4/23/2015 PLC - Right to be heard and equal treatment not violated by tribunal's considerations on enforceability of penalty clause under English law or by decisi…
Right to be heard and equal treatment not violated by tribunal's considerations
on enforceability of penalty clause under English law or by decision to allow
belated cost submission (Swiss Supreme Court)
Resource type: Legal update: case report
Status: Published on 22-Apr-2015
Jurisdiction: Switzerland
In a German-language decision 4A_636/2014 dated 16 March 2015 and published on 7 April 2015, the Swiss Supreme Court addressed
whether an arbitral tribunal had violated the right to be heard and equal treatment when assessing the enforceability of a penalty clause
under English law or allowing a belated cost submission.
Prof Dr Nathalie Voser (Partner) and Dr Jörn Eschment (Associate), Schellenberg Wittmer Ltd (Zurich and Singapore)
Speedread
The Swiss Supreme Court has ruled that a party's right to be heard and to equal treatment under the Private International Law Act was not
violated by the arbitral tribunal's assessment on the enforceability of a penalty clause under English law or by taking into account a belated
submission on costs.
With regard to the penalty clause, the court found that instead of simply denying the other party's position, the petitioner should have
submitted its own evidence to support its own position. With regard to the belated submission on costs, an allegedly wrong application of
the relevant procedural rules does not amount to a violation of the principle of equal treatment and cannot justify the setting aside of an
international arbitral award.
This case provides a helpful reminder of the need to submit counter-evidence and that a simple objection against factual allegations made
by the other side might not suffice if, and to the extent that, the arbitral tribunal might consider the allegations as proven. The decision also
adds an interesting facet to the Supreme Court's case law on belated cost submissions. (Decision 4A_636/2014.)
Background
Article 190(2)(d) of the Private International Law Act (PILA) provides that an award will be set aside if the parties' right to be heard and
equal treatment was violated.
Facts
In proceedings against an award rendered in an International Chamber of Commerce (ICC) arbitration by a tribunal seated in Geneva, the
petitioner (Y) invoked Article 190(2)(d) PILA as basis for setting aside the award.
The dispute arose in connection with an agreement between a Luxembourg company (X) and a Russian corporation (Y). Under the terms of
the agreement governed by English law, X was to deliver sand and gravel to Y once certain conditions precedent had been met. Following
an argument over some of these conditions, X terminated the agreement and claimed payment of EUR3.6 million plus interest based on a
penalty clause in the agreement, which provided:
"Notwithstanding any other provision in this Contract, if all of the conditions precedent set out in Appendix 1.1.8 related to the
Commencement Date have not been fulfilled within 15 calendar days from the effective date of the Agreement, the Provider
shall be entitled to immediately terminate the Contract and the Provider shall be entitled to a sum payable by the Employer
equivalent to 20% of the total Contract value [EUR18 million] stated in the BOQ [Bill of Quantities]."
By award dated 15 September 2014, the arbitral tribunal granted X's claim in full, ordering Y to bear 80% of the tribunal's costs and
compensate X for some of its legal expenses.
Y filed a petition to set aside before the Swiss Supreme Court, arguing that its right to be heard and equal treatment under Article 190(2)(d)
PILA had been violated as the arbitral tribunal had:
Allegedly disregarded certain arguments raised by Y regarding the penalty clause (violation of the right to be heard).
Invited X to file a cost submission after the relevant deadline agreed in the procedural timetable had lapsed, which it then took into
account in the award (violation of the principle of equal treatment).
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Decision
The Swiss Supreme Court rejected the petition.
With regard to the right to be heard, the Supreme Court considered the arguments raised by Y, which had allegedly been disregarded by
the arbitral tribunal, in connection with the enforceability of the penalty clause under English law as follows:
Assumption of a 10% profit margin: The award's failure to explicitly mention Y's objections to X's assertion to apply a general 10%
profit margin did not violate the right to be heard because, had the arbitral tribunal truly ignored Y's position, it would not have taken any
evidence in the first place. By relying on the profit margin usually realised by X in similar projects to estimate X's lost profit under the
agreement with Y, the arbitral tribunal had duly considered the evidence before it to establish the facts of the case.
Estimated operating costs: The award's failure to explicitly address Y's objections against X's estimate of certain operating costs also
did not violate the right to be heard. The arbitral tribunal relied on the only evidence available, which was statements by one of X's
witnesses, whom Y chose not to cross-examine. As regards the statements' evidentiary value, the tribunal duly noted the relationship
between X and the relevant witness (an employee of X's parent company), and Y was not able to show that its objections had been
disregarded during the arbitration. Finally, while Y may have criticised X's failure to submit an expert report in addition to the witness
statements, this was not tantamount to an actual motion for taking such additional evidence that the tribunal could have ignored.
