Publications

Axel Buhr; in: dRSK, 22.06.2022
Com­men­tary on Swiss Fed­er­al Tri­bunal deci­sion 4A_462/2021 on February 7, 2022

The Swiss Fed­er­al Tri­bunal had an oppor­tu­ni­ty to clar­i­fy the rules for the dis­clo­sure of con­flicts of inter­est that arise at the end of arbi­tra­tion pro­ceed­ings: Must an arbi­tra­tor still dis­close a con­flict that aris­es only after the final delib­er­a­tions have already been made? May the con­flict­ed arbi­tra­tor still par­tic­i­pate in the release of the final award, despite the con­flict? Unfor­tu­nate­ly, the answer of the Swiss Fed­er­al Tri­bunal is not crystal-clear.

I. Back­ground

[1] In Octo­ber 2017, Turk­ish com­pa­ny A ini­ti­at­ed arbi­tra­tion pro­ceed­ings against Turk­ish com­pa­ny B and its Sin­ga­pore-based sis­ter com­pa­ny at the Swiss Cham­bers’ Arbi­tra­tion Insti­tu­tion (which is known today as the Swiss Arbi­tra­tion Cen­tre; sec. A.a and B.a).

[2] The two respon­dents were part of a U.S.-American group of com­pa­nies that pro­duces dyes and chem­i­cals for the tex­tile indus­try among oth­er things. Com­pa­ny A was trad­ing with chem­i­cals and had been com­pa­ny B’s agent in Turkey for a long time (sec. A.a and A.b).

[3] In 2015, com­pa­nies A and B had entered into a joint ven­ture agree­ment with the inten­tion to for­mu­late, mar­ket and sell cer­tain tex­tile dyes through a joint ven­ture com­pa­ny (sec. A.b).

[4] Appar­ent­ly, the joint ven­ture did not thrive as expect­ed. In 2017, com­pa­ny A ter­mi­nat­ed the joint ven­ture agree­ment for breach and request­ed dam­ages from com­pa­ny B in the ini­tial amount of USD 21 mil­lion (sec. A.d and B.a).

[5] In line with the arbi­tra­tion agree­ment, the arbi­tra­tion had its seat in Basel (Switzer­land) and was gov­erned by the 2012 edi­tion of the Swiss Rules (sec. A.c).

[6] The arbi­tral tri­bunal was com­posed of three mem­bers. All mem­bers of the arbi­tral tri­bunal had been appoint­ed by the SCAI Court (known today as the Arbi­tra­tion Court) with­out any objec­tions (sec. B.b).

[7] In June 2019, the arbi­tral tri­bunal con­firmed its juris­dic­tion over com­pa­ny B and declined the same over com­pa­ny B’s Sin­ga­pore-based sis­ter com­pa­ny. The par­tial award was not chal­lenged by any par­ty (sec. B.c) and the arbi­tra­tion pro­ceed­ed accord­ing­ly (sec. B.d‑i):

1. In Sep­tem­ber 2019, com­pa­ny B filed its state­ment of defence. Com­pa­ny B request­ed the arbi­tral tri­bunal to dis­miss com­pa­ny A’s case entire­ly and to award com­pa­ny B dam­ages in the ini­tial amount of USD 960’000.
2. An evi­den­tiary hear­ing was held in Octo­ber 2020.
3. On 19 Jan­u­ary 2021, the arbi­tral tri­bunal con­firmed receipt of the par­ties’ cost state­ments and noti­fied the par­ties that the pro­ceed­ings would be closed in due course.
4. On 13 April 2021, com­pa­ny A enquired with the arbi­tral tri­bunal about the esti­mat­ed time of arrival of the final award and was informed that the pro­ceed­ings should be com­plet­ed by the end of the summer.
5. On 22 June 2021, the arbi­tral tri­bunal closed the pro­ceed­ings in accor­dance with Arti­cle 29 of the 2012 Swiss Rules.
6. On 15 July 2021, the arbi­tral tri­bunal issued its final award. With one arbi­tra­tor dis­sent­ing, the major­i­ty dis­missed all claims of the par­ties entire­ly and ordered com­pa­ny A to com­pen­sate com­pa­ny B for arbi­tra­tion costs in the amount of USD 1.1 million.

