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Iura Novit Arbiter: Application of the Law on the Tribunal’s Own Motion

The Swiss Fed­er­al Tri­bunal con­firmed that the legal analy­sis of an arbi­tral tri­bunal in Switzer­land is not restrict­ed by the legal argu­ments of the par­ties. Rather, by apply­ing the prin­ci­ple of «iura novit arbiter» the Swiss Fed­er­al Tri­bunal con­sid­ers that a tri­bunal does not already sur­prise the par­ties, if it mere­ly choos­es to apply the law in a dif­fer­ent man­ner than the par­ties anticipated.

Com­men­tary by Simon Gabriel and Axel Buhr on Swiss Fed­er­al Tri­bunal deci­sion 4A_56/2017 on Jan­u­ary 112018

I. Back­ground

[1] In the time between Novem­ber 2014 and May 2015, the Swiss com­pa­ny C ini­ti­at­ed three arbi­tra­tion cas­es at the Swiss Cham­bers’ Arbi­tra­tion Insti­tu­tion SCAI against the French com­pa­ny R (con­sid. B.a).

[2] All three cas­es relat­ed to a Swiss law gov­erned Share Pur­chase Agree­ment (SPA), entered into by the Par­ties in Sep­tem­ber 2011. Under the SPA, R had pur­chased the shares in the French com­pa­ny T from C for EUR 1 and a flex­i­ble earn-out to be cal­cu­lat­ed in accor­dance with an earn-out plan defined in the SPA. With its Notices of Arbi­tra­tion, C request­ed R’s pay­ment of an earn-out in excess of EUR 4 Mio. for the years 2012 to 2014 (con­sid. A).

[3] Sub­se­quent­ly, all three cas­es were joined by SCAI. In line with the arbi­tra­tion agree­ment, an arbi­tral tri­bunal com­posed of three arbi­tra­tors was con­sti­tut­ed, with seat of the arbi­tra­tion in Zurich (con­sid B.a).

[4] C based its claim on the earn-out plan in Arti­cle 2.2.2 (b) and annex 2.2.2(b) of the SPA (see con­sid. A for a repro­duc­tion of the rel­e­vant parts).

[5] R reject­ed C’s claim in full, argu­ing that no earn-out was owed to C pur­suant to the agreed earn-out plan.

[6] In the pro­ceed­ings on the mer­its, the cor­rect method for the cal­cu­la­tion of the earn-out and its appli­ca­tion were at the heart of the dis­pute (see con­sid. B.b for a sum­ma­ry of the Par­ties’ diverg­ing posi­tions on the cal­cu­la­tion method and the numer­ous points at issue in this respect).

[7] On 23 Decem­ber 2016, the Arbi­tral Tri­bunal issued its Final Award, par­tial­ly grant­i­ng C’s claim and order­ing R to pay to C some EUR 3 Mio. as earn-out.

[8] With its appeal dat­ed 1 Feb­ru­ary 2017, R request­ed the Swiss Fed­er­al Tri­bunal to set aside the award.

II. Deci­sion

[9] As a basis of its appeal, R invoked Arti­cles 190(2)(d) and (e) of the Swiss Pri­vate Inter­na­tion­al Law Act (PILA), argu­ing that R’s right to be heard had been vio­lat­ed and that the award was incom­pat­i­ble with pub­lic pol­i­cy, respectively.

A. Right to be heard

1. Gen­er­al Considerations

[10] With regard to the pur­port­ed vio­la­tion of R’s right to be heard, R sub­mit­ted that the Arbi­tral Tri­bunal in its award on the one hand had failed to con­sid­er sev­er­al defence argu­ments raised by R, and, on the oth­er hand, had based its deci­sion on unfore­see­able and sur­pris­ing con­sid­er­a­tions (con­sid. 3).

[11] At the out­set of its analy­sis, the Swiss Fed­er­al Tri­bunal recalled its long-stand­ing case law on the right to be heard in adver­sar­i­al pro­ceed­ings (con­sid. 3.1): The Swiss Fed­er­al Tri­bunal not­ed that the right to be heard, as guar­an­teed by Arti­cles 182(3) and 190(2)(d) of the Swiss Pri­vate Inter­na­tion­al Law Act, does not require an inter­na­tion­al arbi­tral award to be moti­vat­ed. Yet, a min­i­mum duty exists, oblig­ing an arbi­tral tri­bunal to con­sid­er and deal with the rel­e­vant issues. This duty is vio­lat­ed when, inad­ver­tent­ly or as a result of a mis­un­der­stand­ing, an arbi­tral tri­bunal does not take into con­sid­er­a­tion alle­ga­tions, argu­ments, evi­dence and offers of evi­dence sub­mit­ted by one of the par­ties and rel­e­vant for the award to be rendered.

