The International Arbitration Review: Bulgaria

Introduction

Bulgaria has traditionally been an arbitration-friendly jurisdiction, both for domestic and international disputes. Arbitration as a means of dispute resolution was implemented in Bulgaria at the end of the nineteenth century with the first Civil Procedure Act (1892). In the first half of the twentieth century, arbitration was widely used to resolve both civil and commercial cases, and the arbitrators had extensive powers, including powers to resolve disputes ex aequo et bono. During the socialist period (1944–1989), arbitration was allowed only in respect of legal disputes between Bulgarian socialist organisations and foreign enterprises or entities. The transition to a market economy at the end of the 1980s led to the considerable development and modernisation of both domestic and international commercial arbitration, which gradually come back as a widely used dispute resolution mechanism.

i National legislation

Arbitration in Bulgaria is regulated mainly by the International Commercial Arbitration Act (ICAA).2 Adopted in 1988, the ICAA is largely based on the UNCITRAL Model Law on International Commercial Arbitration (1985), thus rendering Bulgaria one of the first Model Law jurisdictions. The 2006 amendments to the UNCITRAL Model Law have not yet been implemented in Bulgaria, and at present there are no plans in this respect.

In addition to the ICAA, provisions of the Civil Procedure Code3 (in respect of the scope of arbitration agreements, arbitrability and the seat of arbitration) and the Private International Law Code4 (in respect of the recognition and enforcement of foreign arbitral awards) are also applicable to arbitration proceedings.

ii International conventions concluded by Bulgaria

Bulgaria is party to the most significant international conventions in the field of arbitration. In respect of recognition and enforcement, Bulgaria is a party to the Convention on the Recognition and Enforcement of Foreign Arbitral Awards (New York 1958) (New York Convention5 and the European Convention on International Commercial Arbitration (Geneva 1961).6

In the field of international investment law, Bulgaria is party to the ICSID Convention7 and the Energy Charter Treaty (ECT).8 Bulgaria is a party to 72 bilateral investment treaties (BITs),9 including with all major investors' jurisdictions. After the Achmea decision and the following developments regarding intra-EU BITs, a number of BITs between Bulgaria and some EU member states have been recently terminated. In respect of investment protection, Bulgaria has been a Member State of the European Union since 1 January 2007, and thus all legal issues arising in respect of the validity of intra-EU BITs would be relevant (see Section III).

iii The ICAA scope and structure

Despite its name, the ICAA applies to both domestic and international arbitrations having a seat in Bulgaria. An arbitration is deemed international if one or all of the parties to it are seated (for legal entities) or resident (for individuals) outside of Bulgaria. Respectively, an arbitration is domestic when all parties are seated or resident in Bulgaria.

The ICAA is applicable also to arbitrations with a seat outside Bulgaria, but only in respect of the effects of an arbitration agreement (i.e., the duty of state courts to terminate a case if the dispute is subject to arbitration), the possibility to request interim measures in support of an arbitration seated outside Bulgaria and the enforcement of foreign arbitral awards.

Both institutional and ad hoc arbitration are regulated by the ICAA. It applies to private parties, as well as to state or public entities having concluded arbitration agreements. The ICAA follows the Model Law's structure and covers arbitration agreements, the composition of arbitral tribunals, their jurisdiction and the Kompetenz-Kompetenz principle, the conduct of the proceedings, arbitral awards and their effects, set aside proceedings and the recognition and enforcement of arbitral awards.

iv Arbitrability under Bulgarian law

The conditions of arbitrability under Bulgarian law are primarily addressed in Article 19 of the Civil Procedure Code. The parties to a dispute involving a pecuniary right that is disposable (i.e., a right that parties may dispose of between themselves by way of a settlement) may agree that the dispute be settled by arbitration, with the exception of the following:

