Federal Tribunal refuses to extend the scope of its review
The case involved a dispute between a bank and the member of another banking group under a Share Purchase Agreement whereby the purchaser had to recapitalize the subsidiary that was sold according to a ratio which might have led to a subsequent adjustment.
The contract provided for ICC arbitration in Geneva and when a dispute arose, the three-member arbitral tribunal (Pierre Tercier chair, with arbitrators Alan Redfern and Ibrahim Fadlallah) upheld the claim in full.
A Civil law appeal was made to the Federal Tribunal and the opinion is interesting at Section 3.3.2 because the Court firmly rejected the Appellant’s request that the scope of review of the Court should be somewhat broadened in matters involving a violation of the right to be heard, because the arbitral tribunal allegedly failed to address an important argument raised by one of the parties.
Whilst finding that in the case at hand the arbitral tribunal did not fail to address the argument, the Court pointed out in an obiter dictum in a way, but it is significant, that its exercise of a very narrow review, when seized of an appeal against an international arbitral award, corresponds to the intent of the legislator and that the Swiss Parliament deliberately restricted the scope of review of the Court.
To justify the position, the Court said that not being able to complain that an argument was not addressed is not substantially worse than having the argument rejected on an untenable basis, which the Court cannot review anyway because arbitrariness is not among the reasons for which an international award issued in Switzerland can be appealed. “Arbitrariness” (i.e. reckless disregard of the facts or the law) does not indeed necessarily constitute a violation of public policy in the Court’s view.
The reasoning of the Court strikes this writer as somewhat audacious and it will probably be the source of comments. It is already mentioned in Andreas Bucher’s thorough and interesting additions to his commentary (“Commentaire romand”) that he regularly posts on his web site http://www.andreasbucher-law.ch/images/stories/chapitre_12-58.pdf , which contains a treasure of information. In particular, as my readers know, Andreas Bucher has already demonstrated convincingly that the Court’s position is not persuasive when it keeps repeating that an international arbitral award “needs not be reasoned” but that the arbitrators nonetheless have a minimal duty to examine the pertinent arguments, but that if they do not, the respondent – or the arbitrators – may explain to the Federal Tribunal that the argument was refuted implicitly but that in any event they have no duty to examine any and all arguments submitted by the parties……
This is certainly consistent with the deliberate intent of the legislature in the 1980s to restrict the scope of review by the state courts when international arbitral awards are involved but one may seriously wonder whether a process laboring under such limitations can still be called “judicial review.”
Judgment of December 16, 2015
First Civil Law Court
Federal Judge Kiss (Mrs.), Presiding
Federal Judge Klett (Mrs.)
Federal Judge Kolly
Clerk of the Court: Mr. Carruzzo
Represented by Mr. Sébastien Besson and Mr. Fabrice Robert-Tissot,
Represented by Mr. Elliott Geisinger, Sebastiano Mr. Nessi and Ms. Elena Trabaldo-de Mestral,
At the beginning of 2012, B.________ SA (hereafter: B.________), a company under [name of country omitted] and part of the eponymous banking group, decided to divest its subsidiary, X.________ SA (hereafter: X.________).
The sale of X.________ was preceded by a tender in which three [name of country omitted] banks participated, including A.________ Bank (hereafter: A.________), the candidature of which was accepted. However, the Bank of Y.________ (hereafter: Y.________) and Z.________, whose previous agreement was necessary, subjected their approval of this transaction to the condition that B.________ would recapitalize X.________ up to EUR 3 billion before closing the transaction. The contractual negotiations chiefly concerned the insertion of an adjustment mechanism into the future sales contract, should the recapitalization done by B.________ go beyond the requirements of Y.________, particularly if at the date of closing, the Core Tier 1 Ratio (or CT1 Ratio) – i.e. the ratio the assessment of the solvency of a bank is based on by comparing its equity with its risk-weighted assets – was below the 10% ratio anticipated in the negotiations.
