Public Order as a Ground for Annulment of Arbitral Awards in Romania

Public order or public policy is a concept deeply entrenched in international arbitration, and its relationship with different national legal systems is a constant source of fascinating doctrinal and jurisprudential analysis.

In this article, we aim to provide valuable insights into the application of public order in Romanian arbitration, with a focus on its use as a ground for annulment of arbitral awards, according to Article 608(1)(h) Romanian Civil Procedure Code (“RCPC”).

1.    The Concept of Public Order in Romanian Arbitration

The most relevant reference to public order in relation to arbitration is made in Article 608(1)(h) RCPC, which regulates one of the very limited grounds for setting aside an arbitral award rendered under Romanian law:

“(1) An arbitral award may be set aside only by an action for annulment on one of the following grounds: (…)

h) the arbitral award violates public order, morality, or mandatory provisions of law;”

Public order is not defined under Romanian law, thus allowing the courts and the doctrine to have liberty in examining such a broad and subtle concept.

In analysing the above regulation, Romanian courts have defined public order as “the set of mandatory rules of the domestic legal system, which aim to prevent the effects of legal acts that are contrary to these rules.” In another definition, the Romanian jurisprudence established that public order represents “the political, economic, and social order of a state, ensured by a set of rules and measures, which are reflected in the normal functioning of the state apparatus, the maintenance of public order, and respect for citizens' rights.”

These definitions are in line with the international arbitral doctrine and case law, which usually regard public order as the “most fundamental norms from which no court can depart.”

An important point to note regarding the notion of public order in relation to the action to set aside an arbitral award is that public order does not completely overlap with the notion of “mandatory provisions of law”, which also constitutes a separate ground for annulment according to Article 608(1)(h) RCPC.

Mandatory provisions of law have been defined as provisions that impose a certain conduct on the parties, from which the parties may not derogate.

In this sense, the Supreme Court of Romania established that the notion of public order is not identical to the notion of mandatory provisions of law.

We believe this separation is justified. Public order, as observed by international authors, goes beyond the scope of mandatory laws, and is an all-encompassing concept containing the most fundamental legal, social, political and economic norms. Naturally, an overlap between these two concepts exists because, in most legal systems, public order is regulated by mandatory provisions of law, due specifically to the importance of public order within the legal system.

However, the notion of public order is broader and may be expressed by fundamental principles, customs, usages or traditions that are not necessarily contained in mandatory provisions of law. 

Concluding, the notion of public order is very broad in the context of Romanian arbitration and parties claiming that the arbitral award violates public order must make a very compelling case to demonstrate such violation and set aside the award.  

2.    Romanian Public Order as Grounds for Challenging an Arbitral Award

As Article 608(1)(h) RCPC does not elaborate on this, it has fallen to the Romanian courts to determine which types of provisions or legal institutions can be considered grounds for annulment due to the violation of public order.

2.1.       Types of Provisions that May Constitute Public Order in Romanian Law

a)   Tax Law

Romanian courts have unanimously ruled that arbitral tribunals cannot adjudicate on matters relating to tax law. This is because taxation is a matter of public order, and the establishment of tax obligations is the exclusive remit of the relevant tax authorities.

Regarding an action to set aside an arbitral award that analysed a legal situation containing both fiscal and civil issues, the Supreme Court of Romania maintained that the arbitral tribunal correctly considered itself unable to adjudicate on the fiscal issues, as these are matters of public order that cannot be adjudicated in arbitration.

b)   Insolvency Law

In Romania, insolvency is regulated by Law no. 85/2014. This law establishes derogatory procedural and substantive rules regarding the prevention, commencement and administration of a company’s insolvency.

These rules are of public order under Romanian law. According to Article 45 of Law no. 85/2014, any legal actions relating to an insolvent company must be adjudicated by a specialised insolvency court (judecător sindic) under a special procedure.

More importantly, according to Law no. 85/2014, all legal proceedings initiated against an insolvent debtor are suspended de jure, including, of course, all arbitrations. Therefore, an arbitral award issued in breach of this provision may be set aside for violating the public order insolvency regulations.