As regards the principle of equal treatment, the Supreme Court noted that Y had not mentioned that one of its own cost submissions was
equally belated but not considered by the arbitral tribunal as a result. Instead, Y was in effect arguing that, under the agreed procedural
rules, the arbitral tribunal was not entitled to allow and consider X's belated cost submission at all. However, the allegedly wrong, or even
arbitrary, application of procedural rules does not amount to a violation of the principle of equal treatment and can, in and by itself, not
justify the setting aside of an international arbitral award.
Comment
With regard to the penalty clause, the Supreme Court points out that during the arbitration, instead of simply denying the other party's
positions, the petitioner could (and should) have submitted its own evidence to support its position on the profit margin as well as the
operating costs to be assumed. The petitioner's failure to do so ultimately left the arbitral tribunal and the Supreme Court nothing to work
with in terms of calculating the estimate as such and finding a violation of the right to be heard. This is a helpful reminder for party
representatives of the need to submit counter-evidence and that a simple objection against factual allegations made by the other side
might not suffice if and to the extent that, based on the evidence on record, the arbitral tribunal might consider these allegations as proven.
With regard to the belated cost submission, this decision adds an interesting facet to the Supreme Court's case law. Despite its recent
tendency towards a more restrictive take on party-compliance with procedural deadlines (for example, see decisions 4A_617/2010,
discussed in Legal update, Supreme Court finds that right to appointment of expert by arbitral tribunal was not violated as request made
out of time and not in proper form (www.practicallaw.com/4-507-0887) and 4A_274/2013, discussed in Legal update, Swiss Supreme Court
finds right to be heard and equal treatment not violated by refusal to allow evidence submitted out of time pursuant to procedural
rules (www.practicallaw.com/5-542-9065)), arbitral tribunals do enjoy some discretion to show procedural leniency when it is due, for
example when choosing to accept a slightly belated cost submission. However, the finding in the present case was directly linked to the
fact that the Supreme Court is not in a position to review the applicable procedural rules outside the scope of the existing grounds for
setting aside, in particular the procedural ordre public. This is noteworthy since the ICC rules applicable in this case were agreed by the
parties and an arbitral tribunal's disregard for agreed procedural rules does constitute a ground:
For setting aside an award pursuant to, for instance, Article 34(2)(a)(iv) of the UNCITRAL Model Law (www.practicallaw.com/7-2056044).
For denial of recognition and enforcement of an award under Article V(1)(d) of the New York Convention (www.practicallaw.com/6205-5196).
In other words, as far as compliance with the agreed arbitral procedure is concerned, both the UNCITRAL Model Law and the New York
Convention provide greater scope for setting aside or opposing enforcement of an award, respectively, than the PILA does in respect of
setting aside an arbitral award in Switzerland.
Case
Decision 4A_636/2014 (Swiss Supreme Court).
Resource information
Resource ID: 2-609-6905
Published: 22-Apr-2015
Products: Arbitration (All jurisdictions), PLC US Law Department
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Topics
Enforcement: Arbitration (http://uk.practicallaw.com/topic6-521-5771)
Procedure and Evidence: Arbitration (http://uk.practicallaw.com/topic1-381-2958)
Practice notes
Arbitration in Switzerland (http://uk.practicallaw.comtopic9-513-8272)
Enforcing arbitration awards in Switzerland (http://uk.practicallaw.comtopic1-573-3968)
Standard clause
Switzerland: ad hoc arbitration clause (http://uk.practicallaw.comtopic6-521-7299)
Glossary
Model Law (http://uk.practicallaw.comtopic7-205-6044)
New York Convention (http://uk.practicallaw.comtopic6-205-5196)
Legal update: case report
Supreme Court finds that right to appointment of expert by arbitral tribunal was not violated as request made out of time and not in proper
form (http://uk.practicallaw.comtopic4-507-0887)
Swiss Supreme Court finds right to be heard and equal treatment not violated by refusal to allow evidence submitted out of time pursuant to
procedural rules (http://uk.practicallaw.comtopic5-542-9065)
Country Q&A
Arbitration procedures and practice in Switzerland: overview (http://uk.practicallaw.comtopic5-502-1047)
Litigation and enforcement in Switzerland: overview (http://uk.practicallaw.comtopic1-502-1695)
Case page
Decision 4A_636/2014 (http://uk.practicallaw.comtopicD-031-8821)
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