Objections in the arbitral proceedings must be raised clearly and forcefully.

Case information
February 20, 2013
4A_407/2012
Interest to foreign readers: 
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Very interesting
Topics: 
Violation of due process (right to be heard)
Equal treatment of the parties
Original language: 
German

Parties

Appellant: 
Respondent: 

Counsel

Appellant: 
Respondent: 
Introductory note: 

The case involved a merger governed by Austrian law, which was subject to the condition precedent that the competent anti-trust authorities of Austria would approve the merger. The parties undertook to make their “best endeavors” to obtain the approval. The approval was not granted and a claim for damages ensued as the contract between the parties contained an ICC arbitration clause with venue in Zurich.

 

The Arbitral tribunal was composed of chairman Georg von Segesser with arbitrators J.Fernandez Arnesto and Hans-Georg Koppensteiner and it issued a final award on May 29, 2012 essentially upholding the claim based on the defendants’ failure to provide “best endeavors” but substantially reducing the amount of damages. One of the arbitrators dissented. The outcome of the arbitration was reported by GAR in June 2012.

 

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

 

  1. While repeating its often stated view that a procedural violation must be raised without delay in the arbitration proceedings under penalty of forfeiting the right to raise it in the Federal Tribunal, the Court has now held that it behooves the party invoking a violation of its rights to do so with the utmost clarity (see sections 3.2 and 3.4 of the opinion in this respect).

 

  1. Counsel for the Appellants had politely asked the Arbitrators if it was “their view” that “more efforts” should be made to hear a particular witness. The Federal Tribunal found that this was not a valid “complaint” as to the way the proceedings were going (see section 3.2.2 of the opinion in this respect)

 

  1. Counsel had also stated that equal treatment was “at stake” and that his clients were at “a disadvantage” because one party could devote 23 hours to interrogating witnesses as opposed to the 14 hours available to the other. Here too, the Federal Tribunal found that the argument had not been made forcefully enough to be admissible (see section 3.4 of the opinion in this respect).

 

This is not very persuasive, to say the least. The practical consequence for foreign litigators arguing in an international arbitration held in Switzerland will be that they have to make sure that any procedural violation occurring in the arbitral proceedings – and there are always several debatable rulings in any arbitration – is raised forcefully in the arbitral proceedings, because an understated – or indeed a merely polite… – objection may very well fail to qualify as a valid complaint  in the Swiss Federal Tribunal. Caveant procuratores !

 

Another issue raised by this opinion is the staggering costs imposed on the Appellants. Proceedings in the Federal Tribunal are governed by the principle that court costs are assessed in proportion to the amount in dispute. However the Court should make exceptions in international arbitration matters for it hardly enhances the position of Switzerland as a place for international arbitrations when an Appellant in a case with a significant amount in dispute must take into account that in addition to paying the lawyers preparing the appeal, the costs of the appeal may amount to CHF 85 (USD 90) for each word written by the Swiss Supreme Court…

Translation: 

 

 

4A_407/20121

 

Judgment of February 20, 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: Hurni.

 

1. X.________ SE,

2. Y.________ GmbH,

Both represented by Mr. Thomas Sprecher,

Appellants,

 

v.

 

Z.________ B.V.,

Represented by Mr. Martin Wiebecke,

Respondent,

 

 

Facts:

 

A.

A.a

X.________ SE (Appellant 1) is a European common stock company (Societas Europaea) incorporated in Vienna.

 

Y.________ GmbH (Appellant 2) is a limited liability company under Austrian law incorporated in [name of city omitted] (Austria).

 

Z.________ B.V. (the Respondent) is a closed society under Dutch law incorporated in Amsterdam.

 

A.b

The Respondent and Q.________ GmbH, the latter as seller, entered into a Share Purchase and Acquisition Agreement (SPA) with the Appellants as purchasers on July 30, 2008. The object of the contract was the shares of R.________ AG, an Austrian subsidiary of the Respondent.