  1. disputes in respect of absolute rights over immovable property or possession of immovable property (disputes involving relative contractual rights in respect of immovable property, such as lease agreements, are arbitrable);
  2. disputes in respect of alimony (financial obligation arising out of divorce);
  3. employment disputes (disputes under management agreements between companies or shareholders and their directors are arbitrable);
  4. disputes involving non-pecuniary rights;
  5. administrative and other public law disputes;
  6. disputes involving non-transferable personal rights and disputes in relation to personal or marital status and origin;
  7. civil law disputes that may be initiated by a prosecutor or where the participation of a prosecutor is required;
  8. some disputes in relation to insolvency proceedings (such as disputes for declaratory judgments establishing the existence of receivables from an insolvent company that have not been accepted in the insolvency proceedings);
  9. disputes to which one of the parties is a consumer under the meaning found in the Consumer Protection Act;
  10. hardship and adaptation-of-contract disputes under Article 307 of the Commercial Act arising under privatisation contracts;10 and
  11. concession agreements without trans-border interests (within the meaning of EU law).

v Arbitration agreements

The ICAA requires arbitration agreements to be in written form.

An arbitration agreement is considered to be in writing when the agreement is contained in a document signed by both parties, in an exchange of letters, faxes, telegrams or other means of telecommunication, or in general terms and conditions to which the parties have referred in their contract. Any of the parties may raise an objection as to the form or existence of an arbitration agreement by the end of the first hearing. If no objection is made, it will be considered that there was a valid arbitration agreement.

The ICAA provides that an arbitration agreement may be concluded before a dispute arises or afterwards, and could cover both contractual and non-contractual disputes.

Under Bulgarian law, the doctrine of the separability of an arbitration agreement is fully recognised, and the ICAA provides that an arbitration agreement included in a contract is independent of the other terms of a contract. The nullity of a contract does not automatically render the arbitration agreement in it also invalid.

vi Mandatory principles applicable to arbitral proceedings

Under the ICAA and case law, only a very limited number of mandatory procedural provisions could lead to setting aside an arbitral award, such as the following:

  1. the parties must be treated equally (according to the principle of equal treatment of the parties);
  2. each party must be given an equal opportunity to present its case;
  3. the arbitrators must be impartial and independent;
  4. the parties must be notified of the arbitration and the hearings; and
  5. the requirements for the form and the requisites of arbitral awards provided for in the ICAA should be met (i.e., written form of the award, motives, signatures of the arbitrators).

vii Intervention by state courts

The ICAA strictly limits the possibility of intervention by state courts in arbitration proceedings only to the following:

  1. if a dispute, subject to arbitration, is referred to a state court and no party objects to the state court proceedings by a reply to the statement of claim;
  2. to impose interim or conservatory measures (such as the freezing of assets, collection of evidence, etc.) in support of a future or pending arbitration case;
  3. there is a challenge to the arbitrators;
  4. there is a need to assist the parties or an arbitral tribunal to collect evidence;
  5. in set-aside proceedings;
  6. in proceedings for the issuance of a writ of enforcement for an arbitral award rendered in an arbitration seated in Bulgaria; and
  7. in proceedings for the recognition and enforcement of foreign arbitral awards.

Requests for interim measures or the collection of evidence may be made before any competent Bulgarian court, and the Civil Procedure Code will apply.

In respect of the issuance of writs of enforcement on the basis of arbitral awards rendered in arbitrations seated in Bulgaria, the competent court would be the respective district court at the place of residence of the debtor. The procedure is conducted ex parte and is relatively quick and efficient.

Set-aside proceedings against an arbitral award rendered in Bulgaria may be initiated before the Bulgarian Supreme Court of Cassation within three months of the serving of the arbitration award to the respective party. The filing of a set-aside request does not stop the enforceability of the respective arbitral award unless a specific order in this respect is made by the Supreme Court of Cassation and the requesting party establishes security for the whole amount of the award. The judgment of the Supreme Court of Cassation on a set-aside request is not subject to appeal.

