Failed challenge based on ordre public and the right to be heard

Practical Law UK Legal Update Case Report 9-501-8613 (Approx. 4 pages)

Failed challenge based on ordre public and the right to be heard

by Practical Law

Background

Article 72 of the UN Convention on the International Sale of Goods (CISG) provides:

"(1) If prior to the date for performance of the contract it is clear that one of the parties will commit a fundamental breach of contract, the other party may declare the contract avoided.

(2) If time allows, the party intending to declare the contract avoided must give reasonable notice to the other party in order to permit him to provide adequate assurance of his performance.

(3) The requirements of the preceding paragraph do not apply if the other party has declared that he will not perform his obligations."

Article 75 of the CISG provides:

"If the contract is avoided and if, in a reasonable manner and within a reasonable time after avoidance, the buyer has bought goods in replacement or the seller has resold the goods, the party claiming damages may recover the difference between the contract price and the price in the substitute transaction as well as any further damages recoverable under article 74."

Facts

By various purchase orders dated between February and April 2008, B ordered an aggregate amount of 25,000 metric tons of steel blooms from A, with delivery dates between March and July 2008. After the production of 1,360 metric tons of steel blooms, an explosion occurred at A's steel plant, bringing production to a halt. This qualified as a force majeure situation for A, in which it was not responsible for the resulting delays. Initially, this force majeure period was to last until 30 May 2008 but was later extended until 29 June 2008.

The force majeure situation led to uncertainty as to delivery dates and A and B also had discussions about prices. B ultimately claimed that A had indicated that it would not resume performance of the contract unless B agreed to a substantial price increase. A refused B's request to confirm its willingness to deliver the steel blooms at the originally agreed prices. B considered A's conduct to be an anticipatory breach of contract within the meaning of Article 72 CISG. Accordingly, B purported to terminate the contracts by letters dated 12 and 24 June 2008. On 23 June 2008, B entered into substitute transactions with a different supplier, C.

B initiated arbitration proceedings against A before the Geneva Chamber of Commerce, which appointed a sole arbitrator. The seat of the arbitration was Geneva. B sought a declaration that A had breached the contracts and that the contracts had been effectively terminated by B based on the anticipatory breach of contract by A. B also claimed damages of EUR 3,915,875.44 plus interest as a result of having to enter into the substitute transactions. The sole arbitrator upheld B's claims and awarded a slightly reduced amount of damages of EUR 3,787,344.44 plus interest.

A applied to set aside the award on the grounds that it violated ordre public and its right to be heard. Inter alia, its arguments regarding its right to be heard were that:

The arbitrator had not taken sufficient account of A's arguments on the anticipatory breach of contract and the substitute transactions, which amounted to a denial of A's right to be heard (Formelle Rechtsverweigerung).
The duty of confidentiality imposed by the arbitrator in a procedural order prevented A from investigating the substitute transactions, thus frustrating A's right to defend itself.
The arbitrator had refused to take A's evidence on the substitute transactions.

A argued that the award violated ordre public, on the ground that:

The arbitrator's view that the issue of whether or not the substitute transactions had actually been performed was irrelevant was counter to the fundamental principle that damages should only be recovered for actual loss.
The arbitrator should have awarded interest on damages from the date that B had made payment for the substitute transactions, not from the date that they were agreed upon.

In addition to its request to set aside the award, A also requested that the Federal Tribunal dismiss B's claims.

Decision

The Swiss Federal Tribunal rejected A's petition in its entirety.

No competence to decide on the merits: The Federal Tribunal rejected A's request that it dismiss B's claims, on the ground that, when considering a petition challenging an international arbitral award, the Federal Tribunal as a matter of principle does not have jurisdiction to render a decision on the merits of the actual dispute.

Right to be heard: The Federal Tribunal rejected A's arguments that it had been denied a right to be heard. It held that:

The arbitrator had taken into account A's arguments regarding anticipated breach; A was just criticising the arbitrator's legal analysis, which was beyond the scope of the Federal Tribunal's judicial review.
A had failed to demonstrate that the procedural order imposing the duty of confidentiality had affected the final award, as would be necessary for the order to be challenged together with the final award.
A's petition did not contain sufficient information to enable the Federal Tribunal to analyse whether or not the arbitrator had taken evidence on all relevant issues.

Ordre public: The Federal Tribunal also rejected A's arguments regarding the alleged violation of ordre public. It held that:

A merely criticised the sole arbitrator's understanding of Article 75 CISG but had failed to demonstrate how the award violated a fundamental principle of substantive law, as required for a valid ordre public challenge.
A's complaint about the date from which interest had been awarded must also be rejected for the same reason.

Comment

Once again, the Federal Tribunal has confirmed the very narrow scope for judicial review of international arbitral awards, in respect of challenges on the grounds of both the right to be heard and ordre public. In addition, the decision highlights that challenges must be supported with adequate detail in the petition.

With regard to substantive ordre public, the Federal Tribunal's reasoning suggests that even a breach of the principle that recovery of damages requires actual loss may not fall within the scope of the fundamental legal principles protected by the notion of substantive ordre public. This must be correct, as the principle that actual loss is a prerequisite for the recovery of damages does not apply without exceptions.

The Federal Tribunal's decision also provides some insight into the arbitrator's reasoning on the issue of anticipatory breach of contract under Article 72 CISG, and the calculation of damages based on substitute transactions under Article 75 CISG.

As to the factual background of the dispute, it is notable that A tried to impose higher prices and that B speedily entered into substitute transactions, from which the substantial damages claimed by B resulted. This indicates that the transactions occurred in a steel market in which the prices were increasing.

Finally, this decision demonstrates the speed with which arbitral proceedings can be dealt with in Switzerland. The proceedings took just 18 months, from the time of filing the request for arbitration with the Geneva Chamber of Commerce until the Federal Tribunal's decision on the petition.

Case

4A_550/2009

Failed challenge based on ordre public and the right to be heard | Practical Law