On October 16, 2012, B.________ and A.________ signed a Share Purchase Agreement (hereafter: the SPA) by which the former sold to the latter the entire capital of X.________ for one Euro. One of the clauses of the aforesaid contract states the following:
4.4 CT1 Ratio Adjustment
If, on or prior to 30 June 2013, the Bank of Y.________ officially sets the CT1 Ratio in effect on 30 June 2013 below 10% (or, as the case may be, does not officially set a CT1 Ratio in effect on 30 June 2013), the Purchaser shall, subject to the occurrence of the Closing, pay to B.________ the CT1 Ratio Adjustment, by wire transfer in immediately available funds to B.________'s Bank Account within fifteen (15) Business Days after 30 June 2013. For the avoidance of doubt, no CT1 Ratio Adjustment will be due by the Purchaser to B.________ if the official CT1 Ratio in effect on 30 June 2013 is 10% or more."2
This informally translates as follows:
[Translation into French omitted]
On March 28, 2013, the executive committee of Y.________ set the CT1 Ratio at 9% as of March 31, 2013.
In June 2013, X.________ and A.________ merged, the former being absorbed by the latter.
On September 3, 2013, B.________ invoked the arbitration clause in the SPA and filed a request for arbitration against A.________ with a view to obtaining payment of EUR 160’913’514, with interest, pursuant to Art. 4.4 of the SPA.
Pursuant to its submissions, A.________ requested in substance that the claim be rejected because Art. 4.4 of the SPA, which required interpretation, was not applicable to the circumstances of the case at hand as it reserved an adjustment in B.________’s favor only if, contrary to the case at hand, Y.________ reduced its equity requirements for X.________. Should this interpretation be rejected by the arbitral tribunal, the Defendant asked for a finding that the clause in question was void. A three-member arbitral tribunal was constituted under the aegis of the Court of Arbitration of the International Chamber of Commerce (ICC). In accordance with the arbitration clause in the SPA, its seat was set in Geneva and English was the language of arbitration. In a final award of August 31, 2015, after investigating the matter, the Arbitrators upheld B.________’s claim entirely.
On September 24, 2015, A.________ (hereafter: the Appellant), arguing a violation of its right to be heard (Art. 190(2)(d) PILA3), filed a civil law appeal to the Federal Tribunal with a view to obtaining the annulment of the aforesaid award. In a separate motion filed on the same day, it sought a stay of enforcement ex parte at first and then according to the ordinary rules. The first request was admitted by the presiding judge on September 29, 2015; the second is still pending.
In a letter of October 12, 2015, the Arbitral Tribunal stated that it did not wish to submit observations as to the appeal.
At the beginning of its answer of October 29, 2015, B.________ (hereafter: the Respondent) submitted that the appeal should be rejected insofar as the matter is capable of appeal.
The Appellant, in its reply of November 17, 2015, and the Respondent in its rejoinder of December 4, 2015, maintained their previous submissions.
According to Art. 54(1) LTF,4 the Federal Tribunal issues its judgment in an official language,5 as a rule in the language of the decision under appeal. When the decision was issued in another language (here English) the Federal Tribunal resorts to the official language chosen by the parties. Before the Arbitral Tribunal, they used English, whilst in the briefs submitted to the Federal Tribunal, they used French. In accordance with its practice, the Federal Tribunal shall consequently issue its judgment in French.
In the field of international arbitration, a civil law appeal is admissible against the decisions of arbitral tribunals pursuant to the requirements of Art. 190 to 192 PILA (Art. 77(1)(a) LTF). Whether as to the subject of the appeal – a final award – the standing to appeal, the time limit to appeal, the Appellant’s submission, or the ground for appeal invoked, none of these admissibility requirements raises any problem in the case at hand. The matter is therefore capable of appeal.
3.1. Examining Art. 4.4 of the SPA, the Arbitral Tribunal reached the conclusion that its clear text did not require interpretation and consequently, entitled the Respondent to claim from the Appellant the payment of the undisputed amount calculated pursuant to this clause. Indeed, Y.________ set the CT1 Ratio as of June 30, 2013, below 10% and the closing of the transaction took place (Award n. 154 to 260).
