In view of the historic financial crisis which hit the world in 2008 and still affect us it was expected that disputes within the industry would increase. When closing the books for 2009 it is clear that the crisis in fact resulted in more and larger disputes. In this year's fist Update we can report about the increase and record year for Setterwalls' Dispute Resolution Group. We also report about two challenged arbitral awards and a new law regarding priority for cases in court.
Record year for Setterwalls' dispute resolution group
The crisis year of 2009 was a record year for Setterwalls' dispute resolution group with an increase in turnover of more than 33%. International arbitrations make up the greater part of the increase.
2009 will go down in history as a very tough year for lawyers. Several major firms in New York and London were forced to lay off personnel to reduce costs. Above all, banking and finance and M&A have seen workflow dwindle or dry up. Even in Stockholm, some firms have laid off lawyers and stopped hiring. Setterwalls, on the other hand, has ridden out the crisis very well and one key success factor has been the increased turnover in the Dispute Resolution group.
The dispute resolution group is now the firm's second largest group in terms of turnover. We saw a rise of 18% in Stockholm alone, says Hans Dahlberg acting head of the group. We are constantly taking market share in international arbitrations whilst we remain strong in domestic arbitrations and litigation.
According to Hans, there is every reason to believe 2010 will also be a good year.
The year began very strongly with several new interesting matters. Thus far, the pattern has followed our forecasts, where we assumed that disputes would increase as a result of the financial crisis with a slight lag before the increase was noticeable.
No damages for Vin & Sprit after arbitral award was set aside
The Svea Court of Appeal recently set aside the Systembolaget and Vin & Sprit arbitral award in which Systembolaget had been ordered to pay SEK 40 million in damages to Vin & Sprit. The award had been rendered by a tribunal, of which Hans Danelius, former chief justice for the Supreme Court, was chairman.
The Swedish state owns Systembolaget which has a monopoly in Sweden on over-the-counter sales of alcoholic beverages. Before 2008, the state also owned Vin & Sprit which both imports and produces alcoholic beverages and inter alia holds the prestigious Absolut Vodka brand.
Even though Vin & Sprit was sold to the French liqueur company Pernod Ricard in 2008, Vin &Sprit is still one of Systembolaget's most important suppliers.
It was in conjunction with a bribes scandal during 2001 to 2003, in which nine people at Vin & Sprit were charged with bribery, that Systembolaget decided to terminate a number of supply agreements between the parties. Vin & Sprit challenged the terminations and called for arbitration, claiming that Systembolaget should pay almost SEK 75 million in damages. The arbitral tribunal, consisting of former chief justice of the Supreme Court, Hans Danelius, Professor Lars Pehrson and the attorney, Eric Ericsson reached the conclusion that Systembolaget should be ordered to pay approximately SEK 40 million in damages to Vin & Sprit as a result of the terminations.
Systembolaget has then challenged the arbitral award and in the Svea Court of Appeal it claimed that the arbitral tribunal had exceeded its mandate in two respects. In the first place, it was claimed that the arbitral tribunal had exceeded its mandate in having interpreted a specific contractual provision without Vin & Sprit having requested such interpretation. According to Systembolaget, such an interpretation would contravene the parties' unanimous view of the meaning of the contractual provisions.
In the second place, Systembolaget claimed that the arbitral panel found that the right to terminate under general principles had been contractually excluded despite the fact that Vin & Sprit had made no such claim.
Vin & Sprit objected by stating that the arbitral tribunal had not exceeded its mandate and that any errors had not under any circumstances impacted upon the outcome of the case.
The court of appeal opted to deal with the second claim first; that the right to terminate under general principles had been contractually excluded. On this point, the court of appeal found that Vin & Sprit could not have been said to have invoked such a contractual position and that the tribunal thus could not use this as grounds for its award. In doing so, the court of appeal held that the arbitral tribunal had exceeded its mandate. Furthermore, the court of appeal found that it could not rule out the possibility of the error having impacted on the outcome of the case and thus they arrived at the conclusion that the arbitral award should be set aside.
The court of appeal has, in this judgment, thus made clear that even in cases where a mandate has been exceeded, there is a requirement that the error has impacted on the outcome of the arbitration.
It is unusual that arbitral awards are set aside even if an increasing number of awards are being challenged. In the arbitration at hand, a recital had been prepared and the court of appeal concluded that it is in the nature of the matter – the parties having approved the recital – that the recital should comprise, in all material respects, everything invoked by the parties. In this case it can be said that the court of appeal deemed it very clear that Vin & Sprit had not invoked the legal fact which provided the grounds for the rationale of the arbitral tribunal and that no support for such rationale could be found in either the recital or in Vin & Sprit's claim otherwise. The judgment of the court of appeal cannot be appealed.