[8] In Sep­tem­ber 2021, com­pa­ny A request­ed the Swiss Fed­er­al Tri­bunal to set aside most of the arbi­tral tribunal’s final award. Among oth­er things, com­pa­ny A’s appeal was based on Arti­cle 190(2)(a) of the Swiss Pri­vate Inter­na­tion­al Law Act. In this respect, com­pa­ny A argued that the arbi­tral tri­bunal was not prop­er­ly con­sti­tut­ed when the final award was ren­dered. More specif­i­cal­ly, it was Respondent’s case that the pre­sid­ing arbi­tra­tor of the arbi­tral tri­bunal had lacked the required inde­pen­dence and impar­tial­i­ty to ren­der the final award (sec. C and 3).

[9] Com­pa­ny A’s com­plaint was based on the grounds that the pre­sid­ing arbi­tra­tor had part­nered with com­pa­ny G, a law firm that ranked the com­pa­ny B’s group as a «key client» of their lit­i­ga­tion and arbi­tra­tion depart­ment (sec. 4 and sec. 4.1). Indeed, the pre­sid­ing arbi­tra­tor had pub­licly com­mu­ni­cat­ed on 1 Sep­tem­ber 2021 that she had joined com­pa­ny G on the same day (sec. 4.1).

[10] Com­pa­ny A assert­ed that the new part­ner­ship had been set in stone already before 15 July 2021, when the final award was ren­dered (sec. 4.1). Accord­ing to com­pa­ny A, this fact was evi­dent as:

1. The pre­sid­ing arbi­tra­tor had dis­closed her move in a dif­fer­ent and unre­lat­ed arbi­tra­tion case, which appar­ent­ly was in its ear­ly stages, on 18 June 2021.
2. The pre­sid­ing arbi­tra­tor had con­firmed in a case man­age­ment con­fer­ence held on 28 June 2021 that no con­flicts would arise from the change in the said unre­lat­ed arbi­tra­tion case.

[11] In Novem­ber 2021, the three arbi­tra­tors joint­ly com­ment­ed on the appeal (sec. C and 4.3.1). Among oth­er things, the arbi­tra­tors informed the Swiss Fed­er­al Tri­bunal that the arbi­tral tri­bunal had delib­er­at­ed on 28 Jan­u­ary 2021 and that it «came to a final con­clu­sion» on 5 Feb­ru­ary 2021.

[12] In a per­son­al state­ment, the pre­sid­ing arbi­tra­tor fur­ther informed the Swiss Fed­er­al Tri­bunal that the first meet­ing with com­pa­ny G had not tak­en place before 26 Feb­ru­ary 2021 and that a con­tract had not been entered into before 28 April 2021 (sec. C and 4.3.1).

II. Deci­sion

[13] With its deci­sion dat­ed 7 Feb­ru­ary 2022, the Swiss Fed­er­al Tri­bunal entire­ly dis­missed com­pa­ny A’s appeal (sec. 8).

[14] As far as the alleged lack of inde­pen­dence and impar­tial­i­ty of the pre­sid­ing arbi­tra­tor is con­cerned, the Swiss Fed­er­al Tribunal’s analy­sis rou­tine­ly starts with the con­fir­ma­tion that the fun­da­men­tal guar­an­tee in Arti­cle 30 of the Swiss Fed­er­al Con­sti­tu­tion and Arti­cle 6(1) ECHR requires that a dis­pute is decid­ed by inde­pen­dent and impar­tial judges, no mat­ter whether a case is heard by an arbi­tral tri­bunal or a state court (sec. 3.1.2).

[15] The Swiss Fed­er­al Tribunal’s deci­sion is also clear about the fact that a sit­u­a­tion like in the case at hand (with one of the par­ties to the arbi­tra­tion being a client of the arbitrator’s law firm) indeed gives rise to jus­ti­fi­able doubts as to the arbitrator’s inde­pen­dence and impar­tial­i­ty as a mat­ter of prin­ci­ple. This is true even if the arbi­tra­tion con­cerns unre­lat­ed mat­ters and the arbi­tra­tor is not involved in the rel­e­vant client rela­tion­ship at all (sec. 4.2):

«3.1.2 Accord­ing to estab­lished case law, a lawyer act­ing as a judge is deemed to be biased if there is an ongo­ing man­date with a par­ty or if he has act­ed as a lawyer for a par­ty on sev­er­al occa­sions in the sense that there is a kind of per­ma­nent rela­tion­ship between them. This applies regard­less of whether the man­date has a fac­tu­al con­nec­tion with the sub­ject mat­ter of the dis­pute to be decid­ed or not (BGE 147 III 89, sec. 4.2.2 with ref­er­ences; judg­ment 4A_404/2021 of Jan­u­ary 24, 2022, sec. 5.2.2.2).
Accord­ing to case law, an appear­ance of bias also results from the fact that not the part-time judge (or arbi­tra­tor) him­self, but anoth­er lawyer of his law firm main­tains a man­date with a par­ty or has main­tained it sev­er­al times short­ly before or in the sense of a per­ma­nent relationship.»