We anticipate this becoming an issue in the near future, particularly in construction arbitrations in Romania. The Government’s current budgetary problems are leading to an increasing number of public contract disputes between contractors, subcontractors and suppliers, who may be forced into insolvency due to a lack of funds. 

c)   Public Procurement

Romanian public procurement law directly transposes the EU Public Procurement Directives. These laws are considered to be of public order. They establish the binding framework within which public authorities may procure goods, services, and works. This characterisation stems from the imperative nature of the procedures and sanctions provided by these laws.

The recent years have seen a rise in construction arbitration in Romania, mainly related to public construction contracts. This, in turn, raised questions regarding which section of the court of appeal is competent to hear actions to set aside arbitral awards in public procurement disputes.

In a recent ruling, the Supreme Court of Romania held that public procurement law establishes a specialised competence regarding the adjudication of public procurement disputes, through public order provisions. Hence, disputes relating to public procurement must be adjudicated according to the applicable Law no. 101/2016. This is why, according to the Supreme Court, an action to set aside an arbitral award relating to a public procurement contract must be heard by the civil law section of the competent court of appeal, in accordance with Article 53(1¹) of Law no. 101/2016.

d)   EU Sanctions

Recent developments of EU-imposed sanctions on Russia have seen a special application of European public order in member states.

Two German courts have reportedly held that sanctions imposed by the EU due to the Russian war against Ukraine can have a direct effect on a request for the recognition and enforcement of an arbitral award by a Russian applicant. Interestingly, the Higher Regional Court of Stuttgart denied enforcement in arguing that the supply was caught by the export restrictions imposed by EU Regulation 833/2014, and these restrictions constitute European public order.

Even though there is no relevant Romanian case law on this subject yet, we believe that this rationale is also applicable to the Romanian legal system, since European public order carries the same force and effect as domestic public order in member states. 

2.2.       Types of Provisions that Don’t Constitute Public Order

a)   The Statute of Limitations

Claimants in actions to set aside often criticise alleged violations of the provisions regarding the statute of limitations as public order grounds for annulment.

This misinterpretation stems from the previous regulation of the statute of limitations in Romanian law. Previously, the statute of limitations was considered legal provisions of public policy, and judges could invoke it ex officio. However, this paradigm changed with the entry into force of the new Romanian Civil Code in 2011. Despite this change having been extensively analysed in doctrine and case law, some ambiguities still remain, with some parties intuitively referring to the statute of limitations as a public order regulation.

In that respect, the Romanian Supreme Court clarified that the provisions regulating the statute of limitations from the Romanian Civil Code (“RCC”) are not public order provisions and cannot constitute grounds for annulment of an arbitral award under Article 608(1)(h) RCPC.

b)   Article 1270 RCC – the principle of the binding force of the contract

Article 1270 RCC establishes the principle of the binding force of contracts under Romanian law. This article is often (erroneously) cited as a public order provision in actions to set aside arbitral awards, because it states that the contract “shall have the force of law between the parties.”

Some parties interpreted this provision as a public order regulation due to the ’force of law’ wording. However, it is actually a direct transposition of a long-standing French legal principle currently included in Article 1103 of the French Civil Code, which inspired the Romanian Civil Code. The intention of the Romanian legislator was not to establish the principle of the binding force of the contract as a public order regulation, but rather to emphasise, using a traditional civil law metaphor, that the contract is binding on the parties involved. The main effect of civil contracts cannot be construed as a public order issue, particularly since it relates to private/civil obligations undertaken by private legal subjects.

In this sense, the Romanian Supreme Court has clarified that this provision does not constitute public order, because it regulates the effects of private civil contracts, which are constrained to the sphere of private interests.

3.    Conclusion

The concept of public order in Romanian arbitration is nuanced. Although the courts have provided useful guidelines on how to apply public order in the context of setting aside arbitral awards, economic and social developments present new challenges. For this reason, successfully setting aside an arbitral award on the grounds set out in Article 608(1)(h) of the Romanian Code of Civil Procedure requires an in-depth understanding of Romanian law and the country’s arbitration landscape.