10/2/2014 PLC - Swiss Supreme Court clarifies standard for challenging the basis of preliminary or interim awards regarding an arbitral tribunal's composition…
Swiss Supreme Court clarifies standard for challenging the basis of preliminary
or interim awards regarding an arbitral tribunal's composition or jurisdiction
Resource type: Legal update: case report
Status: Published on 01-Oct-2014
Jurisdiction: Switzerland
In German-language decision 4A_74/2014, dated 28 August 2014 and published on 11 September 2014, the Swiss Supreme Court
confirmed an interim award challenged for lack of jurisdiction and for violating the parties' right to be heard and the principle of equal
treatment.
Prof Dr Nathalie Voser (Partner) and Dr Jörn Eschment (Associate), Schellenberg Wittmer Ltd (Zurich)
Speedread
The Supreme Court has found that, when an interim or preliminary award is challenged because the arbitral tribunal was improperly
constituted or had wrongly accepted jurisdiction, the factual basis for the arbitral tribunal's finding regarding its constitution and jurisdiction
is open to objections based on Article 190(2)(c), (d), and (e) of the Private International Law Act (PILA). However, this is only to the extent
that such objections are directly related to the issues of composition or jurisdiction. Applying these principles, the Supreme Court
confirmed a sole arbitrator's jurisdiction based on the parties' true and common intention ("real consensus") to arbitrate. The Supreme
Court also found that the phrase "the Arbitration Committee, to be established in Basel" meant arbitration proceedings under the auspices
of the Basel Chamber of Commerce, rather than an intention for the dispute to be determined by ad hoc arbitration.
This decision will be published in the official court reporter and, as such, carries particular weight. (Decision 4A_74/2014.)
Background
Article 190(2)(a) of the Private International Law Act (PILA) provides that that an award will be set aside if the sole arbitrator was not
properly appointed or if the arbitral tribunal was not properly constituted.
Article 190(2)(b) PILA provides that an award will be set aside if the arbitral tribunal wrongly accepted or declined jurisdiction.
Article 190(2)(c) PILA provides that an award will be set aside if the arbitral tribunal's decision went beyond the claims submitted to it, or
failed to decide one of the items of the claim.
Article 190(2)(d) PILA provides that an award will be set aside if the parties' right to be heard or the principle of equal treatment has been
violated.
Article 190(2)(e) PILA provides that an award will be set aside if it is incompatible with public policy.
Article 190(3) PILA provides that preliminary awards will (only) be set aside on the grounds set out by Article 190(2)(a) or (b) PILA.
Facts
In proceedings against an interim award rendered by a sole arbitrator seated in Basel, in an arbitration administered by the Swiss
Chambers' Arbitration Institution pursuant to the Swiss Rules of International Arbitration (the Swiss Rules), the petitioner (A) invoked
Articles 190(2)(b)&(d) PILA as a basis for setting aside the award.
The underlying dispute arose in connection with several share purchase agreements entered into by A, a Luxembourg company, and a
Turkish individual (B), as follows:
The First Contracts. Between 15 and 21 October 2011, A and B concluded three agreements whereby A would purchase all or parts of
B's shares in three different companies for US$14.1 million. Each of the First Contracts included the following identical arbitration
clause: "Art. 16 Applicable Law and resolution of disputes - For all disputes arising out of this contract, the Arbitration Committee, to
be established in Basel (Switzerland), is authorized and the law to be applied is Swiss Law. The Arbitration language is German. The
decision of the Arbitration Committee is a judgment in absolute, eliminating the right to appeal of the parties."
The Second Contracts. Between 19 October 2011 and 9 November 2011, the parties concluded three further agreements whereby B
would sell all or parts of his shares in the very same companies, but only for a small fraction of the price agreed in the First Contracts.
Each of the Second Contracts contained a dispute resolution clause providing for the jurisdiction of different state courts.
In October 2012, B initiated arbitral proceedings against A seeking payment of the purchase price agreed under the First Contracts,
arguing that the arbitration clause provided for dispute resolution through arbitration under the auspices of the Basel Chamber of Commerce
and subject to the Swiss Rules. A, on the other hand, submitted that the parties had not validly agreed on arbitration because the
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10/2/2014 PLC - Swiss Supreme Court clarifies standard for challenging the basis of preliminary or interim awards regarding an arbitral tribunal's composition…
arbitration clause under the First Contracts was replaced by the state court jurisdiction clauses in the Second Contracts. In the alternative,
A argued that the arbitration clause had to be interpreted in good faith to provide for an arbitral tribunal to be constituted ad hoc.
Following his appointment, the sole arbitrator, bifurcated the proceedings and, in December 2013, rendered an interim award accepting
jurisdiction to decide B's claims under the First Contracts. He found that, by entering into the Second Contracts, the parties had the true
and common intention not to replace, but rather to uphold, the arbitration clause under the First Contracts. According to the sole arbitrator,
this intention was apparent from the significant price difference, as well as from the conclusion of different contracts at different prices for
the very same shares. The sole arbitrator concluded that the First Contracts reflected the parties' real intentions, both in terms of price and
dispute resolution, whereas the Second Contracts were merely intended to serve as notification of the transactions with the competent
authorities without revealing the real purchase price. Finally, according to the sole arbitrator, the arbitration clause, as interpreted in good
faith, provided for the jurisdiction of an arbitral tribunal to be constituted under the Swiss Rules as opposed to an ad hoc arbitration.
