An award can be annulled only in part

Case information
April 17, 2013
4A_669/2012
Interest to foreign readers: 
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Interesting
Topics: 
Violation of due process (right to be heard)
Enforcement of awards
Failure to pass judgment on a request
Original language: 
French
Published: 
32 Asa Bull 108 (2014)

Parties

Appellant: 
Respondent: 
Introductory note: 

An English company, a Swiss company and a third party entered into a Framework Agreement for the delivery of nickel. The agreement was governed by English law and provided for arbitration in Zurich.

 

When a dispute arose, the Zurich Chamber of Commerce appointed Arthur Marriott QC as arbitrator and in a final award of October 6, 2012, the arbitrator upheld a claim for breach of contract and ordered the English company to pay damages for loss of profits. An addendum was issued on November 14, 2012 incorporating into the operative part of the award the decision concerning costs.

 

An appeal was made to the Federal Tribunal and the following are interesting in the opinion:

 

  1. When several different grievances are raised in an appeal and only one of them is upheld, an international award issued in Switzerland can be annulled only in part. However, this is only possible if the issues are different. When several violations of the right to be heard are argued and this is the only grievance raised in the appeal, a partial annulment is not possible (see sections 3.3 of the opinion in this respect).

 

  1. Prudently, and as the Court did in other instances, the Federal Tribunal dealt with all issues at hand and specifically stated in the opinion that the arbitrator would have to issue a new decision only with regard to the issue for which a violation of the right to be heard had been argued (see sections 3.3 of the opinion in this respect

 

  1. The right to be heard is violated when an important argument is overlooked and neither the award nor the answer to the appeal satisfactory explains that it must be considered as having been rejected implicitly (see section 3.2.1 of the opinion in this respect)
Translation: 

4A_669/20121

 

Judgment of April 17, 2013

 

First Civil Law Court

 

Federal Judge Klett (Mrs.), Presiding

Federal Judge Corboz,

Federal Judge Kolly,

Federal Judge Kiss (Mrs.),

Federal Judge Niquille (Mrs.),

Clerk of the Court: Carruzzo

 

X.__________ Limited,

Represented by Mr. Oliver Ciric,

Appellant,

 

v.

 

Y.__________ Limited,

Represented by Mr. Ivo Hungerbühler, Mr. Lukas Wyss, and Mr. Alexander Blarer,

Respondent,

 

Facts:

 

A.

On July 1, 2010, X.________ Limited (hereafter: X.________), a company under English law based in London, entered into a preliminary agreement with V.________, a company controlled by A.__________, with a view to selling it various nickel products. The agreement was entered into as a letter, written on the letterhead of X._________ and signed by B.________, the executive director of that company, as well as by A.________ (hereafter: the V.________ letter).

 

On October 27, 2010, X.________ and V.________ entered into a tripartite agreement entitled the Framework Agreement (hereafter: The Framework Agreement) with Y.________ Limited (hereafter: Y.________), a company under Swiss law domiciled at [name of city omitted] and created for this purpose by B.________, C.________ and D.________. The principal purpose of this Framework Agreement was to transfer to Y.________ all of the rights granted to V.________ in the V.________ letter, thus making the Swiss company a co-contractor of X.________ for the sale of the latter’s products. The Framework Agreement anticipated an allocation of 2’400 metric tons of nickel over a year from October 2010 and the delivery of the products to Hull (England) where they would be stored in a consignment site “call-off stock”2 reserved for Y.________. The latter was granted the right to sell the consignment stock and to take the products from the consignment site. As consideration it undertook to pay the purchase price of the goods to X.________ the day after their removal. Governed by English law, the Framework Agreement contained an arbitration clause stating that any dispute arising from it would be submitted to a sole arbitrator, with the seat of the arbitration in Zurich.

 

At the same time, A.________ and Y.________ entered into a partnership agreement for the resale of the products of X.________ in the United Kingdom.

 

The Framework Agreement was never performed. Y.________ and X.________ both reject responsibility for the failure.

 

B.