[12] In line with the Swiss Fed­er­al Tribunal’s case law, it is incum­bent upon the alleged­ly aggriev­ed par­ty to demon­strate, in its appeal against the award, how an over­sight of the arbi­tra­tors pre­vent­ed it from being heard on an impor­tant issue. It is for the par­ty to estab­lish, on the one hand, that the arbi­tral tri­bunal did not con­sid­er some of the fac­tu­al, evi­den­tiary or legal ele­ments that the par­ty had con­sis­tent­ly advanced in sup­port of its argu­ments and, on the oth­er hand, that those fac­tors were such as to affect the fate of the dis­pute (con­sid. 3.1, with ref­er­ence to DFT 142 III 360, con­sid 4.1.1 and 4.1.3).

[13] Accord­ing to the Swiss Fed­er­al Tri­bunal, the right to be heard in adver­sar­i­al pro­ceed­ings is far from being unlim­it­ed in Switzer­land. On the con­trary, in the field of inter­na­tion­al arbi­tra­tion, sig­nif­i­cant restric­tions apply: A par­ty is not enti­tled to com­ment on the legal assess­ment of the facts or, more gen­er­al­ly, on the legal argu­ment to be used, unless the arbi­tral tri­bunal intends to base its deci­sion on a rule or a legal ground which has not been men­tioned in the pro­ceed­ings, which none of the par­ties in the case had availed of, and rel­e­vance of which could not be fore­seen in the case at issue. An arbi­tral tri­bunal is also not required to give spe­cial notice to a par­ty of the deci­sive char­ac­ter of a fac­tu­al ele­ment on which it is about to base its deci­sion, inso­far as the fac­tu­al ele­ment has been alleged and proved in accor­dance with the applic­a­ble laws and rules. Final­ly, an appeal invok­ing a vio­la­tion of the right to be heard must not be used as a basis to pro­voke an exam­i­na­tion of the appli­ca­tion of the sub­stan­tive law (con­sid 3.1).

2. Fail­ure to con­sid­er cer­tain defence arguments

[14] Under the first sub­head (alleged fail­ure to con­sid­er cer­tain defence argu­ments raised by R), R assert­ed that the Arbi­tral Tri­bunal had failed to con­sid­er in its award R’s argu­ment that, in cas­es of doubt, the SPA should be inter­pret­ed in accor­dance with the rule in dubio con­tra pro­fer­entem (also known as in dubio con­tra stip­u­la­torem) and, there­fore, in favour of R as the par­ty that appar­ent­ly had not draft­ed the terms of the earn-out plan (con­sid. 3.2.1). Accord­ing to R, the used term «Cost Cap» was, there­fore, to be con­strued strict­ly, rather than broad­ly, as sug­gest­ed by C (con­sid. 3.2.1).

[15] Analysing the con­sid­er­a­tions of the Arbi­tral Tri­bunal, the Swiss Fed­er­al Tri­bunal not­ed in its deci­sion that the Arbi­tral Tri­bunal had inter­pret­ed the SPA in line with the prin­ci­ple of trust («Ver­trauen­sprinzip») and, there­fore, in accor­dance with the applic­a­ble Swiss law. Refer­ring to its case law on the sub­sidiary nature of the rule in dubio con­tra stip­u­la­torem, the Swiss Fed­er­al Tri­bunal con­clud­ed that there was no room for the appli­ca­tion of such rule in the present case, and held that R’s right to be heard had not been vio­lat­ed in this respect (con­sid. 3.2.1).

[16] Under the first sub­head (alleged fail­ure to con­sid­er cer­tain defence argu­ments raised by R), R also assert­ed that the Arbi­tral Tri­bunal had failed to con­sid­er in its award R’s argu­ment that C had pre­vi­ous­ly accept­ed that no earn-out was owed for the years 2012 and 2013 (con­sid. 3.2.2).

[17] Analysing the argu­ment raised by R, the Swiss Fed­er­al Tri­bunal in essence found that the argu­ment was so far from being con­clu­sive­ly raised that the Arbi­tral Tri­bunal was right to implic­it­ly dis­miss the argu­ment (with­out express­ly address­ing it; con­sid. 3.2.2, in fine).

3. Unfore­see­able and sur­pris­ing reasoning

[18] Under the sec­ond sub­head (alleged­ly unfore­see­able and sur­pris­ing rea­son­ing), R found fault with the Arbi­tral Tribunal’s alleged­ly unfore­see­able and sur­pris­ing method for the cal­cu­la­tion of the earn-out in the award, with­out giv­ing the Par­ties suf­fi­cient oppor­tu­ni­ty to com­ment on the effects of this deci­sion (con­sid. 3.3.1).

