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Com­men­tary by Axel Buhr on Swiss Fed­er­al Tri­bunal deci­sion 4A_125/2018 on July 26, 2018

The Swiss Fed­er­al Tri­bunal declined to set aside an award order­ing a client to pay suc­cess fees to its for­mer law firm for the client’s rep­re­sen­ta­tion in Swiss arbi­tra­tion pro­ceed­ings. In his deci­sion on the fee dis­pute, the sole arbi­tra­tor had express­ly devi­at­ed from the strict require­ments estab­lished by the Swiss Fed­er­al Tri­bunal for suc­cess fees in recent case law (BGE 143 III 600). With­out revis­it­ing the require­ments in BGE 143 III 600, the Swiss Fed­er­al Tri­bunal dis­missed the client’s appeal for lack of incom­pat­i­bil­i­ty of the award with Swiss pub­lic policy.

Facts

[1] In 2012, par­ty «A», a Por­tuguese com­pa­ny, engaged par­ty «B», a Swiss-based law firm, as coun­sel for two arbi­tra­tion pro­ceed­ings. With the two arbi­tra­tion pro­ceed­ings, A sought to enforce claims against two third par­ty com­pa­nies («C» and «D») in con­nec­tion with A’s sup­ply of cer­tain steel com­po­nents for two pow­er plants in Ger­many and Slovenia.

[2] The terms and con­di­tions of B’s engage­ment were set out in two engage­ment let­ters, one for each arbi­tra­tion. Both engage­ment let­ters were sub­ject to Swiss law. The arbi­tra­tion agree­ments in the engage­ment let­ters unan­i­mous­ly required that any dis­putes be resolved by an arbi­tra­tor with seat in Zurich, in accor­dance with the arbi­tra­tion rules of the Swiss Cham­bers’ Arbi­tra­tion Institution.

[3] The fee arrange­ment in both engage­ment let­ters was com­posed of a reduced hourly rate and a suc­cess fee com­po­nent. The first engage­ment let­ter pro­vid­ed for «[a] suc­cess fee con­sist­ing of 15% on any (prin­ci­pal) amount claimed by and award­ed to A […] (ignor­ing any suc­cess­ful set-off defence», capped at CHF 1 Mio. The suc­cess fee com­po­nent in the sec­ond engage­ment let­ter was more com­plex. This arrange­ment reads as follows:

«A suc­cess fee con­sist­ing of 15% on (i) any amount claimed by and award­ed to A.________ SA (ignor­ing any suc­cess­ful set-off defence) applies.

The suc­cess fee becomes payable in addi­tion to the reduced blend­ed hourly rate. The amounts in ques­tion do not include any com­pen­sa­tion for attorney’s fees or oth­er costs of arbi­tra­tion and apply irre­spec­tive of whether the amount is deter­mined by a deci­sion of settlement.

In the event of a full set­tle­ment dis­pos­ing of all claims in the arbi­tra­tion, the suc­cess fee is reduced to 4% cal­cu­lat­ed based on the dif­fer­ence between the aggre­gate amount in dis­pute (total of claim, counter-claim and sett-off [sic!] defence).

Should B.________ AG con­sid­er a set­tle­ment offer made by D.________ GmbH to be appro­pri­ate, it may request A.________ SA to con­sent to such offer. Should A.________ SA not wish to agree to the set­tle­ment offer, B.________ AG in its own dis­cre­tion may opt to be com­pen­sat­ed in line with this suc­cess fee arrange­ment as if the set­tle­ment offer had been accepted.

In no event may (i) the suc­cess fee be neg­a­tive or (ii) exceed CHF 1’500’000 or its equiv­a­lent in oth­er cur­ren­cies (suc­cess fee cap).»

[4] In the first arbi­tra­tion pro­ceed­ings, A request­ed pay­ment of some EUR 3 Mio., which was respond­ed by D with a coun­ter­claim in the amount of some EUR 1.8 Mio. A’s claim in the sec­ond arbi­tra­tion pro­ceed­ings amount­ed to some EUR 10 Mio, and was answered by D with a coun­ter­claim in the amount of EUR 147 Mio. In April 2014, both arbi­tra­tion pro­ceed­ings could be set­tled with an under­tak­ing of D to pay A a set­tle­ment amount of some EUR 11.5 Mio.