Arbitrations up during 2009
The number of commercial disputes rose dramatically during the recession. The Arbitration Institute of the Stockholm Chamber of Commerce handled a record number of new arbitration cases during 2009. Added to that are a number of ad-hoc proceedings and arbitral disputes at other institutions and abroad. In all probability, the number of disputes will continue to rise in the wake of the recession.
According to SCC's statistics, SCC heard 215 new cases in 2009, which is said to be the largest number ever. 2008 was also a record year and yet the number of cases rose by 20% during 2009. SCC also states that about half of the cases were international with at least one foreign party. SCC continues to be a popular forum for parties from the former Soviet Union and China on the one side and parties from the EU and USA on the other.
Marie Öhrström joins Setterwalls
The Deputy Secretary General of the Arbitration Institute of the Stockholm Chamber of Commerce (SCC), Marie Öhrström, joins Setterwalls dispute resolution team in April. She has worked nine years at the SCC, which is one of the major international arbitration institutions. Marie started as a case manager and in 2005 she was promoted Deputy Secretary General. Previously she was an associate at Vinge Law firm.
Marie has extensive experience of domestic and international arbitration and alternative dispute resolution (ADR), such as for example mediation. In 2009 Marie published a handbook on commercial dispute resolution and SCC arbitration. She lectures at Universities and is a frequent speaker at conferences in Sweden and internationally.
Besides her expertise in arbitration law, Marie has also worked with marketing, business development and knowledge management during her years at the SCC.
I look forward to joining Setterwalls, which has a reputable and professional team. I hope to be able to contribute with my in-depth knowhow of institutional arbitration. Sitting on a leading position at one of the world's major arbitration centers has of course generated a wide-reaching contact net. I believe this will also benefit Setterwalls and its clients.
Directors' personal liability for capital deficiency in a limited company
The number of bankruptcies in Sweden has increased significantly in the aftermath of the financial crisis. One consequence of this increase, which is often overlooked, is a greater exposure to personal liability among directors in the companies affected.
The fundamental principle underlying a limited liability company is that the owners and management take no responsibility for the company's undertakings. There are, however, exceptions in which there may be cause to "lift the corporate veil". Such an exception applies to directors' liability for capital deficiency in a company, where a director in a Swedish limited company risks personal liability for the company's undertakings.
The rules regarding directors' personal liability in the event of a capital deficiency in a limited company contain, among other things, requirements that the board of directors immediately prepare a trial balance sheet as soon as there is reason to suspect that the company's equity is less than half of its registered share capital. If the board does not fulfil its obligations under these provisions, the directors become jointly and severally liable with the company to the creditors.
A creditor has a lot to gain in turning to individual directors and as a result there are a relatively large number of firms which exclusively focus on advising creditors bringing legal proceedings against directors. Where a company's liability for a payment falls to an individual director, this may very well be a personal financial catastrophe.
The board of directors are often unaware of the risks a board position actually entails and in other cases merely assume that the board is covered by insurance. It is important to consider that it is not sufficient for the company, in these cases, to have taken out corporate insurance, but specific personal payment liability cover is required.
General advice in avoiding personal liability for payments arising out of capital deficiency in a company is to take an active part in the work of the board, always have access to updated financial information and carefully follow the company's financial situation and last, but not least, ensure that there is specific liability insurance to cover these liabilities.
New act on declaration of priority
A new act on the declaration of priority in Swedish courts has been in effect since 1 January, 2010. Under the act, a case or matter can be declared, at the request of a party, to have priority and hence be dealt with more quickly.
The cases and matters which can be considered for a declaration of priority are those which have been subject to unreasonable delay. The preparatory works to the act makes clear that not all delays will considered unreasonable. It is only those cases in which the delay substantial so that there is an evident risk of a violation of a convention that are covered. The new act states that a court can specifically take into consideration the degree of complexity of the case or matter, how the parties have acted during the proceedings, how public authorities and courts have handled the case or matter and the significance of the matter for the claimant. An application for a declaration of priority can be made at any time during the handling of the case and even after a previous rejection. The application must be dealt with promptly by the court and the decision may not be appealed.
Success for Setterwalls when the Svea Court of Appeal dismissed challenge of SCC Russian uranium-contract award
On 18 December 2009, the Svea Court of Appeal rendered a judgment ending the attack which the US company, Globe Nuclear Services and Supply (GNSS) had sustained for many years against its former owner, the Russian state-owned uranium company Techsnabexport (Tenex)
At the previous SCC proceedings between the parties, where Tenex was represented by Clifford Chance's Moscow and Paris offices and Jones Day in Paris, GNSS had claimed damages of almost 1 billion USD from Tenex for breach of contract when Tenex stopped using GNSS as a distributor for its deliveries of uranium to US nuclear power stations. The arbitral tribunal held, however, that invoking the contract between Tenex and GNSS would be inequitable as Y. Adamov, the former Russian atomic minister and persons closely associated with him had secretly assumed control of GNSS before the contract was concluded. The arbitral tribunal therefore completely dismissed GNSS's claim for damages.