[16] Yet, the Swiss Fed­er­al Tri­bunal still found that com­pa­ny A was not able to show that the pre­sid­ing arbi­tra­tor had lacked the required inde­pen­dence and impar­tial­i­ty (sec. 4.3: «Die Beschw­erde­führerin ver­mag mit ihren Vor­brin­gen nicht aufzuzeigen, dass es der Vor­sitzen­den an der erforder­lichen Unab­hängigkeit und Unparteilichkeit gefehlt hätte.»).

[17] Rely­ing on the infor­ma­tion received from the arbi­tral tri­bunal and the pre­sid­ing arbi­tra­tor, the Swiss Fed­er­al Tri­bunal con­sid­ered it deci­sive that at the time when the first meet­ing between the pre­sid­ing arbi­tra­tor and com­pa­ny G took place, the deci­sion of the arbi­tral tri­bunal had already been made. For the Swiss Fed­er­al Tri­bunal, it was not clear at that time whether a con­flict would arise at all. The Swiss Fed­er­al Tri­bunal con­clud­ed that the fact that com­pa­ny B was a key client of the new law firm of the pre­sid­ing arbi­tra­tor could not pos­si­bly have com­pro­mised the deci­sion-mak­ing of the arbi­tral tri­bunal (sec. 4.3.1).

[18] Accord­ing to the Swiss Fed­er­al Tri­bunal, as far as con­flicts are con­cerned that arise at the end of the arbi­tra­tion pro­ceed­ings, it is only rel­e­vant whether or not there is a risk that the con­flict may have com­pro­mised the award (sec. 4.3.2: «[…] allein mass­gebend, ob ein Ein­fluss auf den Entscheid noch möglich ist»).

[19] The Swiss Fed­er­al Tri­bunal came to the con­clu­sion that such an effect could be exclud­ed in the present case (sec. 4.3.1 and 4.3.2). As a result, the Swiss Fed­er­al Tri­bunal did not con­sid­er com­pa­ny A’s argu­ment deci­sive that the Swiss lex arbi­tri requires arbi­tra­tors to remain inde­pen­dent and impar­tial through­out the entire arbi­tra­tion pro­ceed­ings (sec. 4.3.2). It did not fol­low com­pa­ny A’s argu­ment that Arti­cle 9(1) of the applic­a­ble 2012 Swiss Rules, same as Arti­cle 12(1) of the 2021 Swiss Rules, express­ly stip­u­lates that «[a]ny arbi­tra­tor con­duct­ing an arbi­tra­tion under these Rules shall be and shall remain at all times impar­tial and inde­pen­dent of the par­ties». Nor was it deemed rel­e­vant by the Swiss Fed­er­al Tri­bunal that an arbitrator’s duty under the Swiss lex arbi­tri to dis­close poten­tial con­flicts per­sists through­out the entire pro­ceed­ings, as Arti­cle 179(6) of the Swiss Pri­vate Inter­na­tion­al Law Act of the revised Swiss Pri­vate Inter­na­tion­al Law Act now express­ly makes clear:

«A per­son who is asked to become a mem­ber of the arbi­tral tri­bunal shall with­out delay dis­close the exis­tence of cir­cum­stances that could give rise to legit­i­mate doubt as to his or her inde­pen­dence or impar­tial­i­ty. This oblig­a­tion applies through­out the entire proceedings.»
(Infor­mal trans­la­tion of the Swiss Gov­ern­ment of Arti­cle 179(6) of the Swiss Pri­vate Inter­na­tion­al Law Act, as in force since 1 Jan­u­ary 2021)

[20] As far as the pre­sid­ing arbitrator’s duty to dis­close the con­flict is con­cerned, the Swiss Fed­er­al Tri­bunal found that she had not breached her oblig­a­tion under Arti­cle 179(6) of the Swiss Pri­vate Inter­na­tion­al Law Act and Arti­cle 9(2) of the 2012 Swiss Rules (today: Arti­cle 12(3) of the 2021 Swiss Rules) either (sec. 4.3.3). Accord­ing to the Swiss Fed­er­al Tri­bunal, the pre­sid­ing arbi­tra­tor was right to assume that there was noth­ing to dis­close, as the «final con­clu­sion» by the arbi­tral tri­bunal had already been made (sec. 4.3.3: «Vor­liegend durfte die Vor­sitzende, wie oben dargelegt, davon aus­ge­hen, dass sie den erst nach der ‹final con­clu­sion› vom 5. Feb­ru­ar 2021 vere­in­barten Kan­zlei­wech­sel nicht mit­teilen musste.»).

