Multi-tier dispute resolution clauses: consequence of non-compliance with pre-arbitral procedural requirements
PD Dr. Nathalie Voser (Partner) and Aileen Truttmann (Associate), Schellenberg Wittmer (Zurich)
In a French-language decision dated 16 May 2011 and published on 26 May 2011, the Swiss Supreme Court confirmed that an arbitral tribunal was competent even though contractual pre-arbitral steps had not been complied with. The award was, however, set aside based on the violation of the right to be heard, since the arbitral tribunal had not dealt in the award with an argument raised by one of the parties.
V and Y entered into a contract governed by Swiss law in 2001 whereby V was to deliver an industrial production line for non-woven fabrics to Y.
On 20 January 2009, on the basis of an arbitration clause contained in the contract, Y launched arbitration proceedings against V before an ad hoc, three member tribunal in Geneva. Y claimed payment of around EUR5 million for defects in the production line. Y also requested a declaration concerning the supply of spare parts for a period of ten years.
V raised a jurisdictional objection, arguing that the request for arbitration was inadmissible because of Y's failure to comply with the pre-arbitral steps provided for in the contract. Alternatively, V requested the suspension of the proceedings until the pre-arbitral requirements had been complied with, as well as the payment of damages for this breach.
According to Article 18(3) of the contract between the parties:
"Disputes regarding conformity or nonconformity of supplies and services must be submitted to a neutral expert before the launch of arbitral proceedings".
Article 20 of the contract continued as follows:
"In the event of disputes concerning the interpretation or the performance of the Contract, the Parties shall first seek an amicable settlement. Possible disputes resulting from the interpretation or the performance of the provisions of the Contract will be submitted, after failure of the conciliation attempt, to an arbitral tribunal, without any recourse to the state courts. The arbitral tribunal will consist of three arbitrators. Each party shall appoint one arbitrator."
On 27 January 2010, the arbitral tribunal rejected V's jurisdictional objection, with its reasoning to follow in its final award. In the final award of 3 December 2010, the arbitral tribunal confirmed its rejection of V's jurisdictional objection and ordered V to pay EUR3.25 million to Y and to supply spare parts to Y against payment until 31 December 2005.
Regarding Article 18(3) of the contract, the arbitral tribunal held that an interpretation, or possibly a non-performance issue, was at stake in this case, but that no technical aspects were involved. It was unlikely that an expert could have brought the parties to an agreement concerning a point which fell wholly outside his remit. Finally, given the irreconcilable positions adopted by the parties, it was just as unlikely that the expert, giving an opinion on technical issues, could have led the parties to an amicable solution.
In relation to Article 20 of the contract, the arbitral tribunal considered that the wording of the provision was not clear enough to conclude that the absence of a conciliation attempt should necessarily lead to the inadmissibility of the request for arbitration. Furthermore, a meeting had indeed taken place between the parties on 13 January 2009, that is, before the arbitration was initiated. The meeting may have been purely informal, but the point was that it had proved unsuccessful. A declaration of inadmissibility of the request for arbitration or the stay of the proceedings for breach of Article 20(2) of the contract would therefore have been an over-formal approach.
V challenged the award before the Supreme Court, relying on Articles 190(2)(b), (d) and (e) of the Swiss Private International Law Act (PILA).
V claimed that:
The arbitral tribunal was not competent ratione temporis, in that the reference to arbitration was premature as the contractual pre-arbitral steps had not been taken.
The arbitral tribunal had not examined one of its arguments relating to the absolute statute of limitations and had thus violated its right to be heard. V contended that the arbitral award did not address this issue although it had developed its position in detail in a submission of 19 May 2010. The arbitral tribunal commented on this challenge, explaining that it had implicitly dealt with the issue as V had not answered to the otherwise convincing arguments brought forward by Y on this point.
The Supreme Court reaffirmed that a challenge for breach of a multi-tier mechanism should be brought under Article 190(2)(b) PILA (jurisdiction ground), but it dismissed the petition to set aside for breach of that mechanism. However, it set aside the award for violation of the right to be heard.
Multi-tiered dispute resolution clause
The Supreme Court upheld the arbitral tribunal's reasoning in relation to the alleged obligation to submit the dispute to a neutral expert before initiating arbitration proceedings (Article 18(3) of the contract). The Supreme Court considered that there was no correlation between the role assigned to the expert and the issues to be resolved by the arbitrators. It was therefore doubtful, given the irreconcilable positions adopted by the parties, that the opinion of the expert could have brought the parties to an agreement on issues totally outside the scope of his mission.