A applied to the Supreme Court to set aside the interim award, on the grounds that the sole arbitrator had wrongly accepted jurisdiction
and violated the parties' right to be heard, and the principle of equal treatment.
Decision
The Supreme Court dismissed the application to set aside the award.
With regard to the alleged replacement of the arbitration clause, the Supreme Court considered that the sole arbitrator's specific questions
during the hearing as to why the parties had entered into different contracts at different prices for the same shares did not violate the right
to equal treatment or the principle of party presentation. The same applied with respect to the sole arbitrator's decision to interpret B's
allegations regarding the Second Contracts in the sense described above, that is, as only serving for "notification purposes". Furthermore,
by initiating the arbitral proceedings, B, in the Supreme Court's view, further demonstrated his position that the First Contracts reflected the
parties' true and common intention, both in terms of price as well as in terms of dispute resolution by arbitration. Finally, by simply
maintaining its view that the later conclusion of the Second Contracts, in and by itself, showed the parties' will to replace the First
Contracts, A failed to deal with the very substance of the sole arbitrator's reasoning.
With regard to the interpretation of the arbitration clause, the Supreme Court held that, since the parties' intention to submit their disputes
to arbitration had been established, there was no need for a restrictive approach. In particular, the sole arbitrator did not violate any
principles of contract interpretation when he found that the phrase "the Arbitration Committee" indicated an already established institution,
as opposed to an ad hoc institution. Against this background and given the undisputed absence of another Basel-based arbitration
institution within the meaning of the arbitration clause, the sole arbitrator's finding in favour of proceedings under the auspices of the Basel
Chamber of Commerce withstood scrutiny.
Comment
The Supreme Court considers the decision a leading case as it chose to publish it in the official court reporter. Most likely, this is due to
the Supreme Court's finding that, contrary to the wording of Article 190(3) PILA, the grounds for setting aside an arbitral award pursuant to
Article 190(2) PILA may fully be relied upon in proceedings challenging an arbitral tribunal's composition or jurisdiction, but only to the
extent they relate directly to the factual basis for the arbitral tribunal's finding regarding its composition or jurisdiction. This approach is not
only called for due to procedural efficiency, but also because the Supreme Court would otherwise be expected to render a decision in
setting aside proceedings pursuant to Article 190(3) PILA based on facts potentially established by the arbitral tribunal infra/ultra petita
(Article 190(2)(c) PILA), in violation of the parties' right to be heard and equal treatment (Article 190(2)(d) PILA), or in violation of public
policy (Article 190(2)(e) PILA).
As a result, and as explained by the Supreme Court in its decision, a challenge brought against a preliminary or interim award accepting
jurisdiction could, for instance, succeed based on Article 190(2)(b) PILA alone, that is without the unsuccessful party ever having been able
to claim a violation of due process.
This decision marks an important step in the Supreme Court's case law and constitutes its new litmus test in setting aside proceedings
pursuant to Article 190(3) PILA (see also decision 4A_6/2014, also dated 28 August 2014, explicitly referring to the present case as "new
law" - see Legal update, CAS arbitral award partially annulled for lack of jurisdiction (www.practicallaw.com/9-582-8825)). Accordingly, and
in order to avoid forfeiture, parties challenging a preliminary or interim award pursuant to Article 190(3) PILA, should include any and all
arguments under Articles 190(2)(c), (d) and (e) PILA to the extent that they directly relate to the factual basis for the arbitral tribunal's
finding regarding its composition or jurisdiction. In other words, parties cannot simply wait to raise such arguments in (potential)
subsequent setting aside proceedings against the final award.
This case is also a rare example of an arbitral tribunal basing its jurisdiction on the parties' true and common intention to arbitrate. While
such a "real consensus" is usually difficult to prove, the rather dubious circumstances of the case seem to provide sufficient support for the
conclusion that the Second Contracts were indeed only entered into in order to disguise the parties' true intentions, both in terms of price
as well as in terms of dispute resolution by arbitration, as reflected in the First Contracts.
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10/2/2014 PLC - Swiss Supreme Court clarifies standard for challenging the basis of preliminary or interim awards regarding an arbitral tribunal's composition…
Further, the Supreme Court's considerations regarding the sole arbitrator's sua sponte questioning during the hearing may be of some
practical interest. Extensive questioning by arbitrators is very common today, and proactive arbitrators are generally preferred in the
interest of streamlined and efficient proceedings. Notwithstanding the overall boundaries of such questioning in light of an arbitrator's role
and function, the Supreme Court in this case upheld the sole arbitrator's conduct, emphasising that his questions regarding the
relationship between the First and the Second Contracts followed from the facts of the case, and that both parties had the opportunity to
comment on this issue. Indeed, this finding may delineate the Supreme Court's general standpoint on arbitrators' questioning and its
limitations.
Finally, the decision confirms just how far the Supreme Court is willing to go in order to "cure" pathological arbitration clauses once the
parties' intention to arbitrate has been established. While the Supreme Court's decision in favour of proceedings under the auspices of the
Basel Chamber of Commerce is to be welcomed, especially given the (unnecessary) additional time and cost of finding in favour of ad hoc
proceedings, the arbitration clause could also have been interpreted differently.
Case
Decision 4A_74/2014 (Swiss Supreme Court).
Resource information
Resource ID: 1-582-0965
Published: 01-Oct-2014
Products: PLC Arbitration - England and Wales, PLC Arbitration - International, PLC Arbitration Email, PLC US Law Department
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