 

A.c

According to § 14.2 of the SPA the contract is governed by Austrian law. According to § 8.1 SPA the contract was subject to a condition precedent among others,Namely that anti-trust approval would be granted by the Austrian competition authorities and other bodies. At § 8.5 of the SPA the parties undertook to make their “best endeavors”2 to fulfill this condition. According to § 8.7 of the SPA each party could withdraw from the contract should the merger fail to be approved within eleven months of the execution of the SPA, provided the withdrawing party would itself be in compliance with the provisions of the SPA (“[...] provided that the Party intending to rescind this Agreement has complied with all terms and obligations of the SPA”3).

 

A.d

As the anti-trust approval eventually could not be obtained within the contractually agreed upon time limit, the Appellants withdrew from the contract on July 1, 2009. As of September 16, 2009 the Respondent also withdrew from the contract.

 

The Respondent then took the position that the Appellants’ withdrawal would be invalid because the latter had failed to carry out their contractual duty towards the anti-trust approval (“best endeavors”) according to § 8.5 SPA.

 

B.

Based on the arbitration clause in § 14.3 SPA the Respondent initiated arbitral proceedings in the International Chamber of Commerce (ICC) on October 19, 2009. It sought the payment of € 140 Mio with interest and about € 5 Mio of default interest with compound interest. The Appellants submitted that the claim should be rejected and filed a counterclaim for € 800’000 with interest for expenses incurred as a consequence of contractual breaches by the Respondent.

 

In an award of May 29, 2012 the three members arbitral tribunal sitting in Zurich held that the Appellants’ withdrawal was wrong and therefore ineffective (§ 1) while the Respondent’s withdrawal was lawful and effective (§ 2). Furthermore the Arbitral tribunal ordered the Appellants to pay damages to the Respondent in the amount of € 30 Mio plus running and overdue interest (§ 3) and rejected the Appellants’ counterclaim (§ 5).

 

C.

In a Civil law appeal the Appellants submit that the Federal Tribunal should annul the award of May 29, 2012 and send the matter back for a partial repetition of the evidentiary phase (repetition of the interrogation of witnesses) as well as for the adducement of new evidence. Furthermore a stay of enforcement was applied for.

 

The Respondent submits in its brief that the appeal should be rejected to the extent that the matter is capable of appeal. The Arbitral tribunal submits that it should be rejected.

 

Subsequently the Appellants filed a reply, the Respondent and the Arbitral tribunal a rejoinder.

 

In a letter of July 24, 2012 the Appellants withdrew the application for a stay of enforcement.

 

D.

In a decision of the Presiding Judge of July 25, 2012 the application for a stay of enforcement was struck of as a consequence off its withdrawal.

 

 

Reasons:

 

1.

According to Art. 54 (1) BGG4 the Federal Tribunal issues its decision in an official language5, as a rule in the language of the decision under appeal. When this is in another language the Federal Tribunal resorts to the official language used by the parties. The award under appeal is in English. As this is not an official language and the Parties used German in the Federal Tribunal, the decision of the Federal Tribunal is issued in German.

 

2.

In the field of international arbitration a Civil law appeal is allowed under the requirements of Art. 190-192 PILA6 (SR 291) (Art. 77 (1) (a) BGG).

 

2.1

The seat of the Arbitral tribunal is in Zurich in this case. Both parties had their seat outside Switzerland at the relevant point in time. As the Parties did not exclude in writing the provisions of chapter 12 PILA they are applicable (Art. 176 (1) and (2) PILA).

 

2.2

A Civil law appeal within the meaning of Art. 77 (1) BGG may in principle seek only the annulment of the decision under appeal (see Art. 77 (2) BGG ruling out the applicability of Art. 107 (2) BGG to the extent that the latter empowers the Federal Tribunal to decide the matter itself).