GNSS was unable, however, to accept the defeat and appealed against the award alleging that the arbitral tribunal had committed several grave procedural errors and that the award should thus be declared invalid or set aside. GNSS's main objection to the arbitral award was that the arbitral tribunal – in violation of res judicata rules – had allegedly based its arbitral award on circumstances which had already been adjudged and settled in a previous arbitral award (interlocutory award) regarding the parties. Another grave objection invoked by GNSS was the suggestion that the arbitral tribunal had circumvented the procedural rules agreed between the parties by admitting transcripts of examinations by the Russian public prosecutor without the examinees being heard as witnesses in the arbitral proceedings.
The court of appeal has now ruled that no error whatsoever has been committed by the arbitral tribunal. As to the question of whether the matter had already been tried, the court concluded that there was no question of res judicata despite the arbitral tribunal having tried the same circumstances in the interlocutory award and in the final award. The court of appeal found that the final award tried legal grounds other than those that had been dealt with in the previous interlocutory award.
The conclusion of the court of appeal is not surprising. There is a clear legal difference between a final and interlocutory award. The legal effect of a final award concerns not only the grounds which have been invoked and tried for the legal remedy claimed but all alternative grounds for that remedy, i.e. including those which have not been invoked. But when proceedings are divided so that one of several grounds for the same legal remedy is tried by way of an interlocutory award, a party is not prevented from invoking alternative grounds for the same legal remedy in the continued proceedings. Otherwise, there would be no point in dividing the proceedings and in making an interlocutory award. For the same reason, it is entirely permissible for a party to invoke the same circumstances again in the continued proceedings insofar as it is another ground being tried.
In the matter of the transcript of the examinations, the court of appeal found that GNSS had, under all circumstances, forfeited its right to challenge the arbitral award in that respect because GNSS had not specifically protested against the permitting of the documents containing the examinations as written evidence. Nor had they contended that it would be a violation of the rules regarding testimonial evidence to allow the documents.
The court of appeal's conclusion is founded upon the general principle of arbitral law that a party may not invoke a procedural error which the party has not contested during the arbitral proceedings. GNSS did not allege, during the arbitral proceedings, that the transcripts of the examinations were inadmissible for the reason which was later presented in the appeal. GNSS may thus be seen to have accepted the arbitrators' actions in the proceedings and therefore have forfeited the right to invoke the alleged error as grounds for the appeal of the arbitral award.
The court of appeal completely dismissed the GNSS challenge and awarded Tenex full legal costs. Tenex was represented in the Svea Court of Appeal by a team of lawyers headed by Harald Nordenson and Pamela Lannerheim Angergård from Setterwalls and Sigvard Jarvin at Jones Day in Paris as well as a team from Clifford Chance in Moscow led by Timur Aitkulov, Ivan Marisin and Vasily Kuznetsov.
Magnus Fridh, how does it feel – back after one year's work on Sweden's chairmanship of the EU?
In Setterwalls' dispute resolution group, negotiation skills – both in court and arbitration –are an important ingredient. One member of the dispute resolution group, Magnus Fridh, has returned after a year's leave of absence participating in negotiations on behalf of the EU with USA and Japan, among others.
Magnus Fridh is now back at Setterwalls after one year's intensive negotiations, primarily regarding a trade agreement on intellectual property rights.
What have you been working on during the year?
At the moment, negotiations are under way between several states regarding measures against pirate copying and counterfeit goods. The aim is for the negotiations to result in a trade agreement. One of the parties to the negotiations is the EU. During its presidency of the EU, Sweden has coordinated the member states' viewpoints and then negotiated with other countries. That's what I have been involved in. To make a simplified comparison with the work of a lawyer, it's like representing 27 clients – each with different interests - in contractual negotiations
What experience will you bring back with you to Setterwalls?
Naturally, a lot of negotiation tricks to use on the counterparty. Which, naturally I cannot reveal. It has been a great learning experience encountering an entire spectrum of negotiation cultures, from Japanese, to Australians and the French. Above all, I believe we have much to learn from the Americans.
Because the negotiations have taken place in a political environment I have seen how effective one works with the media in big issues. I feel that there is a lot to be done here, not least in high-profile disputes. Last but not least, the work has been very enjoyable and provided me with a fantastic network of contacts.
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