Regarding the alleged obligation to attempt conciliation before launching an arbitration (Article 20(2) of the contract), the Supreme Court also confirmed the reasoning of the arbitral tribunal. The Supreme Court indicated that the general principles of interpretation applied. It considered that the arbitral tribunal had not ignored these principles when emphasising the mention of "attempt at conciliation" in Article 20(2) of the contract, the absence of concrete wording indicating that such a pre-arbitral step was a condition precedent to the admissibility of a request for arbitration, and the lack of a precise description of the conciliation process. The Supreme Court observed that the clause in question did not describe the proceedings. Nor did it indicate if the intervention of a mediator was required, or if the proceedings had to be initiated within a certain timeframe. This lack of specification did not speak in favour of the mandatory character of the attempt to conciliate.
The Supreme Court considered that the parties had, in any event, met before the request for arbitration was filed and that that meeting had not led to a positive outcome. Despite the informal nature of the meeting, a conciliation attempt had indeed been made. The arbitral tribunal had furthermore found that the failure of the conciliation had confirmed the irreversible deterioration of the relationship between the parties. By insisting on the pre-arbitral tier at a later stage, V was therefore not acting in good faith, as the chances of success of conciliation were non-existent even at that earlier stage.
The petition to set aside the arbitral award for breach of the multi-tier dispute resolution clause was therefore dismissed. Although the Supreme Court did not need to deal with the sanctions attached to such a breach, it nevertheless noted that the issue was controversial. However, it observed that the majority of scholars, at least in Switzerland, seemed to be in favour of the stay of the arbitral proceedings and of the setting of a time-limit to the parties to remedy the breach.
Right to be heard
The petition was, however, upheld by the Supreme Court on another ground, namely for breach of the right to be heard (Article 190(2)(d) PILA), as the arbitral tribunal failed to examine V's arguments relating to the absolute statute of limitations.
The Supreme Court found that the arbitral tribunal had not explicitly dealt with this argument. When commenting on the challenge, the arbitral tribunal said it had only implicitly dismissed the argument.
The Supreme Court found that although it was true that V had not specifically answered Y's argument on this issue, in its reply of 13 January 2010, it had nevertheless fully developed its position in its subsequent submission of 19 May 2010.
The Supreme Court noted that the award contained no rebuttal, even implicit, of V's arguments. In its comment on the challenge, the arbitral tribunal had not even referred to V's submission of 19 May 2010. Nor was there any mention in the award that Y had "substantially and convincingly" answered the absolute statute of limitations objection raised by V, as suggested by the tribunal.
The Supreme Court found itself reduced to having to give credit to the mere allegations of the arbitral tribunal that the argument had been effectively dealt with. The Supreme Court held that even if the obligation to provide a reasoned award was not part of the guarantee of the right to be heard within the meaning of Article 190(2)(d) PILA, if it had to rely on mere allegations by the tribunal that it had dealt with a specific issue, it would be denying any effect to the minimum obligation to deal with relevant issues assigned to the arbitrators.
This decision is of some practical importance as it gives additional indication on how to deal with multi-tier dispute resolution clauses.
Drafters should first make sure that the wording of the clause is absolutely clear. This is crucial as the Supreme Court reaffirmed that the general principles of contractual interpretation applied. Practitioners drafting multi-tier dispute resolution clauses should therefore take special care to include wording that unambiguously indicates the consequences of breaching the requirement to go through the pre-arbitration stages. The mandatory character of the requirement should be made clear if such is the intention. Practitioners should also add, for example, a precise description of the proceedings and a time limit within which the pre-arbitration requirement has to be fulfilled. According to the considerations of the Supreme Court, this would support the mandatory character of that stage.
The decision also relies on the principle of good faith in the context of multi-tier clauses. It was held that the party was not acting in good faith by insisting on compliance with the pre-arbitral step, as there was already no prospect of an agreement at the time of the informal meeting. It implicitly follows from this that it must be clear that the party relied on the mandatory character of the pre-arbitral step at the time when it had to take that step. Counsel representing a party insisting on compliance with a pre-arbitral requirement should therefore encourage the client to actively try to enforce the pre-arbitral tier at the time when the pre-arbitral step is to be followed, so that they are in a position to demonstrate that the client effectively relied on the mandatory character of the particular provision.
As had already been the case in a previous decision (4A_18/2007 of 6 June 2007), the Supreme Court left unresolved the issue of how to sanction the non-compliance of a party with a mandatory pre-adjudicatory tier. However, the Supreme Court noted that there was a trend towards staying the proceedings.
This decision is also worth mentioning as it is one of the rare cases in which a challenge has been upheld by the Supreme Court. According to the most recently published statistics (covering the period from 1989 to mid 2009), only 7% of challenges have been upheld by the Supreme Court (Felix DASSER, International Arbitration and Setting Aside Proceedings in Switzerland – An Updated Statistical Analysis, in ASA Bulletin Volume 28, No.1 (2010), pages 82-100, page 82). Although breach of the right to be heard was the most often invoked ground for challenge, it had only a 3.9% chance of success, that is, much less than the jurisdiction ground (10.1%) (DASSER, pages 87-88).