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Hungary: Hybrid Arbitration Clauses – Do They Ever Really Work?

Hungary: Hybrid Arbitration Clauses – Do They Ever Really Work?

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No one signs a commercial contract expecting or wanting a dispute. But a watertight contract with a solid arbitration clause can provide a vital sense of security to the signing parties. In some cases, however, an arbitration clause itself can cause procedural complications that have to be addressed even before a dispute between the parties can begin to be solved.

Contractual parties can choose between an institutional or ad hoc arbitration clause. With an ad hoc clause, the parties address any issues as and when (and if) they arise. In this case, the parties decide on aspects of the arbitration and draft the arbitration clause themselves.

Institutions such as the ICC have solid arbitration clauses that can be simply incorporated into any agreement without much (if any) need for tailoring. This option has several advantages. It provides an automatic format for dispute resolution with established rules and procedures, which usually ensures smooth and timely proceedings. The parties also receive support from the institution, including administrative assistance and a list of qualified arbitrators for the parties to choose from.

The main disadvantage is naturally the costs involved, with administrative and service fees sometimes even exceeding the amount in dispute. As with any institution, there may be a certain level of internal bureaucracy involved, which can create further delays (and costs), as well as unrealistic deadline demands.

Our dispute team sees plenty of institutional arbitration clauses. Most are straightforward and allow for subsequent relatively uncomplicated proceedings. But what happens when an arbitration clause cites two different institutions? We experienced one such situation when a client came to us with a rather strange arbitration clause in their quota share & purchase agreement.

The clause stated that the arbitration should be settled by the Hungarian institutional arbitration forum (HCCI), but by the application of another institutional arbitration forum, the ICC.

The problem is that institutional arbitrations in general use their own set of procedural rules (or, less often, they manage ad hoc arbitration under the party-determined/ad hoc arbitration rules), but they don’t administer cases under another institutional arbitration’s rules. The reason for this is simple: they do not have the necessary means and knowledge to do so.

What made this case even more problematic was that, according to the relevant clause, the arbitration was to be settled under ICC rules, which are by far the most strictly regulated and administered arbitrations (and therefore the most expensive). The administering ICC institution also plays a key role in the procedure and even has certain special features like the scrutiny procedure at the end of the arbitration.

Arbitrations before the HCCI on the other hand are more loosely administered. The HCCI plays more of a perfunctory gatekeeper role, in that it registers the case and the submission and leaves everything else to the tribunal and to the parties. 

We attempted to challenge the validity of the arbitration clause which, unfortunately, proved fruitless. The tribunal gave a very wide interpretation of the party’s freedom to derogate from the HCCI’s procedural rules and establish their own set of procedural rules that, in fact, closely resembled the ICC rules but dismissed any that would be impossible for the HCCI or the tribunal to perform (like the scrutiny procedure).

Sadly, the answer to whether hybrid arbitration clauses actually work remains to be seen. In the end, the parties settled their dispute out of court. In many ways, we were disappointed not to see the outcome of a potential quasi-ICC procedure.

Cases certainly exist where parties have managed to conduct such hybrid arbitrations, which shows that it is possible and lawful to do so. It’s important to note, however, that in all of these cases, what the arbitral institution and the tribunal agreed to administer and conduct was in fact a real ICC arbitration, under the full set of ICC rules, and not under certain, selected provisions of the ICC rules.

By Milan Kohlrusz, Founding Partner, and Katalin Bendzsel-Zsebik, Senior Associate, Bittera Kohlrusz & Toth

This Article was originally published in Issue 9.8 of the CEE Legal Matters Magazine. If you would like to receive a hard copy of the magazine, you can subscribe here.