News – 12.06.2024

Six observations from the Ministry of Justice’s memorandum on the need to reform the Finnish Arbitration Act

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Joel Nurmi

Associate, Licensed Legal Counsel

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The reform of the Finnish Arbitration Act (FAA) is progressing. On 3 June 2024, the Ministry of Justice (MOJ) published a memorandum (link at the end of the article, available only in Finnish) assessing the needs to reform the FAA, considering the international developments and practical needs observed since the enactment of the FAA. 

FAA is broadly equivalent to the Model Law on International Commercial Arbitration (Model Law) adopted by the United Nations Commission on International Trade Law (UNCITRAL). However, there are differences, and in the memorandum MOJ assesses the possibilities of bringing FAA closer to the Model Law and international practice. 

Following is a summary of our six observations from the MOJ memorandum: 

  1. Removal of the action for declaring arbitration award null and void 

The MOJ notes that one of the key reforms to consider is removing the action for declaring award null and void (Section 40 of the FAA). Currently there is no time limit for an action for declaring an award null and void and the action may therefore be filed several years after the award has been issued. This is foreign to the Model Law and is an unusual provision internationally, and as far as we know only exists in Finland and Sweden.  

An action for declaring an award null and void has been criticized among arbitration lawyers. According to 2016 report by Finland Chamber of Commerce (p. 9), the provisions on declaring the award null and void reduce the usefulness of the FAA in international arbitration. Finland Chamber of Commerce considers these provisions to be one of the main reasons why foreign companies and arbitration lawyers do not consider Finland an attractive place for international arbitration. 

In our view, it would be appropriate to remove the action for declaring an award null and void. The possibility of setting aside an arbitration award already adequately ensures the rights of the parties in the event of serious procedural errors. 

  1. Acceleration of the setting aside proceedings  

MOJ notes that shortening the time limit for initiating the setting aside proceedings should be considered. Currently, an action for setting aside must be filed within three months from the arbitration award (Section 41(3) of the FAA). The Model Law contains a corresponding time limit (Article 34(3) of the Model Law). A similar deadline exists in the Danish, Norwegian and German arbitration laws. In Sweden, on the other hand, the period for bringing an action has been shortened to two months in connection with the 2018 amendment to the Swedish Arbitration Act. The MOJ does not specify whether the deadline should be reduced to two months or an even shorter time limit. 

MOJ also notes that limiting the setting aside proceedings only to one court instance should be considered. Currently, the decision of the District Court can be appealed to the Court of Appeal and the Supreme Court in the ordinary way. MOJ notes that it would be important for the effectiveness of arbitration to reach the final resolution of the setting aside action swiftly.  

In our view, the time limit for initiating the setting aside proceedings does not affect the speed of the process as significantly as a possible appeal against a District Court’s decision to the Court of Appeal or even to the Supreme Court. Restricting the proceedings to the District Court (or to the Court of Appeal) could speed up the process. 

  1. Removal of the formal requirement of an arbitration agreement 

Section 3 of the FAA lays down the formal requirement for an arbitration agreement. According to Section 3(1), the arbitration agreement shall be in writing. In the Model Law, the fulfilment of the formal requirement does not require the signatures of the parties or the exchange of messages between the parties, but the formal requirement is fulfilled, for example, by the acceptance of standard terms and conditions by conduct (Mika Hemmo: Välimiesmenettely, 2022, p. 128). Unlike Section 3 of the FAA, Article 7 of the Model Law also considers modern means of electronic communication. MOJ notes that the laws of Sweden, Norway or Denmark do not impose any formal requirements on arbitration agreements. In Sweden, the formal requirement was also not considered necessary before the reform of the Model Law. 

Although international developments have also led to a more lenient interpretation of the FAA formal requirement, MOJ considers that a revision of Section 3 of the FAA could be justified. However, if it were considered necessary to retain the written formal requirement, section could be amended so that the electronic format meets the formal requirement. 

  1. Supplementing the FAA with the doctrine of severability and Competence-Competence 

The doctrine of severability refers to the internationally established principle that an arbitration agreement is assessed as an independent agreement separate from the underlying agreement. For example, the invalidity of the underlying agreement does not automatically lead to the invalidity of the arbitration agreement. The FAA does not have an explicit provision on the doctrine of severability. Despite this, the doctrine of severability is well established in Finnish law (e.g. see Supreme Court’s rulings KKO 1996:61 and KKO 2020:89, paragraph 36 of the reasoning). The doctrine of severability is included in Article 16(1) of the Model Law. However, MOJ notes that supplementing the FAA with the doctrine of severability should be considered, i.e., incorporating the provisions of Article 16(1) of the Model Law. 

