Arbitration serves as an alternative to court proceedings when there is a dispute between two contracting parties regarding the fulfillment of obligations or the exercise of rights within the framework of their contractual relationship. The ability of the contracting parties to resort to arbitration instead of court depends on the existence of necessary arbitration clauses in their contract.

This significance is highlighted in a recent case involving a public interest construction contract between a Municipality and a contracting company.

In the context of the said contract, disagreements arose between the Municipality and the contracting company regarding the executed works and their payments. As a result, the contracting company was accused of insufficient oversight to the detriment of the Municipality's interests and of engaging in collusion aimed at maximizing the profits of individuals involved in the works. The contracting company activated the arbitration clause and initiated the arbitration process despite the Municipality's refusal.

The Municipality filed a civil lawsuit (OR 2.1.) against the contracting company in the District Court and simultaneously submitted an interim application seeking to cancel the arbitration agreement contained in the construction contract and to annul any arbitration proceedings initiated under it.

In Cyprus, arbitration is provided for by the Arbitration Law (Cap. 4), where, according to Article 9(2), the Court has the authority to cancel arbitration proceedings when a fraud issue is raised in the referred dispute. It is understood that the party alleging fraud and seeking the cancellation of the arbitration process bears the burden of prima facie proving fraud by presenting the facts supporting its claims. In no case is it sufficient to make vague allegations of fraud.

The First Instance Court concluded that the evidence presented by the Municipality met all the criteria of the Law and proceeded with issuing orders prohibiting the contracting company from proceeding with the arbitration process based on the arbitration clause contained in the disputed construction contract.

The contracting company did not accept the first instance decision and filed a civil appeal challenging its correctness, presenting six grounds for appeal. Additionally, to support its appeal and dispute the correctness of the First Instance Decision, the contracting company submitted new evidence in the appeal proceedings related to the Municipality's allegation of fraud and deceit against the contracting company.

The Civil Court of Appeal, in a unanimous decision on April 23, 2024, dismissed all the grounds of appeal presented by the contracting company, emphasizing that "the First Instance Court rightly concluded that sufficient details were provided by the Municipality regarding the contracting company's involvement in the alleged fraud during the execution of the construction contract. It is evident that the parties' dispute does not constitute an ordinary construction contract dispute regarding the extent and quality of the construction works that could be resolved within the framework of arbitration. Instead, detailed allegations of very serious fraudulent actions and collusion by various individuals involved in the construction works are made, resulting in the Municipality's financial damage. These allegations are so serious and specific that they can only be examined and decided in a court proceeding."

The attempt by the contracting company to present new evidence regarding the facts of the case did not pass unnoticed by the Judges, who specifically stated that the new evidence did not change the situation at all, as it remains a fact that the Municipality presented sufficient and detailed evidence at the first instance to justify the conclusion of the First Instance Court that very serious fraud issues are raised in the case, which should only be heard by the Court. Additionally, it was emphasized that in such cases, what needs to be proven is a prima facie case of fraud committed by the contracting company, not whether it is substantively involved in fraud.

Undoubtedly, this decision has established that participation in arbitration is not a contractual right that can be enforced like any other contractual right. Elements of compulsory arbitration participation reflect possibly outdated legal approaches globally.

Furthermore, in public contracts, the preference for access to the Courts after the failure of amicable settlement is better aligned with the institution of public contracts aiming to protect the public interest.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

Authors

Photo of Katerina Andreou

Katerina Andreou