In a request of September 6, 2011, Y.________ initiated arbitration proceedings against X.________ with a view to obtaining the payment of the total amount of USD 2’320’919.54. In doing so it principally sought compensation for the profit lost as a consequence of the failure to supply nickel over 12 months (October 2010 to September 2011). In this respect it claimed an amount of USD 2’520’000 corresponding to the unit price of USD 1’050 per metric ton, at which price it would allegedly have resold the goods, multiplied by the quantity anticipated in the Framework Agreement (2’400 metric tons). From this amount it deduced the purchase price of the goods, which it set at USD 30 per metric ton by reference to the figure in one of the clauses of the V.________ letter, namely a total of USD 72’000 (30 x 2’400), the financial costs of USD 54’084.46, as well as the credit insurance premium, namely USD 105’753. The result was a net loss of profit of USD 2’288’162.54, to which an amount of USD 32’757 was added for legal costs concerning the negotiation and the conclusion of the Framework Agreement. The total thus obtained is equal to the aforesaid global amount of the claim.

 

In its answer of October 14, 2011, X.________ opposed the request. Essentially it argued that the Framework Agreement was merely a statement of intent with no binding force, with a view to the subsequent conclusion of a contract (an “agreement to agree”3). As to damages, the Defendant argued that the Claimant had grossly overstated the amount for various reasons.

 

On November 17, 2011, the Zurich Chamber of Commerce appointed a London lawyer as the sole Arbitrator. The parties exchanged briefs. A hearing was held in London from June 20 to June 22, 2012.

 

In a final award of October 6, 2012, the Arbitrator ordered X.________ to pay Y.________ the amount of USD 1’800’000 in lost profit, registration costs, and half his fees (see the dispositive part of the award at no. 114). In substance, he found that the Framework Agreement was a real contract binding the Parties. As to the lost profit, he set it at USD 750 per metric ton, multiplied by 2’400 units. However he did not take into account the legal costs sought by Y.________.

 

Upon request from Y.________ the Arbitrator issued an Amendment to the Award of 6th November [sic]4 2012 on November 14, 2012, limited to the issue of the costs of the parties. Indeed, while he had set an amount in this respect in the award (see award nos. 110-112) he had omitted to formally include this in the “operative part” of the award. He did so by adding a paragraph, no. 115, in which he ordered X.________ to pay Y.________ the amount he set as that party’s costs.

 

C.

On November 12, 2012, X.________ (hereafter: the Appellant) filed a civil law appeal. Arguing that the Arbitrator violated its right to be heard, it asks the Federal Tribunal to annul the final award. Moreover it requires that the names of the parties be anonymized in the judgment published on the internet and in the Official Reporter, as the case may be.

 

In its answer of February 8, 2013, Y.________ submits that the appeal should be rejected. The Arbitrator did not file an answer.

 

In a letter of February 26, 2013, counsel for the Appellant advised the Federal Tribunal that his client maintained its submissions after taking note of its opponent’s answer.

 

Reasons:

 

1.

According to Art. 54 (1) LTF,5 the Federal Tribunal issues its decision in an official language,6 as a rule in the language of the decision under appeal. When the decision was issued in another language (in this case English), the Federal Tribunal uses the official language chosen by the parties. In the arbitration they used English and in the briefs submitted to the Federal Tribunal both used French. According to its practice, the Federal Tribunal shall consequently issue its judgment in French.

 

2.

In the field of international arbitration a civil law appeal is allowed against the decisions of arbitral tribunals pursuant to the requirements of Art. 190 to 192 PILA7 (Art. 77 (1) LTF).

 

2.1

The seat of the arbitration was set in Zurich. At least one of the parties (in this case, the Appellant) did not have its domicile in Switzerland at the decisive time. The provisions of chapter 12 PILA are accordingly applicable (Art. 176 (1) PILA).

 

2.2

The Appellant is directly affected by the award under appeal as the Arbitrator ordered it to pay the Respondent a sum of money much too high in its view. Accordingly it has an interest worthy of protection in the annulment of the award, which gives it standing to appeal (Art. 76 (1) LTF).

