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May 22, 2017 Articles

International Arbitration in Switzerland: The Basics in a Nutshell

By Daniel Hochstrasser and Isabelle Oehri

For more than a century, Switzerland has been among the preferred venues for international arbitrations worldwide, whether in ad hoc or in institutional proceedings, and be it for commercial, investment, or sports-related disputes. What is the secret behind this leading position Switzerland is successfully defending against an increasing competition from recently emerging new arbitration hubs?

Various factors may account for Switzerland's reputation as a well-recognized center for arbitration, including its long-standing tradition of neutrality, democracy, and stability, which made it an ideal host country for many international organizations and dispute settlement institutions, such as the United Nations, the World Trade Organization (WTO), the World Intellectual Property Organization (WIPO), and major international sports organizations including the Court of Arbitration for Sport (CAS), the International Olympic Committee (IOC), FIFA, and UEFA. Such success is, however, above all owed to the clear and liberal Swiss international arbitration law, which offers maximum flexibility for the parties and arbitrators to tailor the proceedings to their needs. The efficiency and predictability of this legislation is further enhanced by the straightforward approach adopted by Swiss courts and practitioners.

This article provides an overview on this regulatory framework governing international arbitration in Switzerland.

Legal Framework
Switzerland's international arbitration law in chapter 12 of the Federal Private International Law Act (PIL) (unofficial English translation) comprises a concise and streamlined set of 19 articles in force since January 1, 1989. It applies to all Swiss arbitrations involving at least one party that had its domicile or regular place of residence outside Switzerland when the arbitration agreement was concluded.

Moreover, Switzerland has signed more than 120 bilateral investment treaties containing arbitration-related rules and is, of course, a member state of the New York Convention on the Recognition and Enforcement of Foreign Arbitral Awards (NYC).

Contractual parties often combine their jurisdictional choice of arbitration in Switzerland as their agreed dispute resolution mechanism with a choice of Swiss law as the substantive law applicable to their relationship. Swiss contract law, in particular the Swiss Code of Obligations (unofficial English translation), is widely recognized as a reasonable and solution-oriented regime suitable for international business disputes.

Arbitrability and Arbitration Agreements
For submitting a dispute to arbitration in Switzerland, a valid arbitration agreement must be concluded. The formal and substantive validity requirements imposed by Swiss law are rather moderate and, in general, do not constitute a major hurdle to take for contractual parties wishing to resort to arbitration.

With respect to formal validity, article 178[1] PIL requires the arbitration agreement to be made in writing or by any other means of communication evidenced in text. This requirement is generally met by any modern means of electronic communication, such as email. A currently discussed draft bill on the revision of chapter 12 PIL suggests to further alleviate the formal criteria by restricting the mandatory text form requirement to only one of the parties' declarations while the other declarations may be made orally or through unambiguous conclusive acts.

Pursuant to article 178[2] PIL, an arbitration agreement is valid in substance if it conforms to the law chosen by the parties, the law governing the dispute, or Swiss law. By offering three alternative options for upholding an arbitration agreement's substantive validity, Swiss law establishes a flexible conflict of law rule that reflects its favorable attitude toward arbitration.

If examined under Swiss law, substantive validity requires that the parties have the capacity to enter into an arbitration agreement (subjective arbitrability) and that the matter of the dispute be arbitrable (objective arbitrability; see below). Moreover, the parties' consent with regard to the essential elements of the arbitration agreement is required—i.e., the parties must express their intention to submit to arbitration and the arbitration clause must specify the object or legal relationship subject to arbitration.

By stipulating that any dispute of financial interest may be the subject of arbitral proceedings, article 177 PIL offers a broad definition of arbitrability. Thus, under Swiss law, contractual parties may resort to arbitration not only in connection with genuinely commercial disputes, but, in principle, also in relation to monetary claims arising in areas such as labor law, family and inheritance law, intellectual property, antitrust and competition law, real estate, and corporate matters including shareholder disputes.

Arbitration agreements usually are binding on the original signatories only. However, Swiss court practice, acknowledging in certain situations the practical need for broadening arbitration clauses, adopts a liberal case-by-case approach allowing for an extension to third parties or related disputes, once the common intent to arbitrate is established (see, as examples, the Swiss Federal Supreme Court's decisions 4P.115/2003 of October 16, 2003 [DFT 129 III 727] and 4A_438/2013 of February 27, 2014 [DFT 140 III 134]). Accordingly, several legal extension theories are recognized, including the principle of confidence (Vertrauensprinzip), agency law, or the piercing of the corporate veil.

