Switzerland: Recent Case Law Of The Swiss Federal Supreme Court In Arbitration Matters

In 2014, the Supreme Court rendered 32 decisions on petitions to set aside international arbitral awards. This Newsletter reviews the six arguably most important cases: three decisions address issues relating to the jurisdiction of arbitrators, including where a contractual pre-arbitral step has not been complied with or where a party seeks to extend an arbitration agreement to a non-signatory; the other cases concern the arbitral tribunal's obligation to deal with the parties' material arguments, the scope of objections against interim awards, and res judicata in international arbitration.

1 OVERVIEW

International arbitration is the preferred method of dispute resolution for many companies. Switzerland has been, and continues to be, a leading arbitration venue. The country's liberal, arbitration-friendly, and efficient legislative and judicial frameworks are among the reasons for which parties choose Switzerland as a seat of arbitration.

Petitions to set aside awards issued by arbitral tribunals seated in Switzerland in international matters may be brought only before the Swiss Federal Supreme Court ("Supreme Court") and only on the basis of one of five grounds contained in Article 190(2) PILA – (a) irregular composition of the tribunal, (b) wrong ruling on jurisdiction, (c) decisions infra or ultra petita, (d) violation of the right to be heard or equal treatment, and (e) violation of public policy. The Supreme Court's decisions on these petitions deserve close attention because they often contain important guidance on the law and practice of international arbitration.

In 2014, the Supreme Court rendered 32 decisions on petitions to set aside international arbitral awards. Consistent with a traditionally low success rate, the Supreme Court granted only four of the 32 petitions.

This Newsletter reviews six decisions that together arguably were the most important cases rendered in 2014.

2 JURISDICTIONAL ISSUES

2.1 Decision 140 III 75: An award rendered after expiry of an agreed deadline falls outside of the tribunal's jurisdiction ratione temporis

In this decision, the Supreme Court set aside an arbitral award that was rendered after the agreed time limit.

An ad-hoc arbitration commenced in June 2010 and the final oral pleadings took place in May 2011. Starting in June 2012, Claimant's counsel repeatedly inquired about the status and threatened to take the matter to the competent Swiss state court. The arbitrator finally offered to resign should he not produce the award by a fixed deadline. The award was rendered two days after that deadline.

Claimant sought to set aside the award on the ground that it was rendered by a tribunal that was no longer in existence and therefore in violation of Article 190(2)(a) PILA.

The Supreme Court upheld Claimant's petition but on a different legal basis. The Court reasoned that there had been a tripartite agreement between the parties and the arbitrator specifying a temporal limit to the arbitrator's mission. This decision clarifies an issue that was heretofore open: where a temporal limit to the tribunal's mission has been agreed, awards rendered after such deadline will violate Article 190(2)(b) PILA as falling outside of the tribunal's jurisdiction ratione temporis.

2.2 Decision 4A_124/2014: FIDIC Dispute Adjudication Boards are, in principle, Mandatory

In this decision, the Supreme Court for the first time decided questions relating to Article 20 of the International Federation of Consulting Engineers ("FIDIC") conditions of contract. The FIDIC model terms and conditions are widely used in international construction contracts. Article 20 provides that disputes shall first be adjudicated by a Dispute Adjudication Board ("DAB"), and only if no DAB is in place, or if a decision has been rendered but either party is dissatisfied, should the dispute finally be resolved by arbitration.

A French construction company contracted to build part of a national highway for an entity owned by the Romanian government. A dispute arose and the contractor referred it to a DAB. More than a year passed until a chairperson was appointed, and no DAB agreement was ever signed. The owner was mainly responsible for this delay. The contractor then filed for arbitration. The owner raised a jurisdictional objection, arguing that the DAB procedure was mandatory and had not yet been complied with. The tribunal rejected this objection finding that the DAB procedure was not mandatory.

"Swiss law is frequently chosen in FIDIC and international construction contracts. The Supreme Court has now confirmed that the DAB is a mandatory pre-arbitral tier, subject to the principle of good faith."