III. Com­ments

[21] On its face, the main take-away from the Swiss Fed­er­al Tribunal’s deci­sion appears to be that an arbi­tral tri­bunal does not nec­es­sar­i­ly need to be inde­pen­dent or impar­tial any longer, once the delib­er­a­tions are completed.

[22] How­ev­er, such a con­clu­sion should be tak­en with a grain of salt: In fact, the deci­sion of the Swiss Fed­er­al Tri­bunal rais­es more ques­tions than it answers and leads to poten­tial uncer­tain­ties instead of clar­i­fy­ing the legal situation:

[23] First, the Swiss Fed­er­al Tri­bunal does not suf­fi­cient­ly dis­tin­guish between two sep­a­rate issues:

1. Whether or not cir­cum­stances exist­ed that gave jus­ti­fi­able doubts as to the inde­pen­dence and impar­tial­i­ty of the pre­sid­ing arbi­tra­tor is one issue.
2. A dif­fer­ent issue is whether or not the final award had to be set aside as request­ed by com­pa­ny A in the event that the Swiss Fed­er­al Tri­bunal found that this was the case.

[24] Unfor­tu­nate­ly, the rea­son­ing of the Swiss Fed­er­al Tri­bunal min­gles both issues. As a con­se­quence, the court even came to the sur­pris­ing con­clu­sion that com­pa­ny A was not able to show that the pre­sid­ing arbi­tra­tor lacked the required inde­pen­dence and impartiality.

[25] Based on the facts described in the deci­sion, this con­clu­sion is dif­fi­cult to jus­ti­fy in the author’s view. Let’s be clear: The fact that the pre­sid­ing arbi­tra­tor joined a law firm that ranked a par­ty to the arbi­tra­tion as a «key client» is a cir­cum­stance that gives rise to jus­ti­fi­able doubts about the pre­sid­ing arbitrator’s inde­pen­dence and impar­tial­i­ty. Based on the strict stan­dards which are – for good rea­son – usu­al­ly required by the Swiss Fed­er­al Tri­bunal and which the Swiss Fed­er­al Tri­bunal even empha­sized in the same deci­sion, any argu­ment to the con­trary can­not con­vinc­ing­ly be made.

[26] The lack of a clear dis­tinc­tion between the two issues is lam­en­ta­ble, as it may send a wrong sig­nal to par­ties, coun­sel and arbi­tra­tors that are not famil­iar with Switzerland’s high stan­dards of inde­pen­dence and impartiality.

[27] Sec­ond, the rea­son­ing of the Swiss Fed­er­al Tri­bunal is unclear about the rel­e­vant time until which an arbi­tra­tor has to main­tain his or her inde­pen­dence and impartiality.

[28] This is a pity in par­tic­u­lar because the issue of the dura­tion is not express­ly dealt with by the Swiss lex arbi­tri: In con­trast to Arti­cles 9(1) of the 2012 Swiss Rules and Arti­cle 12(1) of the 2021 Swiss Rules, the 12^th chap­ter of the Swiss Pri­vate Inter­na­tion­al Law Act does not even stip­u­late an express duty of the arbi­tra­tor to be and remain inde­pen­dent and impar­tial (same as the 2006 UNCI­TRAL Mod­el Law on Inter­na­tion­al Com­mer­cial Arbitration).

[29] The lack of an express rule may be explained with the notion that the arbitrator’s duty to be and remain inde­pen­dent and impar­tial goes with­out say­ing: Arguably, this is why the 12^th chap­ter address­es this duty only indi­rect­ly in Arti­cle 179(6) of the Swiss Pri­vate Inter­na­tion­al Law Act (by pro­vid­ing for a duty to dis­close poten­tial con­flicts) as well as in Arti­cle 180(1)© of the Swiss Pri­vate Inter­na­tion­al Law Act (by pro­vid­ing par­ties with a right to chal­lenge an arbi­tra­tor if cir­cum­stances exist that give rise to legit­i­mate doubt as to his or her inde­pen­dence or impartiality).

