International commercial arbitration – Swiss seated arbitral tribunal – You only get one shot!
Competition between arbitration locations has increased significantly in recent years. Personally, I can still remember a time when international arbitration took place in a much narrower circle. The “good old days” of arbitration were recently described as follows by Prof. Felix Dasser, a renowned Swiss arbitration practitioner, in his keynote speech at the Vilnius Arbitration Day on 13 September 2024:
“Until then, arbitration had been for a select group of initiates and confined to small areas of trade. The arbitrators were called ‘Grand Old Men’ by Dezalay and Garth in their famous book ‘Dealing in Virtue’, published in 1998. These Grand Old Men were often Swiss professors like the unforgettable Professor Pierre Lalive.”
Nowadays, Switzerland is no longer unchallenged as a hub for international arbitration proceedings, but is in competition with various other locations for such proceedings. Accordingly, it must stand out positively from the existing alternatives. One aspect that is generally perceived as positive in the business world is the fact that the award of an arbitral tribunal seated in Switzerland can hardly be successfully challenged before the Swiss Federal Supreme Court (SFSC), Switzerland’s highest court.
A bit more specific: If the parties have validly entered into an arbitration agreement, which is generally the case in international trade today, and an arbitral tribunal with its seat in Switzerland has been duly appointed, which is also generally the case, an arbitral award can practically no longer be successfully challenged before the SFSC, even if the arbitral tribunal’s application of the law, such as the interpretation of the contract at issue, is clearly wrong. This could be counterintuitive for laypersons, i.e., users of arbitration proceedings who are not familiar with Swiss arbitration law. In principle, judgments of state courts and, in certain jurisdictions, arbitral awards can be successfully challenged if the law was clearly misapplied in the judgment or arbitral award. This is not the case with Swiss arbitration awards. This can be well illustrated by a new judgment of the SFSC published on 3 October 2024.
In its new judgment 4A_34/2024 of 7 August 2024, published on 3 October 2024 (see: https://www.bger.ch/ext/eurospider/live/de/php/aza/http/index.php?highlight_docid=aza://07-08-2024-4A_34-2024&lang=de&zoom=&type=show_document), the SFSC dealt with an appeal in which the complaining party essentially asserted with various arguments that the arbitral tribunal had misinterpreted the relevant contract. This line of argument was unsuccessful before the SFSC. The most important considerations of the SFSC in this regard are reproduced below, first in the German original, then followed in a translation from German into English based on Deepl.
In its judgment 4A_34/2024, the SFSC emphasizes that it only examines the arbitral tribunal’s substantive application of the law from the very narrow perspective of a violation of Swiss public policy (see, in particular, consideration 3.2 in fine):
“Das Bundesgericht kann aber im Rahmen einer internationalen Schiedsbeschwerde die materielle Rechtsanwendung des Schiedsgerichts einzig unter dem engen Blickwinkel des Ordre public überprüfen […]. Ansonsten entzieht sich die schiedsgerichtliche Rechtsanwendung der bundesgerichtlichen Kognition. Das Bundesgericht kann somit vorliegend nicht prüfen, ob […] eine falsche Vertragsauslegung und in der Folge eine inkohärente Rechtsanwendung […] effektiv vorliegt.”
English translation with Deepl: “However, in the context of an international arbitration appeal, the SFSC can only review the arbitral tribunal’s substantive application of the law from the narrow perspective of public policy […]. Otherwise, the arbitral tribunal’s application of the law is beyond the cognizance of the SFSC. In the present case, the SFSC is therefore unable to examine whether […] an incorrect interpretation of the contract and, consequently, an inconsistent application of the law […] actually exists.”
With regard to the high hurdle of a violation of Swiss public policy, the SFSC recalls what such a violation requires (see consideration 7.1, in particular):
“Gegen den Ordre public verstösst die materielle Beurteilung eines streitigen Anspruchs nur, wenn sie fundamentale Rechtsgrundsätze verkennt und daher mit der wesentlichen, weitgehend anerkannten Wertordnung schlechthin unvereinbar ist, die nach in der Schweiz herrschender Auffassung Grundlage jeder Rechtsordnung bilden sollte […]. […] Zur Aufhebung des angefochtenen Schiedsentscheids kommt es nur, wenn dieser nicht nur in der Begründung, sondern auch im Ergebnis dem Ordre public widerspricht […].”
English translation with Deepl: “The substantive assessment of a disputed claim is only contrary to public policy if it disregards fundamental legal principles and is therefore completely incompatible with the essential, widely recognized system of values which, according to the prevailing view in Switzerland, should form the basis of every legal system […]. […] The contested arbitral award will only be set aside if it contradicts public policy not only in its reasoning but also in its result […].”
