Violation of the right to be heard upheld by the Federal Tribunal
The case involved a contract governed by Swiss law for the work done on the boiler of a Bulgarian cellulose plant by a Finnish company.
A disagreement arose as a consequence of various delays and the Bulgarian company initiated arbitral proceedings during which the arbitration clause was amended.
The arbitral tribunal (Andreas Reiner, chairman and arbitrators Evgeniy Staykov and Marc Veit) bifurcated the proceedings to determine first whether or not the Finnish company had been grossly negligent. The Arbitrators found that it had not in a partial award in March 2012. In August 2013, the Arbitral Tribunal issued its final award and ordered the Finnish company to compensate for some losses and to pay damages.
An appeal was made to the Federal Tribunal and the following points are quite interesting in the appeal:
- The Federal Tribunal reiterated its (often) previously held view that, while the parties can opt out of any appeal to the Federal Tribunal, they have to do so in an explicit and clear manner. Mere reference to an award being “final” is not sufficient. (See section 2.2 of the opinion in this respect.)
- While international arbitrators sitting in Switzerland do not have a duty to reason their awards, they must address the submissions and legal arguments of the parties that are relevant to the decision to be issued. If they fail to do so, they violate due process (the so-called “right to be heard”) unless it can be shown that they either refuted the argument implicitly or that it was devoid of any pertinence. (See sections 3.2 and 3.3 of the opinion in this respect.)
Judgment of February 4, 2014
First Civil Law Court
Federal Judge Klett (Mrs.), Presiding
Federal Judge Kolly
Federal Judge Hohl (Mrs.)
Federal Judge Kiss (Mrs.)
Federal Judge Niquille (Mrs.)
Clerk of the Court: Leemann
Represented by Mrs. Gabrielle Nater-Bass,
Represented by Mr. Ivaylo Dermendjiev,
Y.________ EAD (Claimant, Respondent) is a common stock company based in A.________ [name of city omitted], Bulgaria where it operates a cellulose plant to produce bleached kraft pulp. On March 10, 2006, it entered into a contract with the Finnish company X.________ Oy in B.________ [name of city omitted] (Defendant, Appellant) by which the latter undertook to deliver devices and equipment to Y.________ for the modernization of the boiler against compensation of EUR 6.1 million. The boiler serves primarily to recover chemicals that can be used for the production of cellulose contained in a so-called “black liquor” of residual substances in the production process. This substance contains organic material, which is burned in the boiler to produce steam, which can then be used in the cellulose plant.
Paragraph 22 of the March 2006 Contract provides the following:
22 RESTRICTION OF THE RESPONSIBILITY
23.1 [recte: 22.1] However all other conditions upon the present Contract, by no circumstances the SELLER or whatever partner, sub-supplier, employer or worker of the SELLER will be responsible for any indirect, casual, subsequent, punitive or edifying damages of whatever nature including but unlimited loss of profit, loss of profitable opportunity, loss of income, loss of production, loss of excessive investment of materials and energy, stoppage of the mill, costs of capital, costs of work force, damages of the property, costs for replacement of the capacities etc.
23.2 [recte: 22.2] The aggregate liability of Seller to Buyer arising out of this Agreement, whether based on warranty, contract, strict liability or otherwise, shall not exceed thirty (30%) percent of the contract price.
All liability of SELLER to BUYER, arising out of this Agreement, shall terminate at the expiration of three years after final acceptance.”2
The Contract furthermore contains the following arbitration clause:
All disputes arose in connection with the present Contract will be finally settled without opportunities to court in the International Arbitration Court in Geneva, Switzerland.
The language of Arbitration will be English. The rights and the obligations of the parties upon the present Contract and its Enclosures will be taken in accordance with the laws of Switzerland.
The decision will be final and binding, the parties shall perform it voluntary and immediately.3
Eventually there was a divergence of views between the parties. Y.________ EAD claimed X.________ had delivered the devices and documentation too late and demanded the payment of a contractual penalty. Moreover, it took the view that X.________ had to compensate for the damage caused by the acquisition of steam from third parties as a consequence of the late resolution of the defects of the boiler. Moreover, it sought a reduction of the purchase price for the delivery of the so-called Crotch Plates (metal parts to open the combustion chamber), which allegedly did not have the contractually guaranteed characteristics. For its part, X.________ Oy claimed that as a consequence of the behavior of Y.________ EAD, it had incurred additional costs for which it should be compensated.
