Federal Tribunal reiterates that the principle of pacta sunt servanda is violated only when an arbitral tribunal declares a contractual provision binding and refuses to apply it or, conversely, when the arbitrators find that a provision is not binding and then demand compliance
The case involved certain contracts for a paper factory concluded in 2005. The contracts contained an ICC arbitration clause in Geneva. Swiss law was applicable to the merits.
A dispute arose because the Contractor had not been paid in full and the Respondent objected that the equipment delivered was unable to achieve the performance levels promised in the contracts.
A three members ICC arbitration tribunal was constituted, with William Park and Robert Lambert as arbitrators and Laurent Levy, chairman. On February 9, 2012 the Arbitrators issued a final award essentially upholding the claim with some set off allowed.
An appeal was made to the Federal Tribunal and this case is probably a good example of an award that should not have been appealed at all, although the following are (mildly) interesting in the opinion:
- The Federal Tribunal confirmed its frequently expressed view that the right to be heard – Swiss Parlance for due process – does not require an international arbitral award issued in Switzerland to be reasoned. However the arbitrators have a minimal duty to address the arguments of the parties and if they overlook something important, the right to be heard is violated unless it can be shown that they implicitly rejected an argument or that it was devoid of any pertinence (see sections 3.1 and 3.2 of the opinion in this respect).
- The Federal Tribunal also reiterated its view, expressed frequently too, that good faith requires a party feeling that its right to be heard is being violated to raise the issue immediately for one cannot wait for the outcome of the arbitration to decide whether or not to invoke a violation of due process (see section 4.1 of the opinion in this respect).
- Finally, and also without surprise, the Court reiterated its view that the principle of pacta sunt servanda is violated only when an arbitral tribunal declares a contractual provision binding and refuses to apply it or, conversely, when the arbitrators find that a provision is not binding and then demand compliance. In other words, it is extremely unlikely that there will ever be an award annulled in Switzerland for violating public policy by disregarding the rule of pacta sunt servanda (see section 5.1 of the opinion in this respect).
Judgment of July 12, 2012
First Civil Law Court
Federal Judge Klett (Mrs), presiding
Federal Judge Corboz,
Federal Judge Kolly,
Clerk of the Court: Carruzzo.
Represented by Mr. Michel A. Halpérin and Mr. Lionel Halpérin,
Represented by Mr. Frank Spoorenberg,
X.________ company and Y.________ company entered into several contracts concerning the installation of a paper factory. They signed in particular a Deed of Agreement on May 17, 2005, amended on September 7, 2005 (Amendment nr. 1) (collectively referred to as the PM-4 Agreement in the award under appeal; hereafter: the Contract) and a Hall Ventilation and Heat Recovery System Agreement (hereafter: the Ventilation Contract) on June 15, 2006. Pursuant to these contracts Y.________ was to deliver to X.________ certain equipment and services for a total price of € 81 million payable by installments. Y.________ guaranteed certain performances that were to be tested after the commissioning of the plant. The disputes which could arise under the contracts would be submitted to an arbitral tribunal constituted under the aegis of the Court of Arbitration of the International Chamber of Commerce (ICC), the seat of the arbitration being in Geneva and Swiss law being applicable to the merits.
A dispute arose between the parties as to the quality of the equipment delivered by Y.________. According to X.________, which had not paid the last installment of the pre-agreed price, the test carried out between March 26 and April 10, 2009 showed that the equipment was not able to achieve the performances promised.
Pursuant to a July 29, 2009 request Y.________ started arbitration proceedings against X.________ with a view to obtaining in particular some 10 million Euros with interest, as payment of the last installment of the agreed price (€ 7’900’000 for the Contract and € 210’000 for the Ventilation Contract) and reimbursement of VAT (€ 626’040).
X.________ acknowledged owing the latter amount while pointing out that it should be set off against its counterclaim, in particular the amount of € 10’140’000 as liquidated damages corresponding to 12,5% of the contract price (€ 9’875’000 for the Contract and € 265’000 for the Ventilation Contract) with interest. Otherwise it submitted that the claim should be rejected.
In a final award of February 9, 2012 the three members ICC Tribunal ordered X.________ to pay an amount of € 10’086’702.45 to Y.________ plus interest. This amount includes the three aforesaid amounts (B., 1st § above), the one concerning the reimbursement of VAT being set off in part with an amount of € 397’746 to be paid by Y.________ as compensation for the defective equipment delivered by X.________. The latter was also found entitled to an amount of € 487’000 for equipment that had not been delivered. The other claims and counterclaims were rejected. Finally, the Arbitral tribunal let each party pay its legal expenses while ordering X.________ to pay all the costs of the arbitral proceedings.