 

Filed within 30 days after the notification of the final award (Art. 100 (1) LTF in connection with Art. 45 (1) LTF) the appeal meets the formal requirements at Art. 42 (1) LTF and is consequently admissible.

 

 

 

 

2.3

The Appellant’s submission that the name of the parties should be anonymized in this judgment has no independent bearing since this judgment will be published in an anonymous format in accordance with Art. 27 (2) LTF and the practice of the Federal Tribunal.

 

3.

Relying upon Art 190(2)(d) PILA, the Appellant argues that the Arbitrator violated its right to be heard.

 

3.1

The right to be heard in contradictory proceedings within the meaning of Art. 190(2)(d) PILA does not require an international arbitral award to be reasoned (ATF 134 III 1868 at 6.1 and references). However it imposes upon the Arbitrators a minimal duty to examine and address the pertinent issues (ATF 133 III 235 at 5.2 p. 248 and the cases quoted). This duty is violated when, inadvertently or by misunderstanding, the arbitral tribunal does not take into account some statements of facts, arguments, evidence and offers of evidence submitted by one of the parties and important to the decision to be issued. If the award totally overlooks some items apparently important to the outcome of the case, it behooves the arbitrators or the Respondent to justify the omission in their answer to the appeal. They must show that contrary to the Appellant’s arguments, the items omitted were not pertinent to decide the case at hand or, if they were, that they were implicitly refuted by the arbitral tribunal. However the arbitrators are not obliged to discuss all arguments raised by the parties, so that they cannot be found to have violated the right to be heard in contradictory proceedings for not refuting, albeit implicitly, an argument objectively devoid of any pertinence (ATF 133 III 235 at 5.2 and the cases quoted).

 

Moreover, the Federal Tribunal has held that it does not behoove this Court to decide whether the arbitrators should have upheld or rejected the argument they overlooked, if they had dealt with it. This would indeed disregard the formal nature of the right to be heard and the requirement that, in case of violation of this right, the decision under appeal should be annulled irrespective of the Appellant’s chances to obtain a different result (judgment 4A_360/20119 of January 31, 2012, at 5.1 last paragraph and the precedent quoted).

 

3.2

The Appellant no longer challenges the binding nature of the Framework Agreement of October 27, 2010. However it challenges the way in which the Arbitrator computed the damages claimed by the Respondent for breach of the aforesaid agreement by its contractual counterpart. According to the Appellant, the Arbitrator did not address four arguments it had submitted in its briefs in this respect, in particular in its Skeleton Argument10 of June 15, 2012. Each of these arguments must be reviewed in light of the aforesaid case law and the remarks submitted by the Respondent, while the Arbitrator did not submit an answer. It must be pointed out beforehand that, despite the award being silent as to this issue, it is not disputed that the Respondent – which seeks positive damages from the Appellant and more precisely compensation for its lucrum cessans – can only obtain, in this respect, an amount corresponding to its net lost profit, namely the difference between the price at which it could have resold the nickel products which were the object of the Framework Agreement and all the costs it would have paid to acquire these products (as to the general principle concerning how to compute damages, see for instance judgment 4A_288/2008 of September 4, 2008, at 2.1 and the cases quoted). Moreover it is not demonstrated or even claimed that English law, which governs the contract, would have another approach to the concept of lost profit.

 

3.2.1

The first and principal argument concerns the price that the Respondent should have paid to the Appellant for the acquisition of nickel products (appeal nos. 59-64 and nos. 98-105).

 

The Appellant sets forth, with references, that on the basis of an expert report from a Mr. E.________, it stated in detail all of the elements constituting the price that the Respondent should have paid for acquiring the products at issue. According to the Appellant, the clear text of the V.________ letter shows that the unit price of USD 30 (premium) per metric ton concerned uncut nickel cathodes deliverable in Rotterdam (Netherlands) while the Respondent intended to obtain the delivery of cut nickel cathodes at the consignment site set in Hull. The costs to cut (4 x 4) the cathodes and the transportation costs (including insurance) between these two cities amounted to USD 150 and USD 91 per metric ton respectively, according to the expert, and they were due on top of the unit price pursuant to the V.________ letter. Moreover the financial costs, estimated at USD 83 per metric ton, should also be included. The result was a total deduction of USD 354 (30 + 150 + 91 + 83) per metric ton from the unit resale price of the cathodes (USD 525 according to the Appellant; see appeal Nr 62 p.22); hence a net lost profit of USD 171 per metric ton. According to the Appellant, the Arbitrator totally overlooked this argument, merely taking into consideration the basic price of USD 30 per metric ton.