On March 25, 2009, Y.________ EAD initiated arbitration proceedings according to the rules of the International Chamber of Commerce (ICC) against X.________ Oy and essentially seeking the payment of a contractual penalty of EUR 335’500 for late delivery of technical documentation and devices as well as the payment of damages in the amount of EUR 4’611’047. Moreover, it claimed EUR 1’045’000 as a reduction on the purchase price. The Defendant rejected the claim and counterclaimed for EUR 15’556 for additional services delivered and EUR 35’631.25 for the unjustified call of a guarantee.
On May 11, 2009, the parties entered into the following arbitration agreement:
The Contract dated 10 March 2006 between Y.________ EAD and X.________ Oy shall be governed by Swiss law.
All disputes arising out of or in connection with the Contract, including the pending ICC arbitration case ref. 16204/FM shall be finally settled under the Rules of Arbitration of the International Chamber of Commerce by three arbitrators, one appointed by the Claimant and one by the Respondent. The two party nominated arbitrators shall nominate the Chairman of the Tribunal.
The place of arbitration shall be Zurich, Switzerland and the language of the proceedings shall be English.
This arbitration agreement shall replace Article 23 of the Contract.4
On July 22, 2009, and on August 28, 2009, the two party appointed arbitrators and the Chairman were confirmed by the General Secretary of the ICC Court of Arbitration.
In a procedural order nr. 12 of October 14, 2012, the Arbitral Tribunal bifurcated the proceedings placing certain issues first, among which the issue as to whether the Defendant had been grossly negligent in the performance of the Contract; this was after it relied on a clause excluding risk liability and the Claimant challenged the admissibility of an exclusion of liability according to Art. 100(f) OR.5
A hearing took place in Zürich between February 2 and 4, 2011.
In a partial award of March 19, 2012, the Arbitral Tribunal ordered X.________ Oy to pay EUR 148’250 for the late delivery of the documentation; however, it rejected the claim for payment of a contractual penalty for late delivery of some technical devices. Furthermore, the Arbitral Tribunal held that the Claimant had not succeeded in proving gross negligence by the Defendant.
The parties then submitted various briefs to the Arbitral Tribunal. It was agreed not to hold another hearing.
In a final award of August 2, 2013, the Arbitral Tribunal ordered X.________ Oy to pay EUR 69’600 with interest at 5% from March 25, 2009, as a price reduction for Crotch Plates not corresponding to the newest design (operative part of the award, §V.A.1.a) and to the payment of EUR 552’597 with interest at 5% from March 25, 2009, as compensation for the costs sustained as a consequence of reduced steam production (operative part of the award, §V.A.1.b). Furthermore, the Defendant was ordered to pay 5% interest from March 25, 2009, on the amount of EUR 148’250 already awarded in the partial award (operative part of the award, §V.A.1.c). The counterclaim of X.________ Oy was upheld by the Arbitral Tribunal for EUR 7’778 with interest at 5% from June 2, 2009 (operative part of the award, §V.A.2). A submission by the Claimant for a finding was rejected by the Arbitral Tribunal with all other submissions of the parties (operative part of the award, §V.B and §V.D). As the Claimant had seen most of its submissions rejected, it was ordered to pay USD 100’000 for the costs of the arbitration (partial restitution of advances paid) and EUR 200’000 (partial compensation for the other party’s costs) to the Defendant (operative part of the award, §V.C).
In a civil law appeal, X.________ Oy submits that the Federal Tribunal should annul §V.A.1.a, §V.A.1.b and §V.C of the final award of August 2, 2013, and send the matter back to the Arbitral Tribunal for a new decision.
The Respondent submits that the matter is not capable of appeal and in the alternative that the appeal should be rejected. The Arbitral Tribunal did not state its position.
The Appellant submitted a reply to the Federal Tribunal on December 12, 2013; the Respondent submitted a rejoinder on January 17, 2014.
According to Art. 54(1) BGG,6 the decision of the Federal Tribunal is issued in an official language,7 as a rule in the language of the decision under appeal. If it was written in another language, the Federal Tribunal uses the official language chosen by the parties. The award under appeal is in English. As it is not an official language and the parties used the German language before the Federal Tribunal, the judgment of the Federal Tribunal will be issued in German.
In the field of international arbitration, a civil law appeal is allowed under the requirements of Art. 190-192 PILA8 (SR 291) (Art. 77(1)(a) BGG).
The seat of the Arbitral Tribunal is in Zürich in this case. At the relevant time, the parties had their seats outside Switzerland (Art. 176(1) PILA). Contrary to the Respondent’s claim, there is no indication that the parties opted out of the applicability of Chapter 12 PILA and chosen to apply the third title of the ZPO9 (SR 272) (Art. 176(2) PILA).
