Article 30(1) of the Swiss Federal Constitution grants anyone whose case falls to be judicially decided the right to have their case heard by an independent, unbiased and impartial judge, who is not being influenced by any circumstances not pertaining to the dispute.

Article 18(1) of the Concordat on Arbitration, in connection with Article 34(1)(a) of the Swiss Supreme Court Act (SCA), permits a party to challenge an arbitrator in arbitration proceedings governed by the legal framework for domestic arbitration, if the arbitrator has a personal interest in the outcome of the arbitration proceedings.

On 31 July 2002, X and Y entered into an agreement relating to the "conveyance of the notary's office X". The parties appointed Dr. Z as sole arbitrator for the resolution of any disputes arising out of the agreement.

On 30 April 2007, Y called upon Dr. Z as sole arbitrator and filed a monetary claim against X. On 23 May 2007, X submitted a first request for disqualification of the arbitrator, arguing that Dr. Z was in a business relationship with Y. The request was dismissed by the Supreme Court of the Canton of Aargau (one of Switzerland's 26 federal states), mainly on the ground that X had not submitted in the challenge proceedings that he had been ignorant of the business relationship between Dr. Z and Y when appointing Dr. Z as arbitrator.

On 4 May 2009, X filed a second request for disqualification of Dr. Z after he found out that the company Z. AG, of which Dr. Z was vice president of the board of directors, had granted Y a loan in the amount of CHF 100,000 in July 2005. According to the loan agreement, the loan had been granted "for the bridging of a liquidity bottleneck in the notary's office of the borrower (arisen in connection with the purchase of the notary's office 'Y & X' in C)". The sole arbitrator did not deny that a loan had been granted, but he did deny that this fact constituted a ground for challenge and continued the arbitration proceedings. On 3 February 2010, the Supreme Court of the Canton of Aargau dismissed X's request for disqualification of Dr. Z, denying a personal interest of the sole arbitrator in the outcome of the arbitration proceedings.

X filed a civil appeal with the Swiss Supreme Court to set aside the decision of the Supreme Court of the Canton of Aargau and requested a declaration that Dr. Z should resign from office due to the challenge.

The Swiss Supreme Court set aside the decision of the Supreme Court of the Canton of Aargau and acceded to the request for disqualification of Dr. Z as sole arbitrator.

The Swiss Supreme Court considered that Article 34 of the SCA, which governs the disqualification of federal judges and applies to domestic arbitration proceedings by reference of Article 18(1) of the Concordat on Arbitration (a contract concluded by the cantons of Switzerland), gave effect to Article 30(1) of the Swiss Federal Constitution. According to Article 34(1)(a) SCA, a member of the tribunal is, in particular, obliged to resign from office if he or she has a personal interest in the dispute, be it a direct or an indirect interest. The assumption of a personal interest requires the member of the tribunal to have a perceptible personal relation to the subject matter of the dispute. The interest can be of a material or non-material nature, and it can influence the legal or factual situation. It is, however, required that the interest concerns the member of the tribunal not only in a general way, but that it affects the member's personal sphere of interest to a noticeable degree and to a greater extent than the sphere of any other member of the tribunal.

The Supreme Court found that the loan granted by Z. AG to Y in the amount of CHF 100,000 directly pertained to the subject matter of the arbitration initiated by Y, given that the parties were in dispute over claims arising out of the agreement of 31 July 2002 relating to the "conveyance of the notary's office X" and that the loan had been expressly granted to bridge a liquidity bottleneck of Y "arisen in connection with the purchase of the notary's office 'Y & X' in C". The Supreme Court further took into account that the Supreme Court of the Canton of Aargau had deemed it to be reasonable to assume that the granting of the loan by Z. AG was to be traced to the fact that the sole arbitrator, Dr. Z, and Y knew each other and were in a business relationship. The Supreme Court moreover considered that the cantonal Supreme Court had rightly found that an admission of Y's claim would bring about an improvement of Y's solvency and was, therefore, in the interest of Z. AG as lender.

The Supreme Court therefore held that under these circumstances, the outcome of the arbitration could not be considered open anymore from the point of view of all the parties involved. The Supreme Court found that the sole arbitrator, as a member of the lender's board of directors, had to safeguard the company's interests, and that he bore the financial responsibility within the company, an assignment which can neither be revoked nor delegated under Swiss law. As responsible organ of the company he had an indirect interest in the repayment of the granted loan, even if he held no substantial investment in shares of the company. Given that the loan was needed in the aftermath of the purchase of the notary's office due to financial difficulties to be traced to this very purchase, the Supreme Court found that there was a direct connection to the dispute. Accordingly, the sole arbitrator had a perceptible personal relationship to the subject matter of the dispute, calling his independence into question. He had, in addition, violated his duty as arbitrator to inform X about the relevant facts.

Accordingly, the Supreme Court held that from an objective point of view, the given circumstances gave rise to doubts as to the impartiality of the sole arbitrator, and that the Supreme Court of the Canton of Aargau had wrongfully denied an indirect personal interest of the sole arbitrator in the sense of Article 34(1)(a) SCA.

As a preliminary comment it should be noted that it is very rare that the Swiss Supreme Court accedes to a challenge to an arbitrator based on the lack of independence or impartiality. Thus this case is one of few and as such already noteworthy. Furthermore, although the decision pertains to domestic arbitration, the applicable principles ultimately derive from constitutional law and thus in the same circumstances in an international case, the Supreme Court would have decided the same.

This being said, the fact that the Supreme Court accepted the challenge cannot be viewed as expressing a trend towards a stricter approach to challenges. Rather, the circumstances clearly showed a personal interest of Dr. Z in the outcome of the arbitration. Whether or not such interest is direct or indirect cannot be relevant.

On 1 January 2011, the new federal code of civil procedure (CCP) will enter into force in Switzerland (see Legal update, Switzerland: anticipated developments of 2010), unifying the civil procedure laws and also replacing the legal framework for domestic arbitration currently governed by the Concordat on Arbitration. The new provision on challenges to arbitrators will replace the Concordat's reference to the SCA by the autonomous rule that an arbitrator may be challenged in the event of justifiable doubts as to his or her independence or impartiality. This new provision corresponds with the rule applicable in international arbitration proceedings.

Despite this revision of the legal framework in domestic arbitration, it is not to be expected that the standards applicable to an arbitrator's independence and impartiality will undergo a change, given that Article 34 SCA merely contains an enumeration of situations giving rise to justifiable doubts as to a federal judge's independence and impartiality. It is, therefore, to be assumed that the Federal Tribunal's decision in the present case would have been similar under the CCP.