[19] In par­tic­u­lar, C and R both (exclu­sive­ly) plead­ed extreme posi­tions on the cal­cu­la­tion issue: C argued that due to a spe­cif­ic rea­son, no deduc­tions were jus­ti­fied when cal­cu­lat­ing the earn-out amount, at all. R respond­ed that the spe­cif­ic rea­son alleged by C was with­out mer­it and, there­fore, all the deduc­tions were jus­ti­fied (con­sid. 3.3.1).

[20] The Arbi­tral Tri­bunal, after hav­ing exten­sive­ly ques­tioned R’s wit­ness on each alleged­ly deductible item dur­ing the hear­ing, analysed each deductible item in the award. It only found some of them to be jus­ti­fied. The Arbi­tral Tri­bunal con­sid­ered that the require­ments of some of these items were not suf­fi­cient­ly demon­strat­ed by R (con­sid. 3.3.1 et seq.).

[21] R argued against this back­ground that the use of a cal­cu­la­tion method which no par­ty had plead­ed was sur­pris­ing per se and in par­tic­u­lar also because it infringed the bur­den of proof rules of Swiss law (con­sid. 3.3.1).

[22] The Swiss Fed­er­al Tri­bunal not­ed that the prin­ci­ple of iura novit curia applied to arbi­tral tri­bunals with seat in Switzer­land (con­sid. 3.3.2). It con­sid­ered that the par­ties had thus an onus to «envis­age all imag­in­able sce­nar­ios» of a poten­tial deci­sion and to «devel­op their argu­ments as a con­se­quence» (con­sid. 3.3.2) includ­ing sub­sidiary sub­mis­sions, if necessary.

[23] Analysing the pro­ce­dure cho­sen by the Arbi­tral Tri­bunal in detail, the Swiss Fed­er­al Tri­bunal in essence found that it was not «clear how the fact that the Arbi­tral Tri­bunal had recal­cu­lat­ed the amount of the earn-out for the three rel­e­vant years […] was like­ly to sur­prise the appel­lant, since the object of the dis­pute was to deter­mine the amount of any earn-out due by the acquir­er of the shares» (con­sid. 3.3.2).

B. Pub­lic pol­i­cy (pacta sunt servanda)

[24] Regard­ing the pur­port­ed vio­la­tion of the pacta sunt ser­van­da prin­ci­ple, R assert­ed that the Arbi­tral Tri­bunal had applied its inter­pre­ta­tion of the term «costs» in an incon­sis­tent and con­tra­dict­ing man­ner to dif­fer­ent items of the earn-out cal­cu­la­tion in its award (con­sid. 4.2).

[25] The analy­sis of the Swiss Fed­er­al Tri­bunal start­ed with a sum­ma­ry of its case law on the scope and mean­ing of pacta sunt ser­van­da as a mat­ter of pub­lic pol­i­cy (con­sid. 4.1): In the con­text of Arti­cle 190 (2)(e) of the Swiss Pri­vate Inter­na­tion­al Law Act, pacta sunt ser­van­da is vio­lat­ed only if the arbi­tral tri­bunal fails to apply a con­trac­tu­al term although it con­sid­ers the par­ties to be bound by it or, con­verse­ly, applies a con­trac­tu­al term although it con­sid­ers the par­ties not to be bound by it. As repeat­ed­ly point­ed by the Swiss Fed­er­al Tri­bunal, con­tract inter­pre­ta­tion itself is not part of pacta sunt ser­van­da. This is why almost all dis­putes invok­ing a breach of con­tract as the cause of action can­not be chal­lenged on the grounds of a pacta sunt ser­van­da vio­la­tion (con­sid. 4.1, with ref­er­ence to Judge­ment of the Swiss Fed­er­al Tri­bunal 4A_318/2017 of 28 August 2017, con­sid. 4.2).

[26] Refer­ring to the response state­ment of the Arbi­tral Tri­bunal to R’s appeal, the Swiss Fed­er­al Tri­bunal found that the assump­tion of an incon­sis­tent inter­pre­ta­tion of the con­tract was not only with­out basis, but also total­ly unre­lat­ed («totale­ment étranger») to the mean­ing of pacta sunt ser­van­da as a mat­ter of pub­lic pol­i­cy (con­sid. 4.2).

C. Rul­ing

[27] Based on its analy­sis, the Swiss Fed­er­al Tri­bunal dis­missed R’s appeal as meritless.