Arbitral Proceedings
Swiss law grants the parties a high degree of flexibility to adapt the arbitral proceedings to their liking. They are free to determine the procedure directly or by reference to specific arbitration rules or by submission under a procedural law of their choice (article 182[1] PIL). Absent such party agreement, the arbitral tribunal determines the applicable procedural rules (article 182[2] PIL).

This wide procedural discretion is only limited by article 182[3] PIL: obliging the arbitral tribunal to ensure the parties' equal treatment and right to be heard, this provision expresses the minimum standard of due process guaranteed by Swiss constitutional law that demands application in any judicial proceedings conducted in Switzerland.

Role of State Courts
The role of state courts in international arbitrations in Switzerland is one of passive and active support.

On the one hand, state courts must respect the parties' intention to replace them by an arbitral tribunal and shall therefore, in general, abstain from intervening in arbitration proceedings. Here, the so-called competence-competence principle is of crucial importance. Stipulated in article 186[1] PIL, this principle empowers Swiss-seated arbitral tribunals to rule on their own jurisdiction and, in this context, to decide any questions regarding the existence, validity, or scope of arbitration clauses. This applies even if an action on the same matter between the same parties is pending before a state court or another arbitral tribunal, unless there are serious reasons to stay the proceedings (article 186[1bis] PIL). Conversely, a Swiss state court, seized with a dispute falling within the ambit of a valid arbitration agreement, must decline its jurisdiction to hear the case (see article 7 PIL; article II[3] NYC). If such arbitration agreement provides for arbitration in Switzerland, this priority principle, according to the case law of the Federal Supreme Court (see, for instance, decision 4A_119/2012 of August 6, 2012 [DFT 138 III 681]), even goes one step further by limiting the state court's review to a prima facie assessment only. Once it has satisfied itself that there appears to be a valid and binding arbitration clause, the state court will leave any in-depth examination of specific issues regarding validity and scope to the arbitral tribunal.

On the other hand, in some situations, not merely passive support but active assistance of a state court is needed to enable and ensure the proper and efficient conduct of arbitration proceedings and to protect their outcome. In the course of ongoing arbitration proceedings, a party may, for instance, seek assistance from the court at the place of arbitration in appointing, removing, or replacing arbitrators (article 179 PIL). Further, state courts may be seized in the context of interim relief, in particular, where measures are to be directed against third parties or if a party refuses to voluntarily comply with provisional measures ordered by an arbitral tribunal (article 183 PIL). Eventually, after the rendering of the arbitral award, enforcing the tribunal's decision or, quite the contrary, annulling it may become the subject matter of post-arbitration litigation before state courts. Both in enforcement as well as in setting aside proceedings, the state courts' role is, according to the Swiss system, to conduct a review on the arbitral proceedings and findings essentially restricted to their compliance with the most fundamental principles of due process and fairness, and, these being complied with, to protect the arbitration's results by ensuring the award's efficient enforcement.

Arbitral Award and Its Finality
Any international award rendered in Switzerland is final from its notification (article 190[1] PIL). This means that the award is enforceable and binding by operation of law without any additional state court scrutiny.

Here, a further feature underscoring Switzerland's arbitration friendliness comes into play: the restrictive approach toward challenges of arbitral awards. A party seeking annulment of an unfavorable award may only avail itself of one ordinary means of remedy, i.e., the appeal to the Swiss Federal Supreme Court set forth in articles 190–192 PIL. By limiting any state court review of arbitral awards to a number of limited grounds for appeal that might be brought directly before the highest court in Switzerland, and by acknowledging, under certain conditions, even a complete waiver of appeal, Swiss arbitration law helps in ensuring that the parties obtain a final decision within reasonable time and at reasonable costs. This effect is further enhanced by the expeditious and uniform handling of setting aside motions by the Federal Supreme Court and its express policy of noninterference, which is reflected in a famously low rate of successful challenges of approximately 7 percent.

If none of the parties has its domicile, habitual residence, or business establishment in Switzerland, they may, by an express statement in the arbitral agreement or a subsequent written agreement, entirely exclude the right to challenge the award (article 192 PIL).