 

The matter is therefore capable of appeal to the extent that the annulment of the decision under appeal is sought. However the matter is not capable of appeal to the extent that a return of the case to the Arbitral tribunal is sought with a view to a partial repetition of the evidentiary phase and for the adducement of new evidence.

 

2.3

Only the grievances limitatively listed at Art. 190 (2) PILA are allowed (BGE 134 III 186 at 5 p. 187; 128 III 50 at 1a p. 53; 127 III 279 at 1a p. 282). According to Art. 77 (3) BGG the Federal Tribunal reviews only the grievances that are brought forward and reasoned in the appeal; this corresponds to the duty to submit reasons contained at Art. 106 (2) BGG for the violation of constitutional rights and of cantonal and intercantonal law (BGE 134 III 186 at 5 p. 187 with reference). Criticism of an appellate nature is not allowed (BGE 119 II 380 at 3b p. 382).

 

2.4

2.4.1 The Federal Tribunal bases its judgment iupon the factual findings of the arbitral tribunal (Art. 105 (1) BGG). This refers to the factual findings as to the circumstances forming the base of the dispute and to those concerning the course of the arbitral proceedings, namely the arguments of the parties (judgment 4A_678/2011 of May 31, 2012 at 2.4; 4A_439/2010 of October 20, 2011 at 2.1; 4A_210/2009 of April 7, 2010 at 2). The Federal Tribunal may not rectify or supplement the factual findings of the arbitral tribunal even when they are blatantly inaccurate or based on a violation of the law within the meaning of Art. 95 BGG (see Art. 77 (2) BGG ruling out the applicability of Art. 97 and 105 (2) BGG). However the Federal Tribunal may review the factual findings of the award under appeal when some admissible grievances within the meaning of Art. 190 (2) PILA are brought forward against them or when some new evidence is exceptionally taken into account (BGE 133 III 139 at 5 p. 141; 129 III 727 at 5.2.2 p. 733; with references). Whoever wishes to claim an exception from the rule that the Federal Tribunal is bound by the factual findings of the arbitral tribunal and seeks to rectify or supplement the factual findings on that basis must show with reference to the record that the corresponding factual allegations were already submitted in the arbitral proceedings in accordance with procedural rules (see BGE 115 II 484 at 2a p. 486; 111 II 471 at 1c p. 473; with references).

 

2.4.2 The Appellants disregard these principles in part. They place a statement of facts of several pages in front of their legal arguments, in which they describe the background of the dispute and of the proceedings from their own point of view. In doing so they deviate from the factual findings of the Arbitral tribunal in many respects or broaden them without claiming any substantial exceptions from the binding nature of the factual findings. Such explanations shall therefore be disregarded.

 

3.

The Appellants argue that the Arbitral tribunal violated their right to submit evidence (Art. 190 (2) (d) PILA) to the extent that Dr. A.________ was not heard as a witness and no legal experts were heard as to Austrian law. The Arbitral tribunal would also have violated the Appellants’ right to equal treatment (Art. 190 (2) (d) PILA) to the extent that the Respondent was given more time to interrogate witnesses and because several late filings by the Respondent were authorized.

 

3.1

The party considering itself placed at a disadvantage due to a refusal of the right to be heard or for another procedural violation forfeits its claims when it does not raise them in the arbitral proceedings in a timely manner and does not take all reasonable steps to remedy the violation (judgment 4A_617/20107 of June 14, 2011 at 3.1, publ. in: ASA Bulletin 1/2012, p. 138 ff, 141 ff; BGE 119 II 386 at 1a p. 388; also see judgment 4A_682/20118 of May 31, 2012 at 3.1 with reference to the revised Art. 1466 of the French Code of Civil procedure: “the party which, knowingly and without legitimate reasons, abstains from invoking an irregularity in the Arbitral tribunal in a timely manner is deemed to have renounced to invoke it”). The review of an arbitral award by the Federal Tribunal as to procedural violations is therefore subsidiary because the parties must raise the corresponding violations in the arbitral tribunal first, so that they can still be remedied in the arbitral proceedings. Indeed raising a procedural violation only in the framework of an appeal when there was a possibility in the arbitral proceedings to give the arbitral tribunal the opportunity to remedy the violation, is contrary to good faith (BGE 119 II 386 at 1a p. 388; judgment 4P.72/2001 of September 10, 2001 at 4c).