III. Com­ments

[28] The present deci­sion is instruc­tive on the scope and the mean­ing of the prin­ci­ple iura novit curia which applies to arbi­tral tri­bunals with seat in Switzer­land (see also DTF 130 III 35, con­sid. 5; also referred to as iura novit arbiter).

[29] Arbi­tra­tors who sit in Switzer­land are not seen as (mere) deci­sion-mak­ers with respect to the indi­vid­ual argu­ments plead­ed and respond­ed to between the par­ties in the legal briefs.

[30] Rather, Swiss arbi­tra­tors have the right (and prob­a­bly also the duty) to apply the applic­a­ble sub­stan­tive law cor­rect­ly to the estab­lished facts of the case on their own motion. This applies even if the par­ties failed to plead the cor­rect appli­ca­tion of the law, to the extent that the deci­sion is not sur­pris­ing (Judge­ment of the Swiss Fed­er­al Tri­bunal 4A_374/2011 of 1 Sep­tem­ber 2011, con­sid. 2.4).

[31] The par­ties are expect­ed to know this prin­ci­ple and, con­se­quent­ly, antic­i­pate and argue on all poten­tial out­comes of a case, if nec­es­sary in the form of sub­sidiary positions.

[32] For an undu­ly sur­pris­ing deci­sion it is not suf­fi­cient that an arbi­tral tri­bunal adopts a legal posi­tion that was not plead­ed by either par­ty. Only if the arbi­tral tri­bunal e.g. applies a legal act to which no par­ty has ever referred in the legal briefs, an undu­ly sur­pris­ing ele­ment would have to be accept­ed (DTF 130 III 35, con­sid. 5).

[33] The Swiss notion of iura novit arbiter in arbi­tra­tion pro­ceed­ings is not self-evi­dent for all our inter­na­tion­al col­leagues (and not so for those from com­mon law juris­dic­tions in particular).

[34] The fol­low­ing con­sid­er­a­tions may thus be of prac­ti­cal use for Swiss arbitrations:

  1. As par­ty rep­re­sen­ta­tive in Swiss arbi­tral pro­ceed­ings: It is not suf­fi­cient to rebut the (legal) argu­ments of the coun­ter­par­ty. Rather, the par­ties are expect­ed to antic­i­pate and address as sub­sidiary posi­tions fur­ther rea­son­able appli­ca­tions of the law by the arbi­tral tri­bunal. For this exer­cise, pro­fes­sion­al legal advice on the sub­stan­tive law at issue appears to be indispensable.
  2. As arbi­tra­tor with seat of the arbi­tra­tion in Switzer­land: Even if the Par­ties plead the law and its appli­ca­tion in detail, the arbi­tra­tors are expect­ed to apply Swiss law cor­rect­ly on their own motion. If the tribunal’s own appli­ca­tion of the law is expect­ed to con­sid­er­ably devi­ate from the posi­tions of both par­ties, it is advis­able to gen­tly «warn» the par­ties in an appro­pri­ate man­ner: either by exam­in­ing wit­ness­es on facts which point to the antic­i­pat­ed appli­ca­tion of the law (as in the present case, see above, para. 20). Or by send­ing the Par­ties a list of ques­tions at an appro­pri­ate stage in the pro­ceed­ings which give indi­ca­tions on the poten­tial appli­ca­tion of the law.
  3. For insti­tu­tions admin­is­ter­ing Swiss arbi­tra­tion cas­es: If a tri­bunal applies a con­cept of law that was not plead­ed by either par­ty, this is not (nec­es­sar­i­ly) inac­cu­rate. Nev­er­the­less, any tri­bunal will be grate­ful for a brief hint in such sit­u­a­tions, in order to avoid any oversights.

[35] Final­ly, on anoth­er note, the Swiss Fed­er­al Tri­bunal made pos­i­tive ref­er­ence to a response state­ment of the Arbi­tral Tri­bunal in the set­ting aside pro­ceed­ings (con­sid. 4.2).

[36] It appears that the Swiss Fed­er­al Tri­bunal is indeed inter­est­ed in response state­ments of arbi­tral tri­bunals and con­sid­ers them as helpful.

[37] In view of this devel­op­ment, it may more and more become best prac­tice for arbi­tral tri­bunals to sub­mit a brief response state­ment in Swiss set­ting aside pro­ceed­ings to assist the Swiss Fed­er­al Tri­bunal in the find­ing of accu­rate and ade­quate decisions.
 

Zitier­vorschlag:
Simon Gabriel / Axel Buhr, Iura Novit Arbiter: Appli­ca­tion of the Law on the Tribunal’s Own Motion, in: dRSK, pub­liziert am 14. Feb­ru­ar 2018