Absent such valid waiver, article 190[2] PIL provides for the following exhaustive list of five narrowly defined grounds for appeal, which are, to a large extent, aligned to the grounds for denial of recognition and enforcement contained in article V NYC:

(1)        irregular composition of the arbitral tribunal (article 190[2][a] PIL);

(2)        incorrect decision on jurisdiction (article 190[2][b] PIL);

(3)        decision ultra, infra, or extra petita (i.e., the arbitral tribunal went beyond the claims raised or failed to address certain of them; article 190[2][c] PIL);

(4)        violation of the principle of equal treatment or the parties' right to be heard (article 190[2][d] PIL); and

(5)        incompatibility with public policy (article 190[2][e] PIL).

The nature and scope of these grounds for appeal clearly demonstrate that the overruling of an arbitral award is only possible in rare situations where either essential procedural rights are manifestly violated or where an award contradicts the foundations of Swiss (procedural or substantive) public policy. The latter constitutes the sole plea allowing for a review of the challenged award's merits. The Federal Supreme Court has so far only once, in its famous Matuzalem decision (4A_558/2011 of March 27, 2012 [DFT 138 III 322]), granted a set aside petition for substantive public policy reasons. It found that the challenged sports arbitration award, which de facto imposed on a soccer player an unlimited ban from any soccer-related professional activities, was such a severe violation of the player's right of personality as to amount to incompatibility with public policy. The exceptional circumstances of this case, as well as the fact that, to date, it remains the only one, strikingly illustrate the extremely close boundaries within which the Federal Supreme Court is prepared to reassess the merits of arbitral decisions.

From a procedural angle, the appealing party must file its fully motivated setting aside petition within 30 days of the award's notification, and the opposing party is granted an opportunity to respond. The Federal Supreme Court's subsequent review is limited in two ways. First, its scope is strictly confined to the specific pleas raised by the petitioner. Second, the review is generally based on the finding of facts of the challenged award, and no additional evidence or new facts are admitted. Only in case of an allegedly incorrect jurisdictional decision (article 190[2][b] PIL) does the Supreme Court examine the tribunal's assessments with unfettered powers.

If a setting aside petition is rejected, the challenged award remains binding and enforceable; otherwise, the Federal Supreme Court will annul and remand it to the arbitral tribunal for reconsideration. However, there are two exceptions to this purely cassatory nature: upon successful appeal for irregular composition of the tribunal (article 190[2][a] PIL) or for incorrect decision on jurisdiction (article 190[2][b] PIL), the Federal Supreme Court may itself issue a new decision replacing the annulled award.

Apart from this ordinary appeal (articles 190–192 PIL), a party may, as an extraordinary remedy, also request the revision of an arbitral award. Revision can, in particular, be sought if an award was influenced by a criminal offense or if a party has obtained knowledge of new and relevant facts that were previously unknown. Although not expressly provided for in the current text of chapter 12 PIL, the possibility to seek revision has long been recognized by the Federal Supreme Court. Here again, being the only competent authority, it rules on revision requests by applying the provisions of the Swiss Federal Statute on the Federal Supreme Court by analogy (in particular, articles 123 and 124). The currently discussed draft amendment of chapter 12 PIL proposes to codify this case law by including an explicit rule to this extent.

Legislative Developments and Outlook
In order to keep the legal framework up to date, it is key to continuously adapt it to the needs of the rapidly developing global environment.

Recognizing these dynamics, the Swiss legislator has initiated a reform project on chapter 12 PIL. A first draft bill, published by the Federal Council on January 11, 2017, envisages several additional modernizations and liberalizations. For instance, parties would, in future appeal and revision proceedings before the Federal Supreme Court, be allowed to file their submissions and documents in English while, to date, all filings must be made in an official Swiss language (i.e., German, French, Italian, or Rhaeto-Romanic). Similarly, as regards validity of arbitration clauses, the formal requirements would be relaxed (see above), and the admissibility of unilateral arbitration clauses (e.g., in the context of trusts and wills) would be expressly acknowledged. Further, the reform project aims at codifying settled case law in some areas (e.g., regarding the revision of awards, see above).

Overall however, the rather moderate dimension of the reform proposal, which preserves the cornerstones of the existing chapter 12 PIL, focuses on continuity and thereby again mirrors the global acceptance and success of the Swiss international arbitration law built up over the past decades.

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