 

It must be found that the Appellant is right. Indeed it appears from the award under appeal that while specifically mentioning the deductions proposed by expert E.________ (n. 101) and by the Appellant in agreement with him, the Arbitrator totally overlooks them, without giving the least explanation in this respect.

 

The Respondent objects that this results from the Arbitrator reasoning on the basis of net prices while it had argued on the basis of gross prices. In its view, when taking as a basis for computation the gross unit price of USD 1’050, at which it anticipated to resale the cathodes (see B above) and deducting from this amount the purchase price (USD 30), the cutting costs (USD 150), and the delivery costs of the cathodes (USD 91 from Rotterdam and USD 23 from Hull), i.e. a total of USD 294, one obtains a net lost profit of USD 756 per metric ton, which is equal to what the Arbitrator held but for a few dollars (750 USD; answer at V). This argument is unconvincing. From a mathematical point of view, it does not rely on the same figures as the Appellant’s as the latter intends to charge USD 354 per metric ton (instead of USD 294) in respect of the acquisition costs of the cathodes, which would reduce the net lost profit to USD 696 (1’050 – 354) instead of the USD 756 computed by the Respondent. Furthermore and above all, it does not appear from a reading of the award that its author reasoned on the basis of net prices. At least, the Respondent does not demonstrate this and its mere reference to the word “margin” used by the Arbitrator at Nr 104 and 107 of the award is completely insufficient in this respect. In reality, as he explains in the pertinent section of the award (Nr 108), the Arbitrator held the figure of USD 750 per metric ton because it was a conservative assumption11 issued by B.________, the Respondent’s executive director. In this respect he referred to paragraph 14 and 15 of the witness statement of one of the Appellant’s founders B.________ (ibid). Yet in the excerpt quoted the latter merely reports the indications given by B.________ and A.________ as to the price that some third parties were ready to pay to acquire the Appellant’s nickel products (award Nr 104), namely as to the price that the Respondent could hope to obtain when reselling the products. Consequently nothing in the text of the award under appeal supports the Respondent’s argument. To the contrary it appears that the Arbitrator, on the basis of his free assessment of the evidence, considered that the USD 1’050 charged by the Respondent as a possible resale price of the nickel cathodes was overrated, which is why he reduced it to USD 750. However the problem of the allocation of the acquisition costs of the products does not appear to have caught his attention. At least he did not give any explanation from which the reason for which he overlooked the issue could be asserted. In conclusion the Appellant is right to argue a violation of its right to be heard in this respect.   

 

3.2.2

The second part of the argument relates to the volume of the sales the Respondent could have made during the life of the Framework Agreement (October 2010 to September 2011; appeal Nr 50 to 58 and Nr 106 to 109).

 

According to the Appellant the V.________ letter, the terms of which were incorporated into the Framework Agreement, anticipated that “the agreement as to the stream of deliveries should, “accommodate the global supply and demand [sic]”. Yet due to production problems in Finland it would have been incapable of delivering any product from that country to its clients. To that extent it should have been freed from its obligations to the Respondent, which would have significantly reduced the latter’s lost profit. The argument had been made and the Arbitrator could not ignore it as he did, which is a violation of the right to be heard.

 

The grievance is unfounded. First the Appellant quotes a passage in French which does not exist in the text of the V.________ letter, as the letter was written in English. It does not state which clause of the agreement contains the condition it claims. Therefore the assumption on which its reasoning is based – according to which the parties to the agreement had agreed to make the volume of the deliveries of nickel to the purchaser dependent upon the production volume in Finland – is not established. Furthermore, the Appellant does not indicate with sufficient precision where and how it submitted this argument to the Arbitrator. Finally, it is too evasive as to the specific consequences that the Arbitrator should have drawn from the alleged circumstance.