 

3.2

3.2.1 According to the factual findings in the award under appeal the appearance as a witness of Dr. A.________, the General Secretary of the Austrian competition authority, was requested by the Respondent in its reply of January 14, 2011. The Appellants claim that they requested the appearance of Dr. A.________ in their brief of January 24, 2011. According to the Arbitral tribunal the Austrian Federal Ministry for Economy, Family and Youth stated in a letter of March 24, 2001 that Dr. A.________ would not receive the authorization to testify as a witness in a private arbitral tribunal. Consequently Dr. A.________ was heard neither directly nor through judicial assistance and the Appellants see a violation of their right to evidence in this.

 

3.2.2 In their appeal to the Federal Tribunal the Appellants argue that at the hearing of May 9, 2011 they had reiterated “once again expressly their request that Dr. A.________ be heard as a witness” and therefore “met their obligation to raise the lack of action of the Arbitral tribunal in the arbitral proceedings already”.

 

The corresponding section of the record of the hearing, to which the Appellants refer is not capable of establishing a corresponding grievance. It merely shows that counsel for the Appellants submitted the following question to the Arbitral tribunal: “Is it the view of the Tribunal that the Tribunal should make any more efforts to hear the Official Parties?”9 The Appellants see a “complaint” in this restrained and carefully expressed question. They concede that the alleged complaint was brought forward in “moderate form”, which they explain because “the Parties in an arbitration would have a natural reluctance to complain” and an interest “that the Arbitral tribunal is well-disposed”. The Parties strive not to “annoy the Arbitral tribunal by lasting and harsh complains”.

 

While such motivations are reasonable, they do not change the fact that the mere question as to whether or not the Arbitral tribunal was of the opinion that further efforts should be made to hear the witnesses cannot be made out as a complaint of a procedural violation. The Arbitral tribunal could not conclude from the noncommittal question that the Appellants saw an actual violation of a fundamental principle of procedure in the failure to hear Dr. A.________ as a witness. The Appellants would readily have had several possibilities to communicate this to the Arbitral tribunal with adequate clarity before the award was issued in May 2012. As they did not avail themselves of these they have forfeited their right to claim a violation of the right to be heard in the proceedings in the Federal Tribunal. The matter is not capable of appeal in this respect.

 

3.3

The same applies to the argument that the right to be heard would have been violated by the failure to hear various legal experts as to Austrian law. Neither the appeal brief or the factual findings concerning the proceedings show that this complaint would have been made in the Arbitral tribunal although this would have been readily possible before the award under appeal of May 29, 2012 was issued. The Appellants cannot be heard in this respect for failure to exhaust the corresponding possibilities to raise the argument.

 

3.4

The Appellants then argue that the Arbitral tribunal gave them 14 hours only to interrogate witnesses while the Respondent had 23 hours in total. There they see unequal treatment within the meaning of Art. 190 (2) (d) PILA which they would have “repeatedly” raised in the arbitral proceedings.

 

The corresponding sections of the record of the hearing of May 9, 2012, on which the Appellants rely to base the argument, read as follows:

“[Counsel for the Appellants]: A short statement as to time and as to language. Just for the record, in our figures I estimate that as the total time spent all together the Claimant has spent 18 hours and 50 minutes, the Respondent only 13 hours and 3 minutes, more than five hours less. (...) May I refer you to order number 9 paragraph 7. 'The parties will have equal time during the evidential hearing to use' and it goes on, which confirms this point. Mr. Chairman, reluctantly, and by no means personally, I have to raise in that respect objections. The Respondent's right to be heard and to be treated equally is really at stake here. We had to reduce our questions in chief, in cross and in re”.