The Arbitrators then examined the second question raised by the Appellant, namely the validity of Art. 4.4 SPA, which it challenged in the light of the mandatory rules – mandatory laws or public policy – of the law of [name of country omitted] (award n. 261 to 307). In this respect, they stated the following after reviewing the arguments of the parties (award n. 279):
The issues of whether the Arbitral Tribunal should consider the validity of Clause 4.4 under... [law] because the Z.________ guidelines are to be considered "lois de police", or because it is warranted by Article... of the... Code, are irrelevant in view of the approvals by the Z.________, the Y.________ (and other institutions) of the Transaction, as will be demonstrated below. The Arbitral Tribunal will thus focus on these approvals rather than proceed to a complex analysis of the law applicable to the validity of Clause 4.4, which in the instant case is not determinant to its decisions.6
This translates freely as follows:
[French translation omitted]
Having made this remark, the Arbitral Tribunal then sought to demonstrate that Z.________ did not just approve the transaction broadly speaking, but endorsed the clause in dispute in its very wording (Award n. 280 to 297, particularly n. 290). It also found that Y.________ endorsed the transaction (Award n. 298 to 306), which led it to reject the Appellant’s submission requesting a finding of nullity of Art. 4.4 of the SPA (award n. 307).
3.2. The Appellant argues that the Arbitral Tribunal violated its right to be heard within the meaning of Art. 190(2)(d) PILA, and specifically that it disregarded its minimum duty to examine and address the pertinent issues.
In its view, the Arbitrators resorted to “a dodge” to spare themselves the admittedly delicate review of the arguments it had “hammered” from the beginning and throughout the arbitration to demonstrate that Art. 4.4 of the SPA was not valid in the light of the mandatory rules of the law of [name of country omitted], which constituted mandatory or public policy laws. They disregarded the issue that the approval of the transaction by the competent bodies of [name of country omitted] (Z.________ and Y.________) was different from that of the compatibility of the clause in dispute with the latter rules. Similarly, they overlooked the fact that no authorization can heal a public policy defect (appeal n. 62 to 71).
3.3.1. The right to be heard in contradictory proceedings according to Art. 190(2)(d) PILA certainly does not require an international arbitral award to be reasoned (ATF 134 III 1867 at 6.1 and references). However, it imposes upon the arbitrators a minimal duty to examine and handle the pertinent issues (ATF 133 III 235 at 5.2, p. 248 and the cases quoted). This duty is breached when, inadvertently or due to a misunderstanding, the arbitral tribunal does not take into consideration some statements, arguments, evidence and offers of evidence presented by one of the parties and important to the decision to be issued. If the award totally overlooks some items apparently important to resolve the dispute, it behooves the arbitrators or the respondent to justify the omission in their observations as to the appeal. It similarly behooves them to demonstrate that, contrary to the appellant’s claims, the items omitted were not relevant to resolve 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 invoked by the parties, so that they cannot be held in violation of the right to be heard in contradictory proceedings for failing to refute, 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 or not the arbitrators should have upheld the argument they overlooked, had they handled it. Indeed, this would disregard the formal nature of the right to be heard and the necessity of annulling the decision under appeal in case of violation of this right, irrespective of the appellant’s chances of obtaining a different result (judgment 4A_69/2015 of October 26, 2015, at 3.1).
In its reply, the Appellant supplements its reasons as to the scope that should be given to the principles established by the Federal Tribunal as to this aspect of the guarantee of the right to be heard according to Art. 190(2)(d) PILA (n. 72/73). In particular, the Appellant believes it has brought to light a loosening of this case law in the sense of the Federal Tribunal wanting “…to broaden the review based on a formal denial of justice in connection with the failure to address an argument in the award” (n. 72). Besides the fact that the reply may not be used to supplement the appeal brief (judgment 4A_709/2014 of May 21, 2015, at 2.1), the Appellant’s statement is erroneous as case law in this respect has not changed one iota since the Ca ñas judgment (ATF 133 III 235 at 5.2). Broadening the review is not on the agenda, moreover, particularly because the Federal Tribunal is faced with an ever-growing tendency of Appellants invoking this aspect of the guarantee of the right to be heard in the hope of indirectly obtaining the review of the merits of the award under appeal. It must be recalled that the Federal Tribunal is not a court of appeal and the legislators consciously and deliberately limited the Court’s power of review when deciding appeals concerning international arbitration.
