U.S. companies frequently choose Switzerland as a seat to arbitrate disputes involving international transactions. An analysis of judgments of the Swiss Federal Tribunal (SFT), which addresses challenges to arbitral awards, shows that companies choosing Switzerland for arbitration often were also involved in foreign judicial proceedings involving the same matters. In light of this, a company considering Switzerland as potential seat for future arbitrations should carefully review its rules concerning the relationship between arbitration and various types of legal proceedings. The following three cases decided by the SFT demonstrate that a failure to understanding these rules may lead to problems, including unnecessary delays, additional costs and less than desirable outcomes.
An arbitral tribunal seated in Switzerland may in exceptional circumstances suspend the arbitral proceedings. Such a decision is considered a procedural order, and it cannot be appealed to the SFT unless, in its decision, the tribunal implicitly has ruled on its jurisdiction. In the latter instance, an immediate appeal from the suspension order is possible. SFT, 4A_391/2010 / 4A_399/2010, Nov. 10, 2010, ATF 136 III 597, ¶4.2. The presence of such an "implicit ruling" and, correspondingly, the distinction between appealable and non-appealable suspension orders, was the focus of an appeal to the SFT concerning a construction work on a chalet in Gstaad.
The construction project was commissioned by a Swiss company (the customer) and carried out by a limited liability company organized under the laws of New York (the contractor). After paying several installments of the total price, the customer ordered the construction work to stop. The contractor brought an arbitration for money damages in Switzerland under the auspices of the Swiss Chambers’ Arbitration Institution (SCAI) against the customer and several other persons, including the property owner. An attorney, acting on behalf of one of the contractor’s three managers, complained to the SCAI that the arbitration had been initiated by the other two managers of the contractor without the knowledge and consent of the client, and therefore, the proceedings had to be terminated. The customer then asked the arbitrator to discontinue or to stay the arbitration in Switzerland until the dispute concerning the contractor’s management was resolved in a separate arbitration before the American Arbitration Association (AAA) in New York. The arbitrator rejected the customer’s application for a discontinuance or stay and the customer appealed that ruling to the SFT.
The SFT dismissed the appeal. Following a detailed analysis, the SFT held that the arbitrator’s order did not contain an implicit ruling on jurisdiction. In the SFT’s view, the arbitrator did not intend to decide, once and for all, whether the request for arbitration had been validly filed by two managers of the contractor, nor whether the withdrawal of that request by the third manager of the contractor was valid. Instead, he had simply decided not to close or stay the arbitration until the dispute concerning the contractor’s management was decided in the AAA arbitration in New York. The arbitrator had decided to let the arbitration before him run its course and to postpone any decision on jurisdiction until later when he had a more complete knowledge of the facts. Inasmuch as the arbitrator’s ruling was strictly procedural, the SFT ruled that that customer’s appeal from that order was not permissible.
In accordance with the principle of res judicata, parties to foreign arbitral proceedings cannot subsequently re-arbitrate or re-litigate an identical claim in Switzerland. A prior arbitration award has preclusive effect for parties as well as for other arbitral tribunals and state courts. The question whether this preclusive effect applies only to the operative part of an award or also to the legal reasons on which the award is based was the main issue of proceedings brought before the SFT with regard to an award rendered in a dispute arising out of an agreement to merge a U.S.-based international law firm and a German law firm. The merger agreement provided for certain annual payments to be made to partners of a German firm over a period of several years. It also contained an arbitration clause referring to the Arbitration Rules of the International Chamber of Commerce (ICC) with Zurich as the seat of arbitration.
When one the co-founders of a German law firm (the co-founder) did not receive the expected annual payments for the years 2009 and 2010, he initiated arbitration proceedings against the U.S.-based law firm (the law firm) which the parties agreed to move to Frankfurt, Germany. The ICC tribunal dismissed the co-founder’s claim holding that the annual payments were due only if the partner fulfilled certain conditions concerning his activity, devotion, and performance and that he had not done so.
The co-founder then initiated a second ICC arbitration in Zurich seeking contractual payments for 2011 and 2012. The law firm raised the defense of res judicata, but that defense was dismissed in a procedural order, and the tribunal gave the co-founder a partial satisfaction of his claims based on the annual payments that were due minus an amount for the co-founder’s contributory negligence. The law firm appealed the award to the SFT arguing that the award improperly disregarded the res judicata effect of the award rendered in Germany.