 

3.2.3

In a third part of the argument, the Appellant claims to have argued that it was established that the Respondent could not have obtained bank financing before the middle of January 2011, namely three months after the Framework Agreement came into force, so that the amount of its sales and consequently of its lost profit should have been reduced by at least 25%, the computation of its lost profit having therefore to be made on the basis of a total quantity of 2’000 metric tons instead of the 2’400 mentioned in the aforesaid agreement. According to the Appellant, the Arbitrator was seized of the corresponding argument but did not examine the issue at all (appeal nos. 63, 65-69 and 110-115). It is not so. The Arbitrator dealt with the issue of bank financing at nos.26-28 of his award. In particular he stated that, according to the Respondent, the temporary absence of such financing would not have prevented the performance of the Framework Agreement because other financing alternatives were available (n. 28). Then at no. 71 of the award he stated that the problem as to bank financing was not the cause of the failure of the operation in his view. There is no need to review the pertinence of the conclusion. It is sufficient for the purposes of this appeal to note that the Arbitrator did take into consideration the argument which the Appellant claims he overlooked. Consequently the Appellant wrongly argues a violation of its right to be heard in this respect.

 

3.2.4

Finally, the Appellant argues that the Respondent should pay to A.________ a commission of 38% of the gross profit derived from the resale of the nickel products pursuant to the Participation Agreement between them (appeal nos. 70-73 and nos. 116-121). According to the Appellant, it raised the point in the arbitral proceedings that the commission must be deducted from the hypothetical resale price of the nickel cathodes because it was part of the acquisition cost of these products. However it claims the Arbitrator did not address the issue.

 

It must be noted that the Appellant does not indicate when or where it submitted this argument to the Arbitrator. That there are some references to the share of the profit reserved to A.________ in the award under appeal (nos. 24 and 103 where 37% is mentioned and not 38%) does not mean the argument was raised. Moreover, the Appellant does not explain what the legal nature of the partnership agreement was on the basis of which A.________ had been granted the right to the payment of 37% or 38% of the gross profit. Neither does it claim to have invited the Arbitrator to clarify the issue. Yet, as the Respondent rightly points out, it is not immaterial to know whether the 37% or the 38% were a brokerage fee to be deducted from the resale price of the goods, as the Claimant apparently argues, or a share of the profit made by the Respondent in the implementation of the Framework Agreement after the acquisition costs were deducted (answer no. IV (d)).

 

This being so, the Appellant wrongly argues that it was not heard as to this issue.

 

3.2.5

In the computation it proposes at no. 62, p. 22 of its appeal brief, the Appellant charges the amount of USD 525 per metric ton, which allegedly represents the gross amount at which the Respondent could have resold the nickel cathodes to its clients. However the Arbitrator held an amount of USD 750 in this respect. As the Appellant does not argue a violation of its right to be heard as to this issue, it seeks in vain to substitute the latter amount with the former.

 

3.3

In conclusion, the appeal must be granted in part as to a violation of Art. 190(2)(d) PILA to the extent that it concerns the computation of the price that the Respondent should have paid to the Appellant for the nickel products (above 3.2.1) and rejected as to the other issues (above 3.2.2 to 3.2.5). Case law and legal writing recognize the possibility of annulling an award in part, despite the requirement that an international arbitral award be either confirmed or annulled (see Art. 77 (2) LTF ruling out the applicability of Art 107 (2) LTF), when the item appealed is independent from the others (aforesaid judgment 4A_360/2011 at 6.1 and the references). This requirement is not met in this case which involves only one claim in dispute. Consequently the award under appeal shall be annulled entirely. However, it goes without saying that in the new award to be issued, the only issue to be reexamined will be the one for which the Appellant successfully argued a violation of its right to be heard.

 

 

 

 

4.