“[Counsel for the Appellants]: Having heard Claimant has used more than 23 hours and we only 14 hours I think that my initial remarks as to the imbalance of time are still maintained."

"[Counsel for the Appellants]: (...) I must say, I have not checked it, that we were stopped asking questions on several occasions even if it now turns out that the Claimant are upfront more than nine hours. That is a point where I really feel that we were at a disadvantage.”10

 

In these submissions counsel for the Appellants stated that in his view equal treatment was “at stake” and that he had the feeling to be “at disadvantage”. These are definitely objections or critical remarks concerning the conduct of the proceedings but a sufficiently clear complaint that the proceedings would be affected by a procedural violation within the meaning of Art. 190 (2) (d) PILA can hardly be seen there. Moreover the Appellants failed to make submissions that the hearing of witnesses should be repeated or supplemented and thus did not make all reasonable efforts to give the Arbitral tribunal an opportunity to remedy the alleged unequal treatment before the award was issued in May 2012. To the extent that the Appellants disregarded this and waited to see if the award would be in their favor they forfeited the right to argue unequal treatment within the meaning of Art. 190 (2) (d) PILA in the appeal proceedings in the Federal Tribunal. The matter is not capable of appeal in this respect as well.

 

3.5

The Appellants see further unequal treatment within the meaning of Art. 190 (2) (d) PILA in the acceptance by the Arbitral tribunal of several late submissions of the Respondent while it rejected the expert report of Prof. B.________ as late. In connection with this procedural violation as well the Appellants claim in their appeal to the Federal Tribunal that they would have raised the corresponding grievance in the arbitral proceedings. The brief of June 25, 2011 that they rely upon in this respect refers merely  to objections concerning the change of the procedural schedule. No actual complaint can been seen there. Yet the Appellants disregarded the possibility to point out to the Arbitral tribunal with appropriate clarity before the award was issued in May 2012 that there was unequal treatment in connection with the admission of allegedly belated submissions by the Respondent. The corresponding grievance is therefore not admissible.

4.

The Appellants argue that the Arbitral tribunal violated their right to be heard (art 190 (2) (d) PILA) when it rejected as belated in Procedural Order 17th of August 2011 their submission of July 2011 seeking admission and consideration of an expert opinion by prof B.________  .

 

4.1

Art. 190 (2) (d) PILA allows an appeal only on the basis of mandatory procedural rules according to Art. 182 (3) PILA. According to this the arbitral tribunal must in particular abide by the right of the parties to be heard. With the exception of the requirement that reasons be given, this corresponds to the constitutional right embodied in Art. 29 (2) BV11 (BGE 130 III 35 at 5 p. 37 ff; 128 III 234 at 4b; 127 III 576 at 2c). Case law derives from this in particular the right of the parties to express their views as to all facts important for the judgment, to present their legal arguments and to prove their factual submissions important for the decision with suitable offers of evidence presented in proper format and in a timely manner, and the right to participate in the hearing and to access the record (BGE 130 III 35 at 5 p. 38; 127 III 576 at 2c; with references).

 

4.2

The Arbitral tribunal justified the rejection of the submission because according to § 1.4 of the Procedural Rules of March 23, 2010 the expert reports had to be submitted with the Statement of claim or the Statement of defense or with the Reply and the Rejoinder. Thus the expert report of Prof. B.________ was belated.

 

4.3

The Appellants do not dispute that they filed the expert report subsequent to the Reply and the Rejoinder but they claim that the time schedule according to the Procedural rules of March 23, 2010 would have been “provisional”. The argument is unhelpful for, as the Respondent accurately points out, “provisional” does not mean that a party does not have to comply with the procedural schedule agreed upon. The labelling “provisional schedule” merely reserves a change by the arbitral tribunal, as a rule after consultation with the parties. The Appellants do not claim that the procedural schedule would have been changed and neither is this apparent from the award under appeal. Therefore the arbitral tribunal was right to hold that the request to submit the expert opinion of Prof. B.________ was belated. There is no violation of the right to be heard.