3.3.2. The Arbitral Tribunal did not ‘dodge’ the issue of the possible impact of the violation of preemptory rules of [name of country omitted] as to the validity of Art. 4.4 of the SPA. It simply held that the issue was not relevant (award n. 279: irrelevant … not determinant) to the decision to be issued in the case at hand (ibid: in the instant case) because Z.________ and Y.________ had approved the transaction between the parties to the dispute. The Arbitrators thus clearly indicated why they felt entitled to dispense with an examination as to whether or not the clause in dispute was compatible with the mandatory rules of the law of [name of country omitted] coming in to consideration. The Appellant’s attempt to dissociate the two questions that the Arbitral Tribunal purposefully joined is therefore is therefore in vain. The fact that it handled this issue by explaining why it could dispense with answering it in one way or the other is sufficient from the point of view of the guarantee of the right to be heard, pursuant to Art. 190(2)(d) PILA and the related case law.
It does not behoove the Federal Tribunal to verify the pertinence of the reasons why the Arbitral Tribunal considered that it could dispense with the examination sought by the Appellant. In other words, this Court shall not research whether the Arbitrators were right or wrong to hold, at least implicitly, that the authorization issued by the [name of country omitted] bodies competent for banking supervision healed a possible violation of mandatory or public policy laws of [name of country omitted] by the parties to the contract, or to use the Appellant’s words, if such a defect could not be remedied by any authorization. To follow the Appellant in this direction would indeed lead to substantive review, or at least to extend the scope of review that the Federal Tribunal allows itself in this field. Similarly, and to take a more striking example, if an arbitral tribunal seized of a contractual claim holds in its final award that it may dispense with examining the conditions of liability (breach of contract, fault, damage and causality) because the claim is time barred, the claimant may not apply to the Federal Tribunal in an appeal in which it would argue a violation of its right to be heard for failing to review these requirements by way of a finding that the arbitral tribunal was wrong to uphold the defendant’s objection that the claim was time barred. With a view to obtaining the annulment of the award, and contrary to what the Appellant did in this case, it will be able to submit no more than an argument that the reason upheld by the Arbitral Tribunal to dispense with addressing this issue – in the latter, prescription; in the former, the healing effect of ratification – took place in violation of one of the various grievances mentioned at Art. 190(2) PILA.
The solution is admittedly fairly rigorous to a party that will have to live with a hypothetically unjustified refusal to address the arguments it validly submitted to the Arbitral Tribunal. This, however, is an inherent consequence of the recourse system established in the field of international arbitration, which is characterized by the desire to substantially limit the intervention of the state court. Moreover, in fine, that party’s fate will not be less enviable than that which would have transpired for the party if the arguments, duly examined, were rejected by the arbitral tribunal on unsustainable grounds because arbitrariness is not a grievance included in the exhaustive list of Art. 190(2) PILA.
This being so, the appeal must be rejected. The Appellant’s motion for a stay of enforcement granted ex parte becomes moot as a consequence.
The Appellant loses and shall pay the costs of the federal proceedings (Art. 66(1) LTF) and compensate the Respondent (Art. 68(1) and (2) LTF).
Therefore, the Federal Tribunal pronounces:
The appeal is rejected insofar as the matter is capable of appeal.
The judicial costs set at CHF 100’000 shall be borne by the Appellant.
The Appellant shall pay CHF 150’000 to the Respondent for the federal proceedings.
This judgment shall be notified to the representatives of the parties and to the president of the ICC Tribunal.
Lausanne, December 16, 2015
In the name of the First Civil Law Court of the Swiss Federal Tribunal
Presiding Judge: Clerk:
Kiss (Mrs.) Carruzzo
- 1. Translator’s Note: Quote as A.________ Bank v. B.________ SA, 4A_520/2015. The decision was issued in French. The full 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: PILA is the most commonly used English abbreviation for the Federal Statute on International
- 4. Translator’s Note: LTF is the French abbreviation of the Federal Statute of June 17, 2005, organizing the Federal
- 5. Translator’s Note: The official languages of Switzerland are German, French and Italian.
- 6. Translator’s Note: In English in the original text.
- 7. Translator’s Note: The English translation of this decision is available here: http://www.swissarbitrationdecisions.com/right-to-be-heard-equality-between-the-parties