The SFT dismissed the appeal. It pointed out that the claim brought by the co-founder in the second arbitration was not identical to the claim brought in the first arbitration, since the former concerned the amounts due for 2009 and 2010, whereas the later related to the amounts due for 2011 and 2012. Moreover, according to the SFT, the res judicata effect of a previous award covered its operative part, but not the reasons on which it was based. Accordingly, the principle of res judicata did not apply, and the Zurich arbitration tribunal was entitled to rule on the merits of the co-founder’s claim without being impeded by the legal or factual reasons of ruling in the German arbitration.
Chapter 12 (Arbitration) of the Swiss Federal Private International Law Act, dated Dec. 18, 1987, (as amended) (LDIP) governing international arbitration in Switzerland does not provide for the revision of arbitral awards. However, the SFT has ruled that arbitration awards can be revised pursuant to Article 123 of the Law on the Federal Tribunal (LTF). Such revision is possible when a party subsequently discovers relevant facts or evidence that was not available to it in the arbitration proceeding in which the award was issued. If the SFT accepts a request for revision of an award, it may send the matter to the same arbitral tribunal that issued the award or to a new tribunal for reconsideration.
Issues concerning the significance of the new facts and evidence as well as of the diligence of the party seeking reconsideration were at the center of proceedings before the SFT in relation to an award issued in Geneva pursuant to the rules of the Arbitration Institute of the Stockholm Chamber of Commerce. The underlying dispute arose out of an exclusive importation and sales agreement for the distribution of pasta in the United States, Canada, Israel, and former republics of the USSR (the exclusive distribution agreement) between a German company (the principal) and a New York company (the distributor) as well as out of a subsequent settlement agreement and mutual release signed by the parties. In the original award, the tribunal had ordered the principal to pay the distributor damages (including lost profits) and commissions as well as its legal fees.
The principal requested the SFT to revise this award, primarily relying on the testimony of the daughter of the distributor’s founder subsequently given in a New York court as well as on documents produced by her in response to the order of a U.S. federal court. According to the principal, this new evidence demonstrated that the exclusive distribution agreement was not finalized until January 2017, whereas the award was based on the agreement being in effect four years earlier. In the principal’s view, this new evidence would validate its thesis it had put forward during the arbitration proceeding that both that the exclusive distribution agreement and the settlement agreement allegedly entered into by the parties were not genuine. Since the tribunal relied on the existence of these two agreements in order to grant the distributor damages and commissions, the principal argued that the tribunal would have issued a different award if it had known of these newly discovered facts and evidence.
The SFT rejected the request for revision. It pointed out that in determining the parties’ business relationship, the tribunal relied on factors other than the parties’ agreement, notably, on the testimony of a witness considered by the tribunal as credible. Moreover, the later date on which the agreements were finalized would not necessarily have led the tribunal to conclude that the witness lied. The SFT also found that the principal lacked the required diligence. It had good reasons to request the testimony of the founder of the distributor’s daughter in the Swiss arbitration proceedings but failed to do so.
Several practical lessons can be learned from the preceding three judgments of the SFT. First, before initiating arbitration in Switzerland, a prospective claimant should try to resolve all its internal corporate disputes to "put its house in order." The lack of decisive action in this regard may delay the case if the respondent challenges the authority of the person or persons filing the request for arbitration on the claimant’s behalf.
Second, the res judicata effect of a previous award covers its operative part, but not the legal or factual reasons on which the operative part is based. It follows that an arbitral award adjudicating a claim for periodic payments due for certain years will not necessarily preclude a second arbitration dealing with similar claims for different years. Thus, to avoid a sequel to the first arbitration, a provident respondent could consider implementing some preventive measures which could include bringing a counterclaim for a ruling that the claimant also has no grounds for payment in other years (E.g., Westland Helicopters Limited c. The Arab British Helicopter Company (ABH) et Tribunal arbitral, Apr. 19, 1994, ATF 120 II 172, ¶3a).
In addition, a party to future or pending arbitration in Switzerland considering initiating foreign discovery proceedings to procure evidence to be used in this arbitration should initially try to obtain the same evidence within the framework of the Swiss arbitration, including if necessary, the application to local courts in Switzerland. Otherwise, the opportunity to use such information may be lost.