[5] Sub­se­quent­ly, a dis­pute between A and B arose over B’s fees. As the fee dis­pute could not be set­tled (even after involv­ing the Zurich bar), B ini­ti­at­ed in Sep­tem­ber 2016 arbi­tra­tion pro­ceed­ings against A and request­ed with its main claim pay­ment of out­stand­ing fees in the amount of CHF 2.5 Mio.

[6] In his final award, the sole arbi­tra­tor in Jan­u­ary 2018 ordered A to pay some CHF 1.65 Mio. in fees, includ­ing the max­i­mum fee of CHF 1.5 Mio. under the sec­ond engage­ment letter.

[7] In his award, the sole arbi­tra­tor analysed in detail the require­ments and lim­i­ta­tions of Swiss law for the legal pro­fes­sion in con­nec­tion with suc­cess fee arrange­ments, and the estab­lished case law of the Swiss Fed­er­al Tri­bunal in this field, includ­ing the Swiss Fed­er­al Tribunal’s most recent deci­sion BGE 143 III 600 dat­ed 13 June 2017. By express­ly devi­at­ing from the require­ments estab­lished by the Swiss Fed­er­al Tri­bunal in BGE 143 III 600, the sole arbi­tra­tor found that the suc­cess fee arrange­ment was admissible.

[8] With its appeal, A request­ed the Swiss Fed­er­al Tri­bunal to set aside the award pri­mar­i­ly based on Arti­cle 190(2) (e) of the Swiss Pri­vate Inter­na­tion­al Law Act (IPRG), argu­ing that the award was at odds with the require­ments of Swiss law for the legal pro­fes­sion in such a bla­tant way that the award was vio­lat­ing Swiss pub­lic policy.

Deci­sion

[9] At the out­set of its analy­sis, the Swiss Fed­er­al Tri­bunal high­light­ed the fact that the sole arbi­tra­tor had in essence over­ruled the Swiss Fed­er­al Tribunal’s inter­pre­ta­tion in BGE 143 III 600 of the require­ments and lim­i­ta­tions for the legal pro­fes­sion in con­nec­tion with suc­cess fee arrange­ments under Swiss law (con­sid. 3.1.1).

[10] Analysing the sec­ond suc­cess fee arrange­ment (see above at para. 3), the Swiss Fed­er­al Tri­bunal con­sid­ered the fee arrange­ment as «high­ly prob­lem­at­ic» (con­sid. 3.1.2). Accord­ing to the Swiss Fed­er­al Tri­bunal, the com­pat­i­bil­i­ty with the require­ments and lim­i­ta­tions of Swiss law for the legal pro­fes­sion in con­nec­tion with suc­cess fee arrange­ment was to be «crit­i­cal­ly ques­tioned» (con­sid. 3.1.2).

[11] In this respect, the Swiss Fed­er­al Tri­bunal not only iden­ti­fied the imbal­ance between the two fee com­po­nents as a poten­tial short­com­ing (with the suc­cess fee being five times high­er than the oth­er part).

[12] The Swiss Fed­er­al Tri­bunal in par­tic­u­lar found fault with the fact that the sec­ond suc­cess fee arrange­ment was prone to cause con­flicts of inter­est between B, the law firm, and A, its client. Accord­ing to the Swiss Fed­er­al Tri­bunal, the terms and con­di­tions were much more favourable for the law firm in case of a set­tle­ment by mutu­al agree­ment than in case of a set­tle­ment by award:

1. In case of a set­tle­ment by award, the suc­cess fee of 15% was cal­cu­lat­ed based on A’s main claim of some EUR 10 Mio. only (with­out tak­ing into account D’s coun­ter­claim in the amount of more than EUR 147 Mio.).
2. In con­trast, in case of a set­tle­ment by agree­ment, the suc­cess fee of 4% was cal­cu­lat­ed based on the entire amount in dis­pute (includ­ing D’s counterclaim).

[13] Under the terms of the sec­ond suc­cess fee arrange­ment, the max­i­mum suc­cess fee of CHF 1.5 Mio. was not only much eas­i­er to achieve if the dis­pute was set­tled by agree­ment. It was also payable even in the event that A chose not to fol­low the advice of B, its coun­sel, to enter into a set­tle­ment con­sid­ered favourable (for the client A) by B.