The Respondent furthermore inaccurately argues that the matter is not capable of appeal because the parties opted out of any appeal against the arbitral award in the arbitration agreement.
When none of the parties has its domicile, habitual residence, or an establishment in Switzerland, as is the case here, they may indeed opt out of any appeal against arbitral awards by an explicit statement in the arbitration agreement or in a later agreement. According to the case law of the Federal Tribunal, the statement must however unmistakably show the common will of the parties to avail themselves of the possibility of Art. 192(1) PILA and to opt out of the appeal of the international arbitral award to the Federal Tribunal. Whether this is the case or not must be determined by interpreting the arbitration agreement at hand (BGE 133 III 235 at 4.3.1 p. 240 f.; 131 III 173 at 4.2, esp. 184.108.40.206 p. 177 ff.; both with references).
Contrary to what the Respondent seems to assume, an alleged opting-out of appeal is to be assessed exclusively according to the arbitration clause entered into by the parties on May 11, 2009, by which the arbitration clause contained in the March 10, 2006, contract (Article 23) was expressly repealed (“This arbitration agreement shall replace Article 23 of the Contract”).10 According to the arbitration agreement of May 11, 2009, “All disputes … shall be finally settled under the Rules of Arbitration of the International Chamber of Commerce…”11 [emphasis added]). According to the case law of the Federal Tribunal, this wording does not meet the requirements of an explicit opt-out within the meaning of Art. 192 PILA. The mere reference to a “final” arbitral award does not exclude extraordinary legal remedies according to the meaning generally accepted in the law of civil procedure, but merely the (free) review of the award in ordinary appeal proceedings (see judgment 4A_256/200912 of January 11, 2010, at 2.2; 4A_224/200813 of October 10, 2008, at 2.6.3; 4P.114/2006 of September 7, 2006, at 5.3). This is also the meaning of Art. 190(1) PILA, which states that the award of the arbitral award is “final” from its notification while providing for a legally limited possibility to appeal to the Federal Tribunal as sole appeal body by way of a civil law appeal according to Art. 77 BGG. Contrary to the view submitted in the answer to the appeal, there is therefore no valid opting-out of an appeal to the Federal Tribunal against the arbitral award as provided by Art. 192 PILA.
A civil law appeal within the meaning of Art. 77(1) BGG may in principle only seek the annulment of the award under appeal (see Art. 77(2) BGG, ruling out the applicability of Art. 107(2) BGG to the extent that this empowers the Federal Tribunal to decide the case itself). To the extent that the dispute concerns the jurisdiction or the composition of the arbitral tribunal, there is however an exception in this respect and the Federal Tribunal may decide itself the jurisdiction or lack of jurisdiction of the arbitral tribunal or the rejection of an arbitrator (BGE 136 III 60514 at 3.3.4 p. 616 with references).
While a civil law appeal against an arbitral award may only seek an annulment, this does not stand in the way of a partial annulment of the arbitral award (see judgment 4A_360/201115 of January 31, 2012, at 6.1, ASA Bull. 2012, p. 645).
Likewise, it is not excluded that the Federal Tribunal should send the matter back to the arbitral tribunal if it upholds the appeal on the basis of the violation of the right to be heard, as Art. 77(2) BGG excludes the applicability of Art. 107(2) BGG only to the extent that it would empower the Federal Tribunal to decide the matter itself (see judgment 4A_433/200916 of May 26, 2010, at 4; also BGE 134 III 28617 at 2 p. 286 f. with references concerning revision). The Appellant’s submissions are therefore admissible.
The Appellant argues a violation of the right to be heard by the Arbitral Tribunal (Art. 190(2)(d) PILA).
The right to be heard in contradictory proceedings according to Art. 182(3) and Art. 190(2)(d) PILA does not include the right to a reasoned international arbitral award according to well-established case law (BGE 134 III 18618 at 6.1 with references).
However, there is a minimal duty of the arbitrators to review and handle the issues important for the decision (BGE 133 III 235 at 5.2 p. 248 with references). This duty is violated when the arbitral tribunal, due to oversight or a misunderstanding, overlooks some legally pertinent allegations, arguments, evidence, or offer of evidence from a party. When an award is issued without addressing at all some issues obviously important for the outcome of the dispute, it behooves the arbitrators or the other party to justify the omission in their respective briefs by showing either that, contrary to the Appellant’s claim, the issues involved were not important for the specific outcome of the case or that they were implicitly dealt with by the arbitral tribunal.
Yet, the arbitral tribunal is not compelled to address each and every submission of the parties and it cannot be criticized for violating the right to be heard if it fails to reject, albeit implicitly, a point without relevance to the decision (BGE 133 III 235 at 5.2 with references).
