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PLC - Swiss Supreme Court once again considers meaning of arbitrariness in domestic arbitration
Swiss Supreme Court once again considers meaning of arbitrariness in
domestic arbitration
Resource type: Legal update: case report
Status: Published on 28-Jan-2015
Jurisdiction: Switzerland
In decision 4A_190/2014, the Swiss Supreme Court considered the question whether an arbitral tribunal's legal reasoning was arbitrary.
Nathalie Voser (Partner) and Hannah Boehm (Senior Associate), Schellenberg Wittmer Ltd (Zurich)
Speedread
In a German language decision of 19 November 2014, the Swiss Supreme Court granted an application to set aside a domestic arbitral
award on the grounds of arbitrariness. It held that an award is arbitrary from a legal point of view, if the tribunal's legal reasoning makes
only cursory references to the legal principles at issue, instead of addressing them in a detailed and substantive way. (Decision
4A_190/2014.)
Background
Article 393(e) of the Swiss Code of Civil Procedure (CCP), which governs domestic arbitration, provides that an arbitral award shall be set
aside if it is arbitrary in its result because it is based on findings that are manifestly contrary to the facts as stated in the case file, or
because it constitutes a manifest violation of law or equity.
Facts
Since the 1990s, B, a Swiss commodities trading company, purchased copper concentrate from C, the state-owned company operating a
copper mine in Georgia. After several years, B contacted A, another Swiss based company specialising in producing, processing and
trading commodities, in particular copper from Georgia, to discuss the future of the mine.
In February 2003, A and B signed a "Memorandum of Understanding" providing for a new set-up for the deliveries from Georgia. It was
agreed that B would no longer receive direct deliveries of copper concentrate from C. Rather, A would purchase the copper concentrate
from C and then re-sell it to B. In order to realise this agreement, A and B entered into a delivery contract for a fixed minimum term of five
years under which A was to deliver the entire production of copper concentrate from the mine to B. In order to ensure back-to-back
deliveries, A also entered into a contract with C for C to deliver the entire production of copper concentrate from the mine to A.
In November 2003, a revolution led to a change of government in Georgia and the new government forced the management of C to resign. In
the following year, A and B decided to change their contractual framework, shortly before the first deliveries under the new back-to-back
agreements between A and B, on the one hand, and A and C, on the other hand, should have taken place. In February 2004, A and B
entered into an assignment agreement and agency agreement which contained a clause allowing for termination of the contracts with 60
days prior notice. Under the assignment agreement, A assigned its claims for deliveries pursuant to its supply agreement with C to B.
Under the agency agreement, B undertook, in turn, to pay an agency fee and an assignment fee to A. However, two weeks after signing
the agency and assignment agreements with A regarding the delivery of copper concentrate from the mine, B extended its contracts for
direct delivery with C, to cover the deliveries of copper concentrate from the mine without notification thereof to A.
In June 2004, B terminated the assignment and agency agreements with A, relying on the contractual termination clauses providing for 60
days prior notice.
In April 2011, A initiated arbitration proceedings against B, claiming payments in the amount of more than USD100 million for allegedly
outstanding agency and assignment fees. On 19 February 2014, the arbitral tribunal ordered B to pay A the assignment and agency fees
for the period from March 2004 to December 2008. In its reasoning, the arbitral tribunal held that B had breached the assignment and
agency agreements by extending its contract for direct delivery with C without notifying A of this extension, thereby frustrating the purpose
of those agreements, in bad faith. According to the principle of good faith, B was therefore estopped from terminating the contracts
concluded with A with 60 days prior notice. Instead of applying the termination clause provided for in the assignment and agency
agreements, the arbitral tribunal applied the termination clause of the parties' previous contract that had provided for a fixed contractual
term of five years. Both A and B filed a petition with the Swiss Supreme Court to have the arbitral award set aside.