[14] Notwith­stand­ing these con­cerns, the Swiss Fed­er­al Tri­bunal reject­ed A’s appeal to set aside the award on the grounds that, in accor­dance with Arti­cle 190 of the Swiss Pri­vate Inter­na­tion­al Law Act, an incor­rect appli­ca­tion of law will only lead to the award being set aside if the award is incom­pat­i­ble with pub­lic pol­i­cy (con­sid. 3.1.2, in fine).

[15] The Swiss Fed­er­al Tri­bunal recalled its long-stand­ing case law, accord­ing to which an award was incom­pat­i­ble with pub­lic pol­i­cy if it dis­re­gard­ed the essen­tial and broad­ly acknowl­edged val­ues which, accord­ing to pre­vail­ing views in Switzer­land, should con­sti­tute the basis of any legal order (con­sid. 3.2.1).

[16] The Swiss Fed­er­al Tri­bunal fur­ther referred to three pre­vi­ous cas­es where it had analysed and negat­ed an incom­pat­i­bil­i­ty of the scru­ti­nized suc­cess fee arrange­ments with pub­lic pol­i­cy (con­sid. 3.2.3; the referred cas­es were 5A_409/2014 dat­ed 15 Sep­tem­ber 2014, 5P.201/1994 dat­ed 9 Jan­u­ary 1995 and 5P.128/2005 dat­ed 11 July 2005).

[17] Hav­ing express­ly men­tioned the fact that the total fees B request­ed under the sec­ond suc­cess fee arrange­ment were about 2% of the amount in dis­pute in the arbi­tra­tion pro­ceed­ings, the Swiss Fed­er­al Tri­bunal con­clud­ed that it could not be rea­son­ably claimed that the award was incom­pat­i­ble with pub­lic policy.

[18] As A’s oth­er grounds for appeal were not suc­cess­ful either, the Swiss Fed­er­al Tri­bunal dis­missed A’s appeal.

Com­ments

[19] The deci­sion of the Swiss Fed­er­al Tri­bunal does not elu­ci­date in great detail the require­ments and lim­i­ta­tions of Swiss law for the legal pro­fes­sion in con­nec­tion with suc­cess fee arrange­ments, nor their inter­pre­ta­tion by the Swiss Fed­er­al Tri­bunal in its deci­sion BGE 143 III 600.

[20] For a bet­ter under­stand­ing of the legal issues it should be recalled that Arti­cle 12(e) of the Swiss Fed­er­al Act on the Legal Pro­fes­sion («Bun­des­ge­setz über die Freizügigkeit der Anwältin­nen und Anwälte»; short title: «Anwalts­ge­setz»; [BGFA]) pro­vides for a pro­fes­sion­al rule which for­bids cer­tain suc­cess fee arrange­ments. Trans­lat­ed to Eng­lish, Arti­cle 12(e) BGFA states:

«Pri­or to com­ple­tion of a dis­pute, they [lawyers] must not enter into an agree­ment with the client, pur­suant to which a share in the award­ed amount shall sub­sti­tute their fees; they must also not under­take to waive their fees in the event of an unfavourable outcome.»

[21] Pur­suant to Arti­cle 2(1) BGFA, the BGFA con­cerns all qual­i­fied Swiss lawyers who rep­re­sent par­ties in state courts or are reg­is­tered to do so. Notably, the entire con­tentious and non-con­tentious legal work of the con­cerned lawyers (whether in or out of court) must com­ply with the pro­fes­sion­al rules of the BGFA (Hans Nater, in: Wal­ter Fellmann/​Gaudenz G. Zin­del [eds.], The Swiss Fed­er­al Act on the Legal Pro­fes­sion – Com­men­tary, 2^nd ed. Zurich 2011, Arti­cle 2 n. 8).

[22] Although Swiss law does not require that the par­ty rep­re­sen­ta­tives in Swiss arbi­tra­tion pro­ceed­ings be qual­i­fied (or reg­is­tered) lawyers, lawyers con­cerned by the BGFA must adhere to the pro­fes­sion­al rules also when act­ing as coun­sel in arbi­tra­tion pro­ceed­ings (irre­spec­tive of whether the arbi­tra­tion has its seat in Switzer­land or abroad). This is why it was clear (and not even men­tioned by the Swiss Fed­er­al Tri­bunal) that B’s coun­sel work had to meet the stan­dard required by the pro­fes­sion­al rules in the BGFA, and that its suc­cess fee arrange­ment had to com­ply with Arti­cle 12(e) BGFA.