Requests for the recognition and enforcement of foreign arbitral awards are to be brought before the Sofia City Court. Such requests follow the standard claim procedure, and first instance judgments are subject to appeals before the Sofia Court of Appeals and the Supreme Court of Cassation.

viii Local arbitration institutions

In Bulgaria, more than 40 arbitral institutions are active. This considerable number is because of the possibility until 2017 to include arbitration agreements in consumer contracts. This led to a proliferation of institutions specialised in consumer disputes, such as disputes arising out of utilities contracts (electricity distribution, heating, mobile phones, water supply, etc.) and consumer finance contracts. Some of these institutions administered several thousand cases per year with, however, low individual values.

For commercial disputes, there are three major national arbitration institutions.

The oldest and most prominent Bulgarian arbitral institution is the Arbitration Court (AC) at the Bulgarian Chamber of Commerce and Industry (BCCI),11 which recently marked its 120th anniversary. The AC at the BCCI has considerable experience in dealing with domestic and international commercial disputes in a number of sectors, such as the sale of goods, construction, electricity trade and distribution, leases, loan agreements, agriculture, public procurement and IT sectors. It has a permanent secretariat with a specialised staff and hearing facilities in Sofia. The AC at the BCCI Rules of Arbitration,12 the arbitration fees and costs tariffs,13 the recommended arbitration clause14 and other documents are available in different languages, and the institution has considerable experience in administering disputes in English, Russian and German. The AC at the BCCI implemented an online document management system, allowing parties to proceedings to have full access to all documents in the proceedings (all parties' submissions, orders or awards by the tribunal, correspondence and delivery receipts, transcript from hearings, etc.) via secure access on its website. The AC at the BCCI is by far the busiest arbitral institution in Bulgaria; for example, in 2020 it registered approximately 120 domestic and 20 international new arbitration cases. In addition to institutional arbitration, the AC at the BCCI may act as appointing authority, provide administrative support to ad hoc arbitrations and provide mediation services.

Other major Bulgarian arbitral institutions are the Arbitration Court at the Bulgarian Industrial Association,15 the recently established KRIB Court of Arbitration16 and the Arbitration Court at the Bulgarian–German Chamber of Commerce.17

ix Trends or statistics relating to arbitration

Since 1990, arbitration in Bulgaria has been widely used both by local companies and international businesses. A considerable number of commercial contracts provide for arbitration, and such disputes are very common. Arbitration is the most commonly used means to resolve commercial disputes in business transactions with an international element.

The exact proportion of disputes settled through arbitration is unknown because of the lack of official statistics published by the various arbitration institutions in the country.

Regarding foreign arbitral institutions, Bulgarian parties most often opt for International Chamber of Commerce (ICC), Vienna International Arbitration Centre (VIAC), Stockholm Chamber of Commerce (SCC) or London Court of International Arbitration (LCIA) arbitration.

The year in review

i Developments affecting international arbitration

Legislative developments: 2017 amendments

The most important legislative development in the field of arbitration in Bulgaria in recent years is the amendments to the Civil Procedure Code and the ICAA of 2017 (2017 amendments).18 They were initiated by the Ombudsman with the aim of enhancing the rights of consumers.

Consumer disputes not arbitrable

The first major development introduced by the 2017 amendments was a prohibition on the arbitration of consumer disputes. This was achieved by extending the scope of Article 19 of the Civil Procedure Code:19 the legislator added all disputes involving consumers to the list of disputes that are not arbitrable. Under Bulgarian law, a consumer is considered any natural person who acquires products or uses services for purposes that do not fall within his or her commercial or professional activity, and any natural person who acts outside his or her commercial or professional capacity. Thus, arbitration is no longer available in respect of most of the contracts entered into by physical persons, such as utilities contracts (water, electricity, gas, heating, waste), telecom contracts and consumer finance contracts, or in the purchase of, inter alia, goods by consumers or travel packs.

