Article 190(2)(e) of the Swiss Federal Statute on Private International Law (PILA) provides that an award may be annulled if it is contrary to public policy.

By contract dated 30 July 1998, company A agreed to supply military equipment to Ministry Y for a purchase price of more than EUR 400 million. On the basis of two supplementary agreements, X and the deputy secretariat of Y respectively later succeeded the original parties to the contract.

The supply contract stipulated that 55% of the purchase price was to be paid before delivery, taking into account the expenses incurred by X in performing its contractual obligations. In order to secure repayment of the advance payments in the event of non-performance by X, four bank guarantees were issued in favour of Y. Y terminated the contract and requested the reimbursement of excess payments (in the amount of EUR 161,003,867 plus interest) and payment of a penalty for delay. X contested the validity of the termination of the contract and initiated arbitral proceedings under the ICC. Y attempted to draw down on the bank guarantees issued by X. However, payment was refused by the bank because arbitral proceedings had been initiated.

On 25 January 2008, the arbitral tribunal handed down a partial award, holding that the contract had been terminated by the parties' mutual consent. In a final award dated 21 July 2009, the arbitral tribunal held that Y was entitled to a reduced amount of EUR 73,293,522 plus interest of the total amount claimed (that is, EUR 161,003,867) for reimbursement of excess payments and made a declaration that Y was entitled to draw down on the bank guarantees in that amount. The tribunal set off the remainder of Y's claim for excess payments (EUR 87,710,345) against X's claim for compensation for its performance of the contract.

On 14 September 2009, X filed a petition with the Swiss Federal Tribunal to set aside the final award on the grounds that the award was ultra or extra petita and incompatible with public policy and that the tribunal had infringed X's right to be heard. In particular, X submitted that the award contained an intrinsic contradiction in that it awarded interest not only on the excess payments to be refunded to Y, but on the aggregate amount claimed by Y, which included the amount set off against X's claim for compensation for its performance under the contract. X also considered it contradictory that the tribunal, despite its finding that the contract had been terminated by mutual consent, authorised Y to draw down on the bank guarantees, even though those bank guarantees made provision for draw-down only in the case of breach of contract. Accordingly, X argued that the award violated Article 190(2)(e) PILA.

The Federal Tribunal rejected the petition in its entirety.

In particular, the Federal Tribunal took the opportunity to clarify its practice with respect to the question of whether or not contradictions in an award are contrary to public policy such as to justify the setting aside of the award under Article 190(2)(e) PILA. In a number of decisions rendered in the 1990s, the Federal Tribunal held that awards containing intrinsic contradictions were incompatible with public policy, basing its practice mainly on the opinion of one legal commentator. The Federal Tribunal emphasised in some of those cases that the purpose of Article 190(2)(e) PILA was, among other things, to guarantee a certain minimum quality of international arbitral awards rendered in Switzerland. However, in later decisions, the Federal Tribunal did not hold that intrinsic contradictions in an award contravened public policy. In a decision of 3 April 2002 (DFT 128 III 191), the Federal Tribunal even stated that "intrinsic incoherencies in the rulings of an award do not fall within the definition of substantive public policy".

While the Federal Tribunal in the present case acknowledged that the attainment of a minimum quality of arbitral awards was desirable, it held that when defining the notion of public policy, jurisprudence had prematurely converted this objective into a fundamental principle constituting the foundation of every legal system according to the conceptions prevalent in Switzerland. The Federal Tribunal emphasised in particular that, from a qualitative point of view, allowing a challenge against an award under Article 190(2)(e) on the ground that it contained contradictions could not be justified when an award that was based on untenable findings of fact or on an arbitrary application of law was not susceptible to such a challenge.

The Federal Tribunal therefore concluded that intrinsic contradictions in an award do not fall within the definition of substantive public policy.

As an alternative, the Federal Tribunal emphasised that it considered that the tribunal's reasoning was not contradictory, and that X was in fact challenging the legal basis of the award and the tribunal's interpretation of the terms of the bank guarantees. Neither could be subject to a petition to set aside under Article 190(2)(e) PILA.

The Swiss Federal Tribunal's clarification that intrinsic contradictions in the considerations of an award do not, of themselves, infringe substantive public policy is to be welcomed. In the light of the most recent decisions of the Federal Tribunal on this question, the ruling in this case is not surprising, but it highlights once again the narrow interpretation of the scope of Article 190(2)(e) PILA by the Federal Tribunal.