[23] In its deci­sion BGE 143 III 600 dat­ed 13 June 2017, the Swiss Fed­er­al Tri­bunal had recalled that Arti­cle 12(e) BGFA was meant to pro­tect clients from lawyers tak­ing improp­er advan­tage of their abil­i­ty to bet­ter judge the chance of suc­cess of a case, and to ensure that lawyers remained inde­pen­dent from the inter­ests at stake.

[24] The Swiss Fed­er­al Tri­bunal had fur­ther recalled in that deci­sion that so-called pacta de quo­ta litis (arrange­ments where the entire fees depend on the out­come of a dis­pute) were not com­pat­i­ble with Arti­cle 12(e) BGFA. In con­trast, so-called pacta de pal­mario (arrange­ments where only a por­tion of the fees depends on the out­come of a dis­pute) could be per­mis­si­ble, sub­ject to the fol­low­ing (then par­tial­ly new) requirements:

1. The fees which are payable irre­spec­tive of the out­come of the dis­pute must not only cov­er the costs of the lawyer, but also allow for a rea­son­able profit.
2. The suc­cess fees must not sig­nif­i­cant­ly exceed the fees that are payable irre­spec­tive of the out­come of the dis­pute. BGE 143 III 600 clar­i­fied that the suc­cess fees must not be high­er than the fees that are payable irre­spec­tive of the out­come of the dispute.
3. In BGE 143 III 600, the Swiss Fed­er­al Tri­bunal added as a third require­ment that the suc­cess fee arrange­ment must be made either at the time when enter­ing into the man­date or after the com­ple­tion of the case. Dur­ing the pro­ceed­ings, lawyers must not enter into suc­cess fee arrange­ments with their clients.

[25] In the present case, the suc­cess fee arrange­ments pre­dat­ed BGE 143 III 600. As the con­sid­er­a­tions of the sole arbi­tra­tor have not been pub­lished by the Swiss Fed­er­al Tri­bunal, it is not known whether it was on that basis that the sole arbi­tra­tor chose to «express­ly devi­ate» from BGE 143 III 600 and upheld B’s suc­cess fee arrange­ment with A despite the fact that the sec­ond require­ment had not been met (as not­ed twice by the Swiss Fed­er­al Tri­bunal in con­sid. B.b and 3.1.1). As the Swiss Fed­er­al Tribunal’s strict inter­pre­ta­tion of Arti­cle 12(e) BGFA in BGE 143 III 600 has received a lot of crit­i­cism from Swiss lawyers and arbi­tra­tion prac­ti­tion­ers, it is also pos­si­ble that the sole arbi­tra­tor sim­ply dis­agreed with the Swiss Fed­er­al Tribunal’s inter­pre­ta­tion of Arti­cle 12(e) BGFA.

[26] In its deci­sion, the Swiss Fed­er­al Tri­bunal did not revis­it its inter­pre­ta­tion of Arti­cle 12(e) BGFA. Yet, the Swiss Fed­er­al Tri­bunal was right to negate a vio­la­tion of sub­stan­tive pub­lic pol­i­cy and dis­miss the request to set aside the award based on Arti­cle 190(2)(e) of the Swiss Inter­na­tion­al Pri­vate Law Act. This is in par­tic­u­lar true as the total fees request­ed under the sec­ond suc­cess fee arrange­ment did not exceed some 2% of the amount in dis­pute (as express­ly men­tioned by the Swiss Fed­er­al Tri­bunal in con­sid. 3.2.3), which is well with­in the typ­i­cal range of the costs for legal rep­re­sen­ta­tion in Swiss arbi­tra­tion proceedings.

[27] An inter­est­ing aspect of the deci­sion is the seren­i­ty shown by the Swiss Fed­er­al Tri­bunal when con­front­ed with a sole arbi­tra­tor who chose to «express­ly devi­ate» from (i.e. in oth­er words over­rule) the case law of Switzerland’s high­est court.