Decision
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PLC - Swiss Supreme Court once again considers meaning of arbitrariness in domestic arbitration
The Swiss Supreme Court accepted B's challenge on the grounds of arbitrariness. It held that the arbitral tribunal had awarded A the fees
under the assignment and agency agreements based on a very general reference to the principle of good faith and without addressing the
case law and legal literature dealing with the principles of abuse and law and good faith at all. It concluded that such a cursory reference to
the principle of good faith does not qualify as application of the law and does not withstand the prohibition of arbitrariness.
According to the Swiss Supreme Court, the arbitral tribunal's reasoning in the award did not adequately explain why B's previous breach of
contract made its termination of the parties' agreements an abuse of law. In particular, it remained unclear why a party should be estopped
from terminating a contract because it was in breach of such contract and such breach was in bad faith. Contrary to A's reasoning, the
Swiss Supreme Court found that a party in breach of a contract does not behave contradictorily if it terminates the contract based on the
contractual provisions. On the contrary, the Swiss Supreme Court considered it consistent behaviour if a party terminates a contract it no
longer feels bound by.
Finally, the court could not understand why the arbitral tribunal had "revived" the parties' previous contract by applying the fixed contractual
term of five years. According to the Swiss Supreme Court, the tribunal's general reference to the principle of good faith did not justify the
application of a provision that was not included in the contracts at issue.
Comment
This case warrants several comments.
First, the case reflects the fact that a considerable number of trading companies have their headquarters in Switzerland and operate on an
international level. Therefore, even though A and B have their registered seats in Switzerland, the background of the case is very
international, making it a rather unexpected example of a domestic arbitration.
Second, Swiss trading companies should, in dealing with other Swiss trading companies in an international context, consider opting out of
the domestic framework and applying the international arbitration law. Opting out is permissible since 2011. However, this case also shows
that such opting out must be carefully considered. Indeed, like other cases before, this case illustrates that it can make a significant
difference whether an arbitration seated in Switzerland is domestic or international (see also Legal updates, What mak es a (domestic)
arbitral award "arbitrary" in Switzerland (www.practicallaw.com/2-559-4047) and Swiss Supreme Court Sets aside domestic award on the
grounds of arbitrariness (www.practicallaw.com/2-586-0545)). Unlike awards resulting from international arbitrations, awards issued in
domestic arbitrations can be challenged because they are "arbitrary in their result", allowing the Swiss Supreme Court a more substantive
review of the case than the grounds for setting aside an international award provided for in the Swiss Private International Law Act (PILA).
Finally, the Swiss Supreme Court has, in fact, disapproved the lack of proper legal reasoning. This results, in particular, from the statement
that "the meagre reference to the principle of good faith does not constitute a proper application of the law but goes in the direction of a
decisionism which does not withstand the prohibition of arbitrariness".
Those who are familiar with international arbitration and the custom of certain arbitral tribunals to regularly grant or reject very substantial
claims with simple statements such as "the arbitral tribunal was not persuaded by the arguments" or similar wording, cannot but wonder
whether such type of reasoning would withstand the Swiss Supreme Court's scrutiny under the principle of arbitrariness.
Case
Decision 4A_190/2014 (Swiss Supreme Court).
Resource information
Resource ID: 7-597-8665
Published: 28-Jan-2015
Products: PLC Arbitration - International, PLC Arbitration Email, PLC US Law Department
Related content
Topics
Arbitral Awards and Challenges (http://uk.practicallaw.com/topic0-203-6785)
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)
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PLC - Swiss Supreme Court once again considers meaning of arbitrariness in domestic arbitration
Article
What makes a (domestic) arbitral award "arbitrary" in Switzerland (http://uk.practicallaw.comtopic2-559-4047)
Legal update: case report
Swiss Supreme Court sets aside domestic arbitral award on grounds of arbitrariness (http://uk.practicallaw.comtopic2-586-0545)
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_190/2014 (http://uk.practicallaw.comtopicD-029-0401)
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