[30] Pre­vi­ous­ly, it appeared to be com­mon ground also that the duty of an arbi­tra­tor to remain inde­pen­dent and impar­tial per­sists until the end of the pro­ceed­ings. This under­stand­ing is express­ly enshrined as the First Gen­er­al Prin­ci­ple 1 of the 2014 IBA Guide­lines on Con­flict of Inter­est in Inter­na­tion­al Arbi­tra­tion, same as in 9(1) of the 2012 Swiss Rules and Arti­cle 12(1) of the 2021 Swiss Rules. It is in line with this com­mon under­stand­ing that Arti­cle 179(6) of the revised Swiss Pri­vate Inter­na­tion­al Law Act express­ly spec­i­fies the duty of the arbi­tra­tor to dis­close poten­tial con­flicts «through­out the entire pro­ceed­ings» as well.

[31] Thus, it should not be con­clud­ed from the Swiss Fed­er­al Tribunal’s deci­sion that the duty to remain inde­pen­dent and impar­tial expires before the final award has been released. It may even resurge in the event that a final award is set aside by the Swiss Fed­er­al Tribunal.

[32] Third, the Swiss Fed­er­al Tribunal’s con­sid­er­a­tion that the con­flict did not have to be dis­closed by the pre­sid­ing arbi­tra­tor even though the con­flict arose before the final award was issued is at odds with Arti­cle 179(6) of the Swiss Pri­vate Inter­na­tion­al Law Act that express­ly pro­vides that the arbitrator’s duty «applies through­out the entire pro­ceed­ings».

[33] In addi­tion, the Swiss Fed­er­al Tribunal’s deci­sion is at odds with the con­sid­er­able efforts of arbi­tra­tion insti­tu­tions and asso­ci­a­tions to address con­cerns against inter­na­tion­al arbi­tra­tion as a clan­des­tine dis­pute res­o­lu­tion mech­a­nism and to improve transparency.

[34] More­over, the con­sid­er­a­tion of the Swiss Fed­er­al Tri­bunal that the duty ends for three-mem­ber arbi­tral tri­bunals once the delib­er­a­tions are com­plet­ed is imprac­ti­cal. The delib­er­a­tions may not only be less «final» than the arbi­tral tri­bunal antic­i­pates: To just name two exam­ples, the scruti­ny of arbi­tral insti­tu­tions and nova filed by a par­ty may cause the need for fur­ther deliberations.

[35] The date of «final con­clu­sion» is also an inter­nal date that is not com­mu­ni­cat­ed to the par­ties in most cas­es. How­ev­er, the dura­tion of the arbitrator’s duty to dis­close poten­tial con­flicts can hard­ly end already at a date which is not even known to the parties.

[36] Fourth, the unfet­tered reliance of the Swiss Fed­er­al Tri­bunal on addi­tion­al facts that the arbi­tral tri­bunal and the pre­sid­ing arbi­tra­tor pro­vid­ed with their com­ments may be jus­ti­fi­able with regard to the com­ments by the arbi­tral tri­bunal, as the fac­tu­al infor­ma­tion pro­vid­ed there­in was con­firmed by arbi­tra­tors that were not chal­lenged by any party.

[37] How­ev­er, as far as the fac­tu­al infor­ma­tion pro­vid­ed by the pre­sid­ing arbi­tra­tor is con­cerned, the reliance appears prob­lem­at­ic: As the fac­tu­al infor­ma­tion relat­ed to the com­ing about of the rela­tion­ship with her new law firm, it nec­es­sar­i­ly could not be con­firmed by an unchal­lenged mem­ber of the arbi­tral tribunal.

[38] In the author’s view, there is no basis for the Swiss Fed­er­al Tri­bunal to sim­ply assume that the fac­tu­al infor­ma­tion pro­vid­ed by a chal­lenged arbi­tra­tor must nec­es­sar­i­ly be cor­rect. Evi­dent­ly, this must hold true in par­tic­u­lar in cas­es that con­cern final awards ren­dered by a sole arbi­tra­tor, where the time­line of the deci­sion- mak­ing process can­not be con­firmed by the unchal­lenged mem­bers of the arbi­tral tribunal.

[39] It would be help­ful and wel­come if the Swiss Fed­er­al Tri­bunal clar­i­fied these issues at the ear­li­est opportunity.