of the effects of such a change as well as on discretion as to the scope of the conferred powers.