To ensure the effectiveness of the new provision, the new legislation also provides that:

  1. arbitration clauses in consumer contracts are null and void;
  2. arbitral awards rendered in disputes that are not arbitrable shall be considered null and void;
  3. an express provision has been adopted obliging district courts to refuse issuance of writs of enforcement of arbitral awards that are rendered in disputes that are not arbitrable; and
  4. arbitrators who render arbitral awards involving a consumer may be subject to financial sanctions amounting to up to 2,500 leva, and the arbitration institution involved could be fined up to 5,000 leva.

Control over arbitral institutions

Another major development is the introduction for the first time in Bulgarian law of a mechanism for control over arbitration institutions to ensure the compliance of their practices with the ICAA. Such control is exercised by an inspectorate within the Ministry of Justice. The inspectorate may initiate an inspection ex officio by way of decision by the Minister of Justice or upon complaints by interested parties. During an inspection, the arbitral institution shall ensure access to its premises and archives. Following the inspection, the inspectors may issue mandatory recommendations to the arbitral institution, and non-compliance may lead to fines amounting to up to 2,500 leva. Obviously, this mechanism applies exclusively to arbitral institutions seated in Bulgaria. Notwithstanding that at first sight it may seem a threat to the independence of arbitral institutions, the mechanism is intended primarily to ensure compliance with the provisions protecting consumers that until now had not been enforced in practice.

Minimum conditions for appointing arbitrators

The 2017 amendments introduced for the first time into Bulgarian law conditions to be met by arbitrators. Under the new Article 11(3) of the ICAA, any natural person may be appointed as an arbitrator as long as he or she:

  1. has not been convicted of a premeditated crime;
  2. holds a university degree;
  3. has at least eight years of professional experience; and
  4. has high integrity.

Similar conditions existed under some of the institutional arbitration rules but were not provided for in the ICAA. This requirement should be considered also when appointing arbitrators for arbitrations with a seat in Bulgaria under foreign arbitration rules (for instance, in cases of an ICC arbitration seated in Bulgaria).

Obligation to ensure online access to case files

Following the 2017 amendments, parties in arbitration proceedings should have online access to the case file. Although such options have existed for arbitration at the AC at the BCCI for a long time, applying this condition could create some practical issues in respect of ad hoc arbitration or arbitrations administered by other institutions.

Breach of public policy no longer grounds for setting aside

Perhaps the most unexpected change introduced by the 2017 amendments was the reduction of the grounds for setting aside an arbitral award. The Bulgarian legislator deleted Item 3 of Article 47(1) of the ICAA, which provided that a breach of public policy is grounds for setting aside an arbitral award.

Since the adoption of the ICAA in 1988, a breach of public policy was one of the grounds for setting aside, as it is also under Article 34(2)(b)(ii) of the Model Law. The provision was widely used by the Supreme Court of Cassation and recognised by legal doctrine.

This amendment was unexpected, as it was not discussed by doctrine and was not related to the main purpose of the 2017 amendments (i.e., to enhance the protection of consumers), but on the contrary seems to reduce the possibility for state courts to control arbitral awards.

Deleting a breach of public policy as a ground for setting aside immediately produced effects: the Supreme Court of Cassation extended the scope of other grounds for setting aside to prevent arbitral awards from producing unacceptable results.20

The 2017 amendments did not affect the application of the public policy grounds in matters of the recognition and enforcement of foreign arbitral awards, which are governed by the New York Convention or the Bulgarian Private International Law Code (if the New York Convention is not applicable).

Amendments to the BCCI Rules of Arbitration

Some minor amendments to the AC at the BCCI Rules of Arbitration also entered into force in 2017. They imply, among other things:

  1. provisions clarifying the rules on the constitution of an arbitral tribunal;
  2. rules in respect of registration and conservation of the originals of arbitral awards;
  3. modalities for serving an arbitral award to the parties; and
  4. a provision allowing the publication of anonymised parts of arbitral awards upon a decision by the chair of an arbitration.

ii Arbitration developments in local courts

In recent years, Bulgarian courts have published a number of judgments with importance for various aspects of arbitration. The following are of particular interest.

