Swiss Supreme Court: challenging awards on ground of improper constitution of tribunal and arbitrators' duty to warn parties of any unexpected reasoning

Practical Law UK Legal Update Case Report 7-525-1117 (Approx. 5 pages)

Swiss Supreme Court: challenging awards on ground of improper constitution of tribunal and arbitrators' duty to warn parties of any unexpected reasoning

by PD Dr Nathalie Voser (Partner, Zurich) and Aileen Truttmann (Associate, Geneva), Schellenberg Wittmer

Background

The Swiss Private Law International Act (PILA) contains the following relevant provisions:

Article 190(2)(a) PILA provides that an award can be challenged if the arbitral tribunal was improperly constituted.
Article 190(2)(b) PILA provides that an award can be challenged if the arbitral tribunal wrongly accepted or declined jurisdiction.
Articles 190(2)(d) and (e) PILA provide that an award can be challenged if the arbitral tribunal has violated the parties' right to be heard or the award is incompatible with public policy.
Article 155(i) PILA provides that the law applicable to a company (that is, the law of the country of its incorporation) governs the determination of the powers of representation of the persons acting for the company according to its organisation.

Facts

A dispute arose out of an exclusive agency agreement for the sale of diesel engines for power plants in Iraq. Having not received the commission to which it was entitled under the agreement, Y, an Iraqi company, initiated ICC arbitration proceedings against X, a French company. In accordance with the arbitration clause contained in the agreement, a three-member panel was constituted. The seat of the arbitration was in Lausanne, Switzerland, and Swiss law was applicable to the merits.

X objected that the arbitral tribunal had not been properly constituted, and alternatively that it was not competent to rule on Y's claims. In its award, the arbitral tribunal dismissed X's procedural objections and ordered X to pay to Y an amount of EUR10.4 million, representing commission due under the agreement.

X petitioned the Supreme Court to have this award set aside. Relying on Article 190(2)(b) PILA, X objected to the arbitral tribunal's jurisdiction over the dispute, on the ground that the request for arbitration had been filed by representatives of Y who lacked power to do so.

X argued that:

Whether Y's representatives had the power to file the request for arbitration should have been analysed under Iraqi law, by virtue of Article 155(i) PILA.
Its right to be heard had been violated (for the purposes of Article 190(2)(d) PILA) because the arbitral tribunal had relied on a specific exhibit to conclude that the filing of the request for arbitration had been ratified, although the exhibit had been produced to prove another fact.
The arbitral tribunal had admitted the validity of a corruption-tainted act, violating public policy for the purposes of Article 190(2)(e) PILA.

Decision

The Supreme Court rejected the petition.

Distinction between Article 190(2)(a) and Article 190(2)(b)

Commenting on Y's contention that the relevant basis for X's petition was Article 190(2)(a), rather than Article 190(2)(b) PILA, the Supreme Court noted that the distinction was important, because it could only examine the grounds invoked and argued by the appellant.

The Supreme Court clarified that "proper constitution of the arbitral tribunal", within the meaning of Article 190(2)(a) PILA, was limited to issues regarding the nomination or replacement process, and the independence of the arbitrators. In the present case, the arbitral tribunal had been properly constituted and the issue at stake merely related to the question of whether it had been seised by individuals entitled to do so or by a falsus procurator (unauthorised agent). The issue concerned the rationae personae competence in its widest sense. Therefore, X had correctly relied on Article 190(2)(b) PILA.

Power of Y's representatives to file request for arbitration

The Supreme Court noted that, even if it was correct that the arbitral tribunal did not apply Iraqi law to determine whether Y's representatives had power to file the request for arbitration, it did not need to do so in any case, because it had concluded that the commencement of arbitration had subsequently been ratified by a representative who did have power. The Supreme Court added that X had not argued that such reasoning violated Iraqi law.

X also contended that the individual said to have ratified the initiation of the arbitration proceedings had no power to do so at the time. X relied on the arbitral tribunal's indication in the award that the individual in question only returned to his former CEO position on 19 November 2011, that is, after the ratification occurred.

The Supreme Court noted that it was clear that the arbitral tribunal had inadvertently indicated the wrong date. In another passage, the arbitral tribunal had mentioned 8 July 2011, which corresponded with X's position. As a date is a fact, the Supreme Court could not correct it, even if it was clearly an oversight. However, the Supreme Court held that by relying on the date of 19 November 2011 in the challenge proceedings when it had formerly relied on the date of 8 July 2011, X was acting in a contradictory manner and was therefore breaching the rules of good faith.

The Supreme Court noted that, in any event, the representatives who launched the arbitration continued acting on behalf of the company in the context of the arbitration proceedings after 19 November 2011 without any reaction from the CEO. Therefore, the CEO had implicitly ratified such acts at that time, which was sufficient.

Violation of the right to be heard

The Supreme Court also rejected X's argument that its right to be heard had been violated (Article 190(2)(d) PILA). According to the Supreme Court's well established case law, arbitrators are under a duty to warn parties when they intend to base their decision on a legal provision or consideration not raised during the proceedings, and of which the parties could not have anticipated the relevance. The Supreme Court confirmed once again that this duty was applied very restrictively. In addition, it took the opportunity to specify that it only applied to legal issues, not facts.

It follows that arbitrators are not bound to seek the parties' determination on the scope of an exhibit produced. The parties cannot limit the autonomy of the arbitral tribunal in the assessment of a given exhibit depending on the aim assigned to its production. If the parties could decide in advance the conclusion the arbitral tribunal should draw in relation to each exhibit produced, this would nullify the principle of the free assessment of evidence, which is a cornerstone of international arbitration.

Violation of public policy

Finally, the Supreme Court reaffirmed that public policy is violated only if bribery is established, and the arbitral tribunal refused to take this circumstance into account in its award. It noted that in the present instance, the arbitral tribunal had not considered that a part of the commission was intended for the payment of bribes to Syrian officials. Therefore, there was no violation of public policy.

Comment

This decision provides useful clarification on the scope of Article 190(2)(a) PILA. As the Supreme Court generally does not review the ground if the wrong provision is selected, practitioners should be careful to distinguish issues relating to the constitution of the arbitral tribunal from issues relating to the jurisdiction of the arbitral tribunal.

This decision also shows clearly that, after an exhibit has been produced, there is not much a party can do to prevent the arbitral tribunal from freely assessing the evidence. As underlined by the Supreme Court, a party should therefore immediately object to the production of an exhibit that is harmful to its case. However, it is difficult to see how such an objection could be successful, except in specific circumstances. With regard to a party's own exhibits, this decision just emphasises the importance of carefully selecting the exhibits to be produced.

Finally, in the context of the argument that public policy was violated because of alleged bribery, it appears that the Supreme Court was somehow doubtful of the relevance of the arbitrators' reasoning. Indeed, it is surprising that, although the arbitral tribunal held that there was no evidence of bribery, it nevertheless reduced the amount of the claim for commission in order to not exceed 10% of the sale price. It did this on the basis that a commission higher than 10% can raise suspicion that, not only was the agent's activity remunerated, but that the higher amount was also used for bribery. It remains unclear what the legal basis for such reduction by the arbitral tribunal was - the Supreme Court referred to a sort of legal fiction (une sorte de fiction juridique). Because of its limited review, the Supreme Court could not analyse this reasoning and was reduced to noting that there was no evidence of corruption.

Case

4A_538/2012.

Swiss Supreme Court: challenging awards on ground of improper constitution of tribunal and arbitrators' duty to warn parties of any unexpected reasoning | Practical Law