The Supreme Court upheld the tribunal's jurisdiction but disagreed with the tribunal on the reason why: according to the Court, the DAB procedure is mandatory. However, whether a pre-arbitral tier such as the DAB will operate to bar the tribunal from exercising jurisdiction depends on whether the party relying on the tier, respectively the party seeking to skip it, has acted in good faith in bringing it about. This was not the case here where the owner had delayed the constitution of the DAB.

Swiss law is frequently chosen in FIDIC and international construction contracts, which often contain multi-tier dispute resolution clauses. Therefore, this decision is particularly important.

The decision also clarifies that where the arbitration agreement is governed by Swiss law, Article 178(2) PILA (which reflects the principle of favorem validitatis) will also apply to the pre-arbitral tier.

2.3 Decision 4A_450/2013: Extending the arbitration agreement to a third party

In this decision, the Supreme Court found that a tribunal might have jurisdiction over a third party that was not a signatory to the arbitration agreement.

The arbitration involved a dispute over the construction of industrial facilities between aluminum company A and a group of companies B. The contracts with the arbitration agreements were signed by parties A and B1 alone. However, a division in B1's direct parent, B2, became responsible for the construction project; B2 also provided guarantees for obligations under one of the contracts; and the division was transferred from party B2 to party B3. A filed an arbitration not only against the signatory B1 but also the non-signatory B3. B3 objected on the basis of lack of jurisdiction, and the tribunal agreed.

The Supreme Court disagreed and decided that the tribunal improperly declined jurisdiction (although it did not affirm jurisdiction but remanded the case for further review in light of the Court's reasoning). The Court carefully examined the contractual documents and concluded that B2 had assumed B1's obligations. Moreover, it analyzed the situation under the principle of good faith, reasoning that B1 and B2 behaved in such a way that A could have believed that it had a legal relationship also with B2 (respectively B3, to whom the corporate division was transferred). B2 would have needed to clearly express to A that it did not wish to be considered as a party to the contracts.

"To avoid having non-signatory affiliates pulled into arbitration, corporate groups should clearly communicate which entity is or is not considered bound by the contract."

While this case does not change the law, it serves as a reminder that where one entity signs a contract, but another entity assumes legal or factual responsibility for executing the contract and/or in situations in which the respective roles may not be fully apparent to the counterparty, there is a risk that the arbitration agreement will bind not only the signatory party but also non-signatory parties. If the corporate group wishes to avoid having different entities pulled into arbitration, there should be specific communication with the counterparty clearly establishing which entity is or is not considered bound by the contract and the arbitration clause.

3 PARTIES' RIGHT TO BE HEARD: AN ARBITRAL TRIBUNAL MUST DEAL WITH THE PARTIES' MATERIAL ARGUMENTS

In decision 4A_460/2013, the Supreme Court held that the tribunal violated a party's right to be heard because it failed to address two important legal arguments that this party had repeatedly advocated.

The underlying arbitration was between a Finnish supplier and a Bulgarian purchaser. The seller repeatedly invoked a contractual liability limitation in arguing that it was not liable for certain damages claimed by the buyer. Before the Supreme Court, the seller argued that the tribunal had ignored these arguments in the final award.

The Supreme Court agreed. According to well-established case law, an arbitral award must deal with arguments and evidence put forth by a party if these are material to the outcome of the case. If it does not address them explicitly, the tribunal or the opposing party must demonstrate that they are not material or that the tribunal addressed them implicitly. Here, the Supreme Court found that the contractual limitation was material to the outcome of the case. Moreover, while the award stated the seller's position on this limitation, it failed to address it in the reasoning or operative parts. One could not simply assume that the tribunal had dealt with the argument.

This decision is part of a recent trend that the Supreme Court will look more closely at whether a tribunal has addressed the parties' material arguments.