After the SFSC confirms that the principle of contractual compliance or fidelity (pacta sunt servanda) is also part of Swiss public policy, it explains in its judgment 4A_34/2024 how restrictively it interprets this principle in relation to arbitral awards (see consideration 7.2):
“Der Grundsatz der Vertragstreue (pacta sunt servanda), dem die Rechtsprechung zu Art. 190 Abs. 2 lit. e IPRG eine eingeschränkte Bedeutung beimisst, ist nur verletzt, wenn sich das Schiedsgericht weigert, eine Vertragsklausel anzuwenden, obwohl es davon ausgeht, dass diese die Parteien bindet, oder umgekehrt aus einer Klausel eine Verpflichtung ableitet, obwohl es diese für unverbindlich hält. Das Schiedsgericht muss also eine Vertragsbestimmung angewendet bzw. deren Anwendung verweigert und sich damit in Widerspruch zum Ergebnis der eigenen Auslegung hinsichtlich der Existenz oder des Inhalts des strittigen Vertrags gesetzt haben. Demgegenüber werden der Vorgang der Auslegung und die rechtlichen Konsequenzen, die daraus gezogen werden, nicht vom Grundsatz der Vertragstreue erfasst, weshalb sich damit keine Rüge der Ordre public-Widrigkeit begründen lässt. Das Bundesgericht hat verschiedentlich betont, dass praktisch die Gesamtheit der sich aus der Vertragsverletzung ergebenden Rechtsstreitigkeit vom Schutzbereich des Grundsatzes pacta sunt servanda ausgeschlossen ist […].“
English translation with Deepl: “The principle of contractual compliance (pacta sunt servanda), to which the case law on Art. 190(2)(e) of the Swiss Private International Law Act attaches limited importance, is only violated if the arbitral tribunal refuses to apply a contractual clause although it assumes that it binds the parties or, conversely, derives an obligation from a clause although it considers it to be non-binding. The arbitral tribunal must therefore have applied or refused to apply a contractual provision and thus contradicted the result of its own interpretation with regard to the existence or content of the disputed contract. In contrast, the process of interpretation and the legal consequences that are drawn from this are not covered by the principle of contractual compliance, which is why no complaint of a violation of public policy can be justified. The SFSC has emphasized on various occasions that practically the entirety of the legal dispute arising from the breach of contract is excluded from the scope of protection of the principle of pacta sunt servanda […].”
Against the above background, it is clear that a substantive correction of a Swiss arbitral award does not take place even in clear cases of misapplication of the law. Parties therefore regularly attempt to challenge a Swiss arbitration award by claiming a violation of the right to be heard. However, as can also be seen from the judgment 4A_34/2024, this approach is inadmissible if it is aimed at a substantive review of an arbitral award (see consideration 6.2):
“Nach ständiger Rechtsprechung beinhaltet das rechtliche Gehör keinen Anspruch auf einen materiell richtigen Entscheid, sondern sichert allein das Recht auf Beteiligung der Parteien an der Entscheidfindung […]. Es ist daher unzulässig, dem Bundesgericht unter dem Deckmantel der Gehörsrüge Kritik an der materiellen Beurteilung des Falles zu unterbreiten […].”
English translation with Deepl: “According to established case law, the right to be heard does not include a right to a substantively correct decision, but merely ensures the right of the parties to participate in the decision-making process […]. It is, therefore, inadmissible to submit criticism of the substantive assessment of the case to the SFSC under the guise of a violation of the right to be heard […].”
The circumstance that parties in arbitration proceedings before a Swiss arbitral tribunal, which has been duly appointed and grants the parties the right to be heard, have practically only one shot, i.e., cannot correct the arbitral award even in cases of blatantly incorrect application of the law, is this an advantage or a disadvantage with regard to the Swiss arbitration venue? This is a complex question, with various aspects that speak for and against Switzerland as an arbitration location. Ultimately, it is a question of the personal preference of the users of arbitration. If a user prefers en connaissance de cause that an arbitration award can practically not be successfully challenged and is generally legally binding within a few months even in the event of a challenge, there is certainly nothing to be said against the relevant legal situation in Switzerland. By contrast, users who focus on the possibility of successfully challenging an arbitration award in a state court in the event of gross errors in the application of the law are likely to be less impressed by the situation in Switzerland.
PHH, Zurich, 3 October 2024
This article has been written by Dr. iur. Philipp H. Haberbeck (PHH), a Swiss attorney-at-law, who is registered in the Attorneys’ Register of the Canton of Zurich, Switzerland (see, for more detailed information, www.haberbeck.ch). The law firm PHH operates in the form of an individual company (Einzelunternehmen) under Swiss law, registered in the Commercial Register of the Canton of Zurich, Switzerland, with the company identification number CHE-407.615.179. Each and any mandate is exclusively concluded in writing, based on the mutual signing of a mandate agreement. Please note that the information contained in this article is for general informational purposes only and is not intended to constitute legal advice. No actions or decisions should be taken on the basis of this article without seeking specific legal advice.
Rechtsgebiete: Allgemeines Vertragsrecht