The Federal Tribunal does not have to review whether the arbitral award would have been different if the legally relevant submission had been taken into account. Due to the formal nature of the right to be heard, its violation leads to the annulment of the award under appeal, irrespective of the substantive accuracy of the submission (judgments 4A_669/201219 of April 17, 2013, at 3.1; 4A_360/201120 of January 31, 2012, at 5.1; 4A_46/201121 of May 16, 2011, at 4.3.2).
3.2.1. With reference to the record, the Appellant argues that it submitted to the Arbitral Tribunal from the outset that its liability for the damages claimed was excluded according to paragraph 22.1 of the March 10, 2006, Contract (mistakenly confused with §23.1). Even in its answer to the request for arbitration it invoked the exclusion of liability according to this contractual clause and raised it as its principle argument that it could not be liable for direct or consequential damages of any kind, including loss of profit, loss of production, loss of excessive investment of material and energy and costs for replacement of the capacities22 according to this contractual clause. Both in its answer and its rejoinder moreover, it made clear on the basis of Art. 22 of the March 10, 2006, Contract that its liability was contractually excluded as to the expenses claimed by the Respondent in connection with obtaining steam from third parties as a consequence of the late repair of the boiler. Once the Arbitral Tribunal decided in its partial award of March 19, 2012, that no gross negligence could be held against the Appellant, it explained furthermore in a brief of October 8, 2012, what consequences this finding would have on the claim: thus, it pointed out several times with regard to the claim for the costs in connection with obtaining steam that the parties had completely excluded any liability of the Appellant for such costs. It emphasized there that, according to the finding in the partial award, it could not be held as grossly negligent and therefore the exclusion of liability stood. Moreover, it relied specifically on the fact that, among other things, the questionable expenses for obtaining steam from third parties would fall under the exclusion of liability for “loss of production or costs for replacement of the capacities”23 according to paragraph 22.1.
Despite these submissions, the Arbitral Tribunal did not address the contractual exclusion of liability anywhere in the final award under appeal and ordered it to compensate for the Respondent’s expenses in obtaining steam without regard to the main argument against contractual liability submitted in this respect.
3.2.2. The argument that the right to be heard was violated is founded. The Appellant shows accurately that in the course of the arbitration it submitted several times its point of view that there was a complete exclusion of liability in paragraph 22.1 of the March 10, 2006, Contract as to the type claimed and also relied on this argument in its submission of October 8, 2012, after the Partial Award of March 19, 2012, was issued. The exclusion of liability argued is obviously important to the decision as it was a decisive reason for the arbitrators to bifurcate the proceedings and determine first the issue of its admissibly on the basis of Art. 100(f) OR as to the issue of gross negligence. Once the Arbitral Tribunal found in its partial award of March 19, 2012, that gross negligence by the Appellant was not proved and decided this in its favor accordingly, the exclusion of liability in connection with the damage corresponding to the late repair (reimbursement of the expenses for obtaining additional steam from third parties) was furthermore relevant. While the issue of the exclusion of liability according to paragraph 22.1 of the March 10, 2006 Contract was obviously legally relevant for the adjudication of the claims for damages, the arbitral tribunal merely mentions it in the award under appeal in connection with the summary of the points of view of the parties and overlooks any analysis of this argument of the Appellant in its legal reasons. There is no specific hint in the reasons of the award under appeal that the argument of the contractual exclusion of liability would have been implicitly rejected by the Arbitral Tribunal. Neither the arbitrators, who did not express their position as to the appeal, nor the Respondent attempt to demonstrate the contrary. The Respondent rightly does not attempt to justify the omissions because the argument in dispute would not have been relevant to the specific determination of the case; instead it takes the view that the argument is materially unfounded and should have been rejected by the Arbitral Tribunal in its substantive review when it submits that the expenses claimed for obtaining steam from third parties would be direct damages not covered by the exclusion of liability at paragraph 22.1 and therefore not contractually excluded. In doing so, it does not address the argument that the Arbitral Tribunal disregarded its minimal duty to examine the defense based on contractual exclusion of liability but rather challenges the substantive accuracy of the argument, thus disregarding the formal nature of the right to be heard (see judgment 4A_46/2011 of May 16, 2011, at 4.3.2).
The verdict ordering the Appellant to pay EUR 552’597 with interest as damages for the expenses incurred to procure additional steam from third parties (operative part of the final award §V.A.1.b) was therefore in violation of the right to be heard (Art. 190(2)(d) PILA).