4 APPEALING INTERIM AWARDS AND SCOPE OF RES JUDICATA

4.1 Decision 140 III 477: Permissible scope of objections against interim awards

In this decision, the Supreme Court clarified the permissible scope of objections against interim arbitral awards. The case arose from an arbitration between a Luxembourg company and a Turkish individual about share purchase agreements. A first set of contracts contained a somewhat ambiguous arbitration clause, whereas a second set of contracts provided for state court jurisdiction. When the individual commenced arbitration, the company objected arguing that the parties had replaced arbitration with state court litigation as the applicable dispute resolution mechanism. The arbitrator bifurcated the case and in an interim award upheld jurisdiction. The company argued that the arbitrator had wrongly accepted jurisdiction and in doing so had violated the parties' right to be heard and the principle of equal treatment.

The Supreme Court rejected the petition and found the arbitrator properly upheld jurisdiction. In doing so, it had to decide whether the company's arguments regarding alleged violations of the right to be heard and equal treatment were admissible in the first place. Under Article 190(3) PILA, so-called interim awards – which often result from bifurcated proceedings where jurisdiction or liability is decided in a first stage, and the merits of the case or the quantum are decided in a second stage – may and must be challenged immediately, failing which any objection to them is deemed waived. However, the permissible grounds of appeal against such decisions are only the irregular constitution of the tribunal and a wrong ruling on jurisdiction.

The Supreme Court decided for the first time that in filing an appeal against an interim award, parties may also invoke the other grounds of appeal under Article 190(2) PILA – namely a violation of the right to be heard, equal treatment, or public policy – but only to the extent they relate directly to the factual basis for the tribunal's finding regarding its constitution or jurisdiction. This decision was supported by considerations of procedural efficiency. Moreover, to decide otherwise could permit an interim award to stand that was based on findings of fact based on violations of due process or public policy.

Accordingly, a party which receives an interim award must challenge it immediately if it sees grounds for setting aside and cannot await the outcome of the arbitration in the final award. It is now clear that a challenge on the basis of improper constitution of the tribunal or lack of jurisdiction may and must include all alleged relevant violations also under Article 190(2)(c), (d), or (e) PILA.

4.2 Decision 140 III 278: Res judicata in Arbitration

In this decision, only its second case on this issue, the Supreme Court provided important guidance on the concept of res judicata in international arbitration.

In a 2012 decision, the Supreme Court had for the first time ruled that the principle of res judicata was part of procedural public policy.

The present case was between a state-owned railway company and a general contractor over a dispute regarding the construction of a highway and railway bridge. At issue was the signatory power of the company's representative who signed an addendum to the contract. This issue was the subject of a litigation outside of Switzerland between the country's prosecutor, the company and the contractor. It reached the country's highest court, which in April 2012 held that the addendum was invalid. In parallel to the state proceedings, there was an arbitration in Switzerland in which the validity of the addendum was also an issue. The tribunal in September 2013 issued an award finding that the addendum was valid and enforceable.

"The res judicata effects of a foreign court decision are assessed by using a 'common denominator' approach of the effects of foreign and Swiss law."

The railway company argued that the tribunal had violated the principle of res judicata. The Supreme Court disagreed because it determined the nature of the dispute in the litigation, and the arbitration was not identical. In doing so, the Supreme Court provided additional guidance on two issues.

First, whether a claim raised in a foreign court is identical to the one brought before an international arbitral tribunal seated in Switzerland must be dealt with in accordance with the Swiss lex fori. At the same time, the effect of a foreign judgment in Switzerland cannot be more extensive than the effect of a Swiss judgment or the effect of the foreign judgment under the legal system from which it emanates. Thus, the res judicata effects of a foreign decision are assessed by using a "common denominator" approach of the effects of both the foreign law and Swiss law.

Second, when it comes to the identity of the parties, the Supreme Court questioned whether a rigid and formal approach is justified and indicated that it was open to consider the specifics of the situation to prevent "potential ambush tactics" from jeopardizing arbitral proceedings.

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.

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