 

5.

The Appellants finally argue that the Arbitral tribunal violated their right to be heard (Art. 190 (2) (d) PILA) because in interpreting § 6 SPA (the “best endeavors” clause) it would have resorted to a “completely surprising legal construction”, namely the theory of the removal of the business logic.

 

5.1

According to the case law of the Federal Tribunal there is no right of the parties to be heard specifically as to the legal assessment of the facts they submit in the proceedings. There is however an exception when a tribunal intends to base its decision on a legal ground which the parties did not rely upon and the relevance of which they could not reasonably anticipate (BGE 130 III 35 at 5 p. 39; 126 I 19 at 2c/aa p. 22; 124 I 49 at 3c p. 52; 123 I 63 at 2d p. 69; 115 Ia 94 at 1b p. 96 ff). The issue as to whether the application of the law by an arbitral tribunal must be considered surprising within the meaning of the case law of the Federal Tribunal is a matter of appreciation as to which the Federal Tribunal exercises restraint in the field of international arbitration (BGE 130 III 35 at 5).

 

5.2

According to § 8.1 SPA the contract was among other things subject to the condition precedent of anti-trust approval by the Austrian competition authorities and other bodies. At § 8.5 SPA the Parties undertook to make their “best endeavors” to fulfill this condition. The Parties were in dispute as to what measure of “best endeavors” or “efforts” were due under this clause. While the Respondent took the view that an unlimited duty of the Parties to collaborate was meant thereby, the Appellants considered that § 8.5 merely purported to sanction bad faith frustration of the condition. Yet no duty was meant for the Parties to sacrifice their commercial interests to obtain the anti-trust clearance.

 

The Arbitral tribunal essentially followed the stricter view of the Respondent, according to which an actual duty to collaborate must be deducted from § 8.5 SPA, yet set the required measure of efforts somewhat lower than the Respondent and justified this with the theory of the removal of the business logic. The arbitral tribunal thus actually found a middle ground between the point of views of the Parties, which actually stands closer to that of the Respondent than to the Appellants’.

 

5.3

While it is not fully understandable to what extent the doctrine of the removal of the business logic is relevant in connection with the interpretation of § 8.5, there can be no claim of an application of the law by surprise. The arbitral tribunal did not base its decision on an interpretation of § 8.5 which the Appellants could not at all anticipate. Rather it set a standard of “best endeavors” which is in the range delimited by the submissions of the Parties. As the Respondent accurately points out in its brief, the standard upheld by the Arbitral tribunal was covered by the Parties argumentatively and they had therefore to take into account that the Arbitral tribunal might find a solution between their extreme point of views. The argument that the Arbitral tribunal would have violated the Appellants’ right to be heard in interpreting § 8.5 SPA is unfounded.

 

6.

The appeal is to be rejected to the extent that the matter is capable of appeal. In such an outcome of the proceedings the Appellants must pay the costs and compensate the other party (Art. 66 (1) compared with Art. 68 (2) BGG).

 

Therefore the Federal tribunal pronounces:

 

1.

The appeal is rejected to the extent that matter is capable of appeal.

 

2.

The judicial costs set at CHF 100’000 shall be borne by the Appellants severally and in equal shares internally.

 

3.

The Appellants shall pay to the Respondent severally and in equal shares internally an amount of CHF 200’000 for the federal judicial proceedings.

 

4.

This judgment shall be notified in writing to the Parties and to the ICC Arbitral tribunal in Zurich.

 

 

Lausanne, February 20, 2013.

 

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

 

The Presiding Judge:                                        The Clerk:

 

Klett (Mrs.)                                                        Hurni