[28] For inter­na­tion­al arbi­tra­tions with place of arbi­tra­tion in Switzer­land, Arti­cle 187(1) of the Swiss Pri­vate Inter­na­tion­al Law requires that arbi­tral tri­bunals decide their cas­es accord­ing to the rules of law cho­sen by the par­ties. When­ev­er par­ties choose Swiss law, the cho­sen law includes Arti­cle 1(3) of the Swiss Civ­il Code, which requires courts (and arbi­tral tri­bunals) to «fol­low estab­lished doc­trine and case law» (infor­mal trans­la­tion of the Swiss gov­ern­ment, based on the French and Ital­ian lan­guage ver­sions of the Swiss Civ­il Code). While it is wide­ly agreed that courts (and arbi­tral tri­bunals) should take guid­ance from, but are not bound by, legal doc­trine, the inter­pre­ta­tion is more strict when it comes to the case law of Swiss state courts, and that of the Swiss Fed­er­al Tri­bunal in par­tic­u­lar. In this regard, it is gen­er­al­ly assumed that courts (and arbi­tral tri­bunals) must not devi­ate from the case law of Switzerland’s high­est court with­out good cause, even if they con­sid­er a dif­fer­ent inter­pre­ta­tion of the rel­e­vant law more con­vinc­ing (Susan Emmenegger/​Axel Tschentsch­er, in: Regi­na E. Aebi-Müller/Pia Caroni/​Susan Emmeneg­ger et al. [eds.], Bern­er Kom­men­tar Band I/1, Berne 2012, Arti­cle 1 Swiss Civ­il Code, n. 500).

[29] In our view, a high thresh­old helps to pre­serve the uni­ty of the legal order and a con­sis­tent appli­ca­tion of law across all courts and arbi­tral tri­bunals in Switzer­land. This is espe­cial­ly true against the back­ground of the «iura novit curia» prin­ci­ple, accord­ing to which Swiss arbi­tra­tors (like state courts) are required «to (i) ascer­tain the law applic­a­ble to the mer­its on its own ini­tia­tive and (ii) apply the law so deter­mined ex offi­cio» (Bern­hard Berger/​Franz Keller­hals, Inter­na­tion­al and Domes­tic Arbi­tra­tion in Switzer­land, 3^rd edi­tion Berne 2014, para. 1434).

[30] Even though Arti­cle 1(3) of the Swiss Civ­il Code may not be part of pro­ce­dur­al pub­lic pol­i­cy, we find it remark­able that the Swiss Fed­er­al Tri­bunal has not com­ment­ed with a sin­gle word on the fact that the sole arbi­tra­tor chose to express­ly devi­ate from the case law of the Swiss Fed­er­al Tri­bunal in his award.

[31] This deci­sion is a fur­ther exam­ple for the great restraint with which the Swiss Fed­er­al Tri­bunal reviews awards when it is request­ed to set them aside.

[32] Take-aways:

1. For Swiss coun­sel: The present deci­sion does not change the fact that suc­cess fee arrange­ments must com­ply with the strict require­ments estab­lished by the Swiss Fed­er­al Tri­bunal in BGE 143 III 600. Suc­cess fee arrange­ments which are incom­pat­i­ble with the Swiss Fed­er­al Tribunal’s inter­pre­ta­tion of Arti­cle 12(e) BGFA remain unlaw­ful. Lawyers may not only face dif­fi­cul­ties in obtain­ing the required approval for the enforce­ment of incom­pat­i­ble suc­cess fee arrange­ments from the com­pe­tent super­vi­so­ry com­mis­sions, they are also at risk of becom­ing sanc­tioned by the same com­mis­sions for vio­lat­ing Arti­cle 12(e) BGFA.
2. For arbi­tra­tors: In our view, arbi­tra­tors are well advised to align their inter­pre­ta­tion of Swiss law with the estab­lished case law of Switzerland’s high­est court. In line with Arti­cle 1(3) of the Swiss Civ­il Code, arbi­tra­tors should not devi­ate from the case law of the Swiss Fed­er­al Tri­bunal with­out good cause, even if they con­sid­er a dif­fer­ent inter­pre­ta­tion of the rel­e­vant law more con­vinc­ing. For the sake of fore­see­abil­i­ty of Swiss arbi­tra­tion pro­ceed­ings and com­pat­i­bil­i­ty of Swiss arbi­tral awards with the case law of Swiss state courts, there should be no dou­ble stan­dards when it comes to the appli­ca­tion of Swiss law.

Zitier­vorschlag:
Axel Buhr, Award grant­i­ng unlaw­ful suc­cess fees upheld, in: dRSK, pub­liziert am 27. Sep­tem­ber 2018