Judgment No. 46 dated 08 January 2020 under commercial case No. 878/2019 of the Sofia City Court

An arbitration agreement that provides arbitration only for the interpretation of the respective main contract does not include in its scope claims for specific performance or liability. Further, an extension of the arbitration agreement executed by individuals that at the respective moment were not legal representatives of the company is not valid, notwithstanding the fact that the company has not explicitly objected after obtaining knowledge of the clause.

By this judgment rendered in the course of recognition and enforcement of foreign arbitral award proceedings, the court followed its already established case law, considering that arbitration agreements are subject to strict interpretation. In particular, it does not admit pro-arbitration interpretation as it concerns the scope of arbitration agreements (i.e., the claims covered) and does not allow application of the presumptions pro-validity applicable in commercial contracts.

From a practical point of view, this judgment reconfirms that parties should carefully consider the wording and modalities of execution of arbitration agreements and, where possible, use qualified local lawyers.

Judgment No. 198 dated 11 March 2020 under commercial case No. 1620/2019 of the Supreme Court of Cassation

In this judgment, the Supreme Court of Cassation (which is the Bulgarian jurisdiction competent for set-aside proceedings) addressed two important questions.

First, it had to assess where a lease agreement, concluded by an individual, represents a consumer contract. With the 2017 amendments of the ICAA, consumer disputes were rendered non-arbitrable. However, the respective provision defining a consumer implies the contracting for services or goods. The court considers that a lease agreement is neither a service, nor a good, and thus it does not fall into the exclusion.

Second, the court had to consider the validity of the specific arbitration agreement, which provided for ad-hoc arbitration by an individual specified in the arbitration agreement. The arbitration agreement is included in a pre-drafted standard contract, provided 'as is' to the individual and not subject to negotiations. The court concludes that because the individual designated as sole arbitrator in the arbitration agreement was not known to the individual, party to the lease agreement, the arbitration agreement is not valid.

iii Investor–state disputes

Bulgaria is currently involved in a number of investment arbitrations. At present there is public information available about four pending ICSID cases.

Energo-Pro v. Republic of Bulgaria21

The case was initiated by the Czech energy company Energo-Pro, which is the operator of an electricity distribution grid in Bulgaria. The claim was based on the Czech Republic–Bulgaria BIT and the ECT. The dispute arose after regulatory changes in the electricity sector were initiated in 2012. Although its main objective was to reduce the burden of renewable energy sources generation on the electricity system, it had considerable adverse effects on electricity distribution and supply companies.

The arbitral tribunal has been constituted and the case is still pending. After hearing on jurisdiction, the merits and quantum, the parties filed their submissions on costs in April 2020 and an award is expected soon.

ČEZ, a.s. v. Republic of Bulgaria22

This case was initiated following a dispute similar to those in the Energo-Pro case. The claim is based on the Czech Republic–Bulgaria BIT and the ECT.

The case is still pending, but on 2 March 2021, the Arbitral Tribunal issued a decision on jurisdiction, which seems to have rejected the objections to jurisdiction (including in relation to the Achmea decision) raised by the state.

ACF Renewable Energy Limited v. Republic of Bulgaria23

This case was initiated in 2018 on the basis of the ECT. The investor owns and operates a photovoltaic power plant in Bulgaria. The dispute arose out of changes to the regulatory framework in the electricity sector that began in 2012 and continued until 2018.

The case is still pending. The arbitral tribunal issued a decision on jurisdiction on 20 December 2019 by which it rejected the objections to jurisdiction based on Achmea. The claimant filed a reply on the merits and a counter-memorial on jurisdiction on 5 February 2021.

Moti Ramot and Rami Levy v. Republic of Bulgaria24

This case was initiated in 2018 on the basis of the Israel–Bulgaria 1993 BIT. It concerns real estate and construction investments in Bulgaria by Israeli nationals.