In connection with the reduction of the price amounting to EUR 69’600 for not using metal parts according to the contract for the Crotch Plates, the Appellant also shows accurately that in the arbitration, it repeatedly invoked the contractual exclusion of claims to reduce the price. Even after the partial award, it argued again explicitly in its submission of October 8, 2012, that in the March 10, 2006, Contract, the parties had agreed on a regime of limited legal recourses in case of defects, which would rule out any reduction in price.
The argument of the contractual exclusion of claims to reduce the price is addressed in the final award only in a sentence summarizing the points of view of the parties. The legal reasons in the award under appeal do not show any review of this defense at all. The Arbitral Tribunal upheld a claim of the Respondent to reduce the price because the Crotch Plates were not according to the Contract without showing in its reasoning that it reviewed the – undoubtedly legally relevant – argument of the contractual exclusion of price reductions and hold it unfounded. While the Arbitral Tribunal did not state its position before the Federal Tribunal, the Respondent limits itself to the unsubstantiated allegation that one should not assume that the Arbitral Tribunal did not consider the defense in dispute. Considering the lack of such arguments in the appeal proceedings, it cannot be objected to the Appellant that it did not attempt to develop the reasons for this arbitral silence any further (see BGE 133 III 235 at 5.2 p. 248 f.).
Therefore, it must be held that the Arbitral Tribunal violated the right to be heard of the Appellant in connection with the price reduction of EUR 69’600 awarded in the Respondent’s favor as well (operative part of the final award §V.A.1.a). According to the submissions in the appeal, this also leads to the annulment of the award of costs of the arbitration (operative part of the final award §V.C), which was done on the basis of claims upheld and rejected.
The appeal is upheld and the §V.A.1.a (price reduction of EUR 69’600), §V.A.1.b (damages of EUR 552’597) and §V.C (award of costs) of the operative of the final award of August 2, 2013, are annulled and the matter shall be sent back to the ICC Arbitral Tribunal sitting in Zürich for a new adjudication.
According to the issue of the proceedings, the Respondent shall pay the costs and compensate the other party (Art. 66(1) and Art. 68(2) BGG).
Therefore the Federal Tribunal Pronounces:
The appeal is upheld, §V.A.1.a (price reduction of EUR 69’600), §V.A.1.b (damages of EUR 552’597) and §V.C (award of costs) of the operative part of the final award of August 2, 2013, are annulled and the matter is sent back to the ICC Arbitral Tribunal sitting in Zürich for a new adjudication.
The judicial costs set at CHF 10’000 shall be paid by the Respondent.
The Respondent shall pay CHF 12’000 to the Appellant for the federal judicial proceedings.
This judgment shall be notified in writing to the parties and to the ICC Arbitral Tribunal sitting in Zürich.
Lausanne, February 3, 2014
In the name of the First Civil Law Court of the Swiss Federal Tribunal
Presiding Judge: Clerk:
Klett (Mrs.) Leemann
- 1. Translator’s Note: Quote as X.________ Oy v. Y.________ EAD. 4A_460/2013. The original decision is in German. 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: In English in the original text.
- 4. Translator’s Note: In English in the original text.
- 5. Translator’s Note: OR is the German abbreviation for the Swiss Code of Obligation.
- 6. Translator’s Note: BGG is the German abbreviation for the Federal Statute of June 17, 2005 organizing the Federal Tribunal, RS 173.110.
- 7. Translator’s Note: The official languages of Switzerland are German, French, and Italian.
- 8. 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.
- 9. Translator’s Note: ZPO is the German abbreviation for the Code of Civil Procedure.
- 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/invalid-waiver-of-the-appeal-to-the-federal-tribunal-through-ref1
- 13. Translator’s Note: The English translation of this decision is available here:
- 14. Translator’s Note: The English translation of this decision is available here:
- 15. Translator’s Note: The English translation of this decision is available here:
- 16. Translator’s Note: The English translation of this decision is available here: http://www.swissarbitrationdecisions.com/award-annulled-for-violation-of-due-process
- 17. Translator’s Note: The English translation of this decision is available here: http://www.swissarbitrationdecisions.com/request-for-revision-of-an-arbitral-award
- 18. Translator’s Note: The English translation of this decision is available here: http://www.swissarbitrationdecisions.com/right-to-be-heard-equality-between-the-parties
- 19. Translator’s Note: The English translation of this decision is available here: http://www.swissarbitrationdecisions.com/award-can-be-annulled-only-part
- 20. Translator’s Note: The English translation of this decision is available here:
- 21. Translator’s Note: The English translation of this decision is available here:
- 22. Translator’s Note: In English in the original text.
- 23. Translator’s Note: In English in the original text.