The FAA does not contain provisions on the arbitrators’ competence to decide on their own competence either, i.e., the Competence-Competence doctrine. According to this doctrine, the arbitrators themselves can decide questions about the existence and validity of the arbitration agreement and its scope. This principle is reflected in Article 16 of the Model Law. MOJ proposes that supplementing the FAA in this respect as well should be considered. 

  1. Determination of the applicable substantive law

There is no explicit provision in the FAA on determining the applicable law (i.e., on substantive law / law applicable to merits of the case) when the parties have not agreed on it. However, according to the legislative history of the FAA, in such situations the applicable law is determined by the conflict-of-law provisions that the arbitrators consider applicable in the case (Government Decree of the FAA, HE 202/1991 vp, p. 22). This corresponds to Article 28(2) of the Model Law, according to which the arbitral tribunal shall apply the law that becomes applicable based on those conflict-of-law rules which the arbitral tribunal deems applicable.  

However, legal scholars have held that Article 28(2) of the Model Law is no longer widely accepted, and that legal development has led to a more flexible choice of law (Hemmo 2022, pp. 1294–1295). In international arbitration, direct choice of law has prevailed, whereby arbitrators determine the applicability of a particular law based on an overall assessment of the relevant circumstances, without resorting to the application of domestic conflict-of-law rules as an intermediate step (Hemmo 2022, p. 1297). 

According to MOJ, it would therefore be clearest and simplest, in the light of international developments, for arbitrators to be able to directly choose the substantive law most appropriate to the circumstances and for the resolution of the dispute. 

MOJ also notes that, according to Section 31(3) of the FAA, if the parties have agreed so, the arbitrators may nevertheless decide on the basis of what they deem reasonable. The legal status is unclear as to whether the parties can agree that the dispute will be resolved by applying norms other than the law. An explicit provision for this should be included in the FAA.  

  1. Supplementing the Act with independent provisions on liability for legal costs 

According to the MOJ, supplementing the FAA with its own independent provisions on legal costs should be considered. At present, the FAA does not include such provisions, but the reimbursement of legal costs is determined in accordance with Chapter 21 of the Code of Judicial Procedure (CJP). When assessing the need for reform, MOJ refers to legal literature. Möller has noted that since the enactment of the FAA, several exceptions have been made to Chapter 21 of the CJP that are not applicable to arbitration (Gustav Möller: Behovet av en översyn av Finlands lag om skiljeförfarande, JFT 5–6/2015, p. 415). An example of this is Chapter 21, Section 8b of the CJP, according to which the court may, on its own initiative, reduce the liability of the legal costs of the other party. Despite its wording, the provision may not be applied in the arbitration proceedings without having been invoked by a party, since arbitration emphasises the party autonomy (see Hemmo 2022, p. 1280).  

The MOJ has not drawn attention to the wording of Section 49 of the FAA, which in our view requires clarification.  The wording at the beginning of Section 49 of the FAA (emphasised) ‘the arbitrators may, in their award or in any other decision concerning the termination of the arbitration proceedings […]’, has allowed arguments that an order for costs contained in the decision to terminate the arbitration proceedings would not be enforceable like arbitral award in situations where arbitration proceedings are terminated due to lack of jurisdiction. Revising the wording of the provision should be considered, although it should be clear among arbitration professionals that a claim for legal costs brought by one party against another may be resolved by arbitration in connection with the decision to terminate the arbitration proceedings (see, for example, Hemmo 2022, p. 984). In our view, therefore, for the sake of clarity, the new provisions on legal costs of the arbitration proceedings should stipulate that an arbitral tribunal’s order for costs contained in a termination decision is equivalent to an arbitration award and enforceable in the same way as an arbitration award.  

Finally 

Reforming the FAA is necessary to increase Finland’s attractiveness as a venue for arbitration. MOJ emphasises that the FAA should be reformed considering the social and business developments and the internationalisation of commercial dispute resolution activities which have taken place since the FAA entered into force.

It is possible to issue comments on the MOJ memorandum until 15 July 2024 (see link below, available only in Finnish). 

Ministry of Justice: Reform of the Arbitration Act – memorandum (3 June 2024) (in Finnish): https://oikeusministerio.fi/-/arvio-valimiesmenettelylain-uudistustarpeista-lausunnolle- 

Ministry of Justice request for comments on the memorandum of assessment (in Finnish): Statement – Lausuntopalvelu