While formally adding a paragraph – no. 115 – to the award under appeal, the award issued by the Arbitrator on November 14, 2012, upon request from the Respondent (B last paragraph above) is not a real additional award but merely an addendum seeking to rectify a purely formal omission because the allocation of the costs of the Parties, which it specifically addresses, had already been the object of a decision by the Arbitrator in the initial award (nos. 110-112). Moreover, he relied on Art. 36 of the Swiss Rules of International Arbitration which concerns the “correction of the award” while  “additional award” is addressed at Art. 37 of the same rules.

 

Under such conditions, the addendum becomes void ipso facto as a consequence of the annulment of the original award (ATF 131 III 164 at 1.1). However, to simplify the issue and to avoid that some new problems may arise at the enforcement stage, as the case may be, due to the existence of the addendum and a new award, which will have to be issued due to the annulment of the initial award, the addendum must also be annulled (see no. 2 of the dispositive section of judgment 4A_433/200912 of May 26, 2010).

 

5.

The judicial costs and the cost of the Parties for the federal proceedings must be adjudicated. They must be appointed because neither party prevails entirely (Art. 66 (1) LTF, Art. 68 (1) and (2) LTF). The Federal Tribunal will do so by adopting the computation at no. 62 of the appeal, rectified pursuant to the grievances admitted or rejected and then compared with the result anticipated by the Appellant (USD 200’000 [appeal no. 63], as opposed to the USD 1’800’000 awarded by the Arbitrator [award Nr A/108]) by substituting the unit resale price of USD 525 with USD 750 (see 3.2.5 above), leaving aside the USD 65 charged in connection with A.________’s claim to 38% (see 3.2.4 above) and by multiplying the intermediate result by 2’400 instead of 2’000 (see 3.2.3 above) one obtains a total of USD 950’400 (750 – [30 + 91 + 150 + 83] x 2’400) to be paid by the Appellant. Consequently, in the best of cases, it could obtain in fine a reduction of USD 849’600 (1’800’000 USD – 950’400 USD), slightly below half the amount held by the Arbitrator and significantly less (53%) than what it was claiming (1’800’000 USD – 210’000 USD = 1’588’000 USD). However it must be taken into account that it had to act to enforce a procedural guarantee – its right to be heard – the importance of which cannot be measured merely by the financial consequences of the award under appeal (aforesaid judgment 4A_360/2011 at 7). Consequently it appears fair to divide the judicial costs in half and to award no other costs.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Therefore, the Federal Tribunal pronounces:

 

 

1. The appeal is admitted in part.

 

2. The award of October 6, 2012, and the addendum of November 14, 2012, are annulled.

 

3. The judicial costs, set at CHF 17’000, shall be borne by each party in half.

 

4. No costs are awarded.

 

5. This judgment shall be notified to the representatives of the Parties and to the sole Arbitrator.

 

 

 

Lausanne April 17, 2013.

 

 

 

In the name of the First Civil Law Court of the Swiss Federal Tribunal.

 

 

 

The Presiding Judge:                                        The Clerk:

 

Klett (Mrs.)                                                        Carruzzo

 
  • 1. Translator’s note: Quote as X._____ v. Y.______, 4A_669/2012. The original decision is in French. The text is available on the website of the Federal Tribunal www.bger.ch.
  • 2. Translator’s note: In English in the original text.
  • 3. Translator’s note: In English in the original text.
  • 4. Translator’s note: In English in the original text.
  • 5. Translator’s note: LTF is the French abbreviation for the Federal Statute of June 17, 2005, organizing the Federal Tribunal, RS 173.110.
  • 6. Translator’s note: The official languages of Switzerland are German, French, and Italian.
  • 7. Translator’s note: PILA is the most commonly used English abbreviation for the Federal Statute on International Private Law of December 18, 1987, RS 291.
  • 8.  Translator’s note: The English translation of this decision is available here:  http://www.swissarbitrationdecisions.com/right-to-be-heard-equality-betw...
  • 9.  Translator’s note: The English translation of this decision is available here: http://www.swissarbitrationdecisions.com/icc-award-annulled-for-breach-o...
  • 10. Translator’s note: In English in the original text
  • 11. Translator’s note: In English in the original text.
  • 12. Translator’s note: The English translation of this decision is available here:  http://www.swissarbitrationdecisions.com/award-annulled-for-violation-of...