Access to Justice and Financial Hardship - International Law Office
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Arbitration - Portugal
Access to Justice and Financial Hardship
Contributed by AM Pereira Sáragga Leal Oliveira Martins Júdice E Associados - Sociedade De Advogados
September 24 2009
Facts
Court of Appeal Decision
Comment
In accordance with Article 437(1) of the Civil Code,(1) the Porto Court of Appeal recently held that a party experiencing
financial hardship - which arose after the parties had established an arbitration clause and was not intentionally caused - did
not remain bound by the arbitration clause and could therefore file suit in court.
Facts
Two limited liability companies entered into a contract which included a clause stating that:
"any disputes concerning the present agreement shall be decided according to the arbitration rules of the Porto
Chamber of Commerce and Industry Arbitration Centre by one or more arbitrators appointed in accordance with the
said rules."
However, after the parties had entered into the agreement, one of them found itself in financial difficulties, which were not of
its own making, and was declared insolvent.
The administrator filed suit against the other contracting party, asking the court to:
declare the arbitration clause null and void, since the plaintiff did not have the financial resources to cover its arbitration
costs;(2)
confirm the plaintiff's right to file suit in court; and
order the defendant to pay the plaintiff €216,242.
The defendant objected, claiming that the arbitration clause had been breached. However, the court agreed with the plaintiff,
holding that forcing the plaintiff to resort to arbitration would deny it the opportunity to defend its legitimate rights arising from
the contract.
The defendant appealed to the Porto Court of Appeal.
Court of Appeal Decision
The appeal court confirmed the first instance court's decision, finding that when the parties had agreed on the arbitration
clause, they had assumed that they were all able to cover the costs of arbitral proceedings. Therefore, one of the parties
being declared insolvent clearly constituted an unexpected change in the circumstances that had led the parties to include an
arbitration clause in their agreement. Furthermore, the declaration of insolvency was not attributable to the plaintiff and was
entirely unexpected.
The court emphasized that if the plaintiff were forced to arbitrate, it would be denied the opportunity to defend its legitimate
rights arising from the contract, which would violate its right to access to justice under Article 20 of the Constitution.
Therefore, the court held that the requirements of Article 437(1) had been met. The plaintiff was not bound by the arbitration
clause and could file suit in court.
Comment
Portugal's higher courts have considered this question before (for further details please see "Right to Plead Case versus
Enforcement of Arbitration Agreement"). However, the decisions on this subject have not always been consistent - hence the
importance of this decision.
Portugal's insolvency legislation, the Insolvency and Corporate Rescue Code, did not apply in this case, but it makes specific
provision for such a situation. According to Article 87(1), if insolvency is declared, "the effect of the arbitration clauses to
which the insolvent entity is a party is suspended in relation to disputes whose outcome could affect [the insolvent party's]
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Access to Justice and Financial Hardship - International Law Office
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assets". Therefore, had the case been decided under the new legislation, the decision would have been the same.
For further information on this topic please contact José Miguel Júdice or António Pinto Monteiro at AM Pereira, Saragga
Leal, Oliveira Martins, Judice e Associados - Sociedade De Advogados by telephone (+351 21 319 7300), fax (+351 21 319
7400) or email ([email protected] or [email protected]).
Endnotes
(1)
Article 437(1) states that:
"if the circumstances which influenced the parties decision to contract have been unusually changed, the injured party
has the right to terminate the contract or to amend the latter in accordance with the principle of equity, provided that the
obligations implied by the said contract gravely affect the principles of good faith and are not covered by the own risks
of the contract."
(2)
Legal aid cannot be provided for arbitrations.
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Authors
José Miguel Júdice
António P Pinto Monteiro
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