The case is still pending

Outlook and conclusions

Arbitration remains a widely used and reliable tool for dispute resolution in Bulgaria. The jurisdiction is arbitration-friendly, and the local legislative framework and court practice are predictable in respect of arbitration. 2019 and 2020 were successful years in this respect, confirming the previous trend.

In respect of commercial arbitration, the limitation of consumer disputes, although limiting the number of cases, may have positive effects in terms of the credibility and integrity of arbitration. Lower fees for arbitration compared with fees in the state courts, the faster arbitration process and the considerable workload of the state courts, which often impedes judges from going into the details of a dispute, are favourable conditions for commercial arbitration to expand in Bulgaria across sectors, including the electricity and gas trade, construction and the International Federation of Consulting Engineers (FIDIC) disputes, and possibly post-M&A disputes.

Investment arbitration may also experience growth. Although the Court of Justice of the European Union Achmea case raises a number of questions in respect of intra-EU BITs and related arbitration, and could cause hesitation in some claimants, the recently adopted legislative measures in the energy sector in Bulgaria could generate a considerable number of investment claims. This trend is already noticeable in the Czech Republic, Italy and Spain, and Bulgaria may follow.

Footnotes

1 Anna Rizova-Clegg is a partner and Oleg Temnikov is a counsel at Wolf Theiss.

2 International Commercial Arbitration Act, published in State Gazette issue No. 60 of 5 August 1988, as amended from time to time, last amendment published in State Gazette issue No. 8 of 24 January 2017.

3 Civil Procedure Code, published in State Gazette issue No. 59 of 20 July 2007, as amended from time to time, last amendment published in State Gazette issue No. 15 of 19 February 2021.

4 Private International Law Code, published in State Gazette No. 42 of 17 May 2005, as amended from time to time, last amendment published in State Gazette issue No. 100 of 21 December 2010.

5 Convention on the Recognition and Enforcement of Foreign Arbitral Awards (New York, 1958), signed on 10 October 1961, entered into force on 8 January 1962, published in the State Gazette Issue No. 57/1964. Note that Bulgaria made a reciprocity reservation under Article 1 of the New York Convention.

6 European Convention on International Commercial Arbitration (Geneva, 1961), signed on 21 April 1961, entered into force on 13 May 1964, published in State Gazette issue No. 57/1964.

7 Convention on the Settlement of Investment Disputes between States and Nationals of Other States, signed on 21 March 2000, entered into force on 12 May 2001.

8 1994 Energy Charter Treaty, signed on 17 December 1994, entered into force on 16 April 1998.

9 For a full up-to-date list, see UNCTAD's Investment Policy Hub at the following link: https://investmentpolicy.unctad.org/international-investment-agreements/countries/30/bulgaria.

10 This limitation to arbitrability is not expressly provided in law, but has been established in the courts' practice.

18 Act for amendment and supplementation of the Civil Procedure Code, published in State Gazette issue No. 8/2017.

19 Arbitration Agreement – Article 19.

(1) The parties to a property dispute may agree that the said dispute be settled by an arbitration court, unless the said dispute has as its subject matter any rights in rem or possession of a corporeal immovable, maintenance obligations or rights under an employment relationship, or is a dispute one of the parties to which is a consumer within the meaning of § 13, Item 1 of the Supplementary Provisions of the Consumer Protection Act.

(2) The arbitration may have a seat abroad if one of the party has his, her or its habitual residence, registered office according to the basic instrument thereof or place of the actual management thereof abroad.

20 For instance, judgment No. 189 of 9 November 2017 under commercial case No. 1675/2017 of the Supreme Court of Cassation, where an arbitral award was set aside on the ground that the award was dealing with matters outside the arbitration agreement, where before the amendments the Supreme Court of Cassation would probably have used the provision on breach of public policy.

21 ICSID case No. ARB/15/19.

22 ICSID case No. ARB/16/24.

23 ICSID case No. ARB/18/1.

24 ICSID case No. ARB/18/47.

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