On March 16, 2012 X.________ (hereafter: the Appellant) filed a Civil law appeal. Submitting that the Arbitral tribunal violated its right to be heard and public policy, it asked the Federal Tribunal to annul the final award.
In its answer of May 7, 2012 Y.________ (hereafter: the Respondent) submitted that the appeal should be rejected.
By letter of March 23, 2012 the Arbitral tribunal stated that it did not wish to take a position as to the appeal.
The request for a stay of enforcement contained in the appeal brief was rejected by decision of the Presiding Judge of April 19, 2012.
According to Art. 54 (1) LTF2 the Federal Tribunal issues its decision in an official language3, as a rule in the language of the decision under appeal. When the decision is in another language (here English), the Federal Tribunal resorts to the official language chosen by the parties. In front of the Arbitral tribunal they used English while in the briefs submitted to the Federal Tribunal, they used French. In conformity with its practice the Federal Tribunal will consequently issue its decision in French.
In the field of international arbitration a Civil law appeal is possible against the decisions of arbitral tribunals pursuant to the requirements of Art. 190 to 192 PILA4 (Art. 77 (1) LTF). The seat of the arbitration was in Geneva. At least one of the parties (in this case both) did not have its domicile in Switzerland at the decisive time. The provisions of chapter 12 PILA are accordingly applicable (Art. 176 (1) PILA).
The Appellant is directly affected by the award under appeal as the Arbitral tribunal ordered it to pay the Respondent and upheld its counterclaim only in limited part. Thus it has undeniably a legally protected interest to the annulment of the award, which gives it standing to appeal (Art. 76 (1) LTF).
Filed within 30 days after the final award was notified (Art. 100 (1) LTF), the appeal meets the formal requirements of Art. 42 (1) LTF and is accordingly admissible.
As a first argument, the Appellant invokes Art. 190 (2) (d) PILA because the Arbitral tribunal would have violated its right to be heard by failing to examine the arguments it had put forward as to the absence of new performance tests and as to the level of starch applied during the performance test carried out.
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 186 at 6.1and the 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 breached when inadvertently or due to a misunderstanding, the arbitral tribunal does not take into account some statements, arguments evidence and offers of evidence presented by one of the parties and important for the decision to be issued. If the award is totally silent as to some elements apparently important to adjudicate the dispute, it behooves the arbitrators or the respondent to justify the omission in their observations as to the appeal. They have to show that contrary to the appellant’s submissions, the items omitted were not pertinent to resolve the case at hand or, if they were, that they were implicitly rejected by the arbitral tribunal. However the arbitrators are not obliged to discuss all arguments raised by the parties, so that from the point of view of the right to be heard in contradictory proceedings, they cannot be blamed for failing to reject, albeit implicitly, an argument devoid of any pertinence (ATF 133 III 235 at 5.2 and the cases quoted).
Moreover, the Federal Tribunal held that it does not behoove this Court to decide whether or not the arbitrators should have upheld the argument they overlooked, had they addressed it. This would indeed disregard the formal nature of the right to be heard and the requirement that, should it be breached, the decision under appeal must be annulled irrespective of the Appellant’s chances to obtain a different result (judgment 4A_46/20115 of May 16, 2011 at 4.3.2 in fine and the cases quoted).
18.104.22.168 As to the verification of the guaranteed performances, the Appellant argues in substance that the combination of the various contractual provisions required the Respondent to change or modify the machines at its own expenses should the first performance test be failed and to do so within maximum 12 months from the commissioning of the plant and that in this timeframe, two new tests – or even more should the Parties agree – must be carried out if necessary. Yet according to the Appellant the Respondent had made no improvement to the machines within the aforesaid timeframe and agreed to carry out new performance tests only under condition that the Appellant would renounce all liquidated damages based on the Contract, thereby breaching its contractual obligations. Therefore it had to pay the liquidated damages for failing to ensure that the guaranteed performances would be achieved before the aforesaid time limit expired. Moreover the absence of new tests was decisive as to the due date of the payment of the last installment the Appellant had to pay.
In this framework it is argued that the Arbitral tribunal failed to address, albeit implicitly, the essential issue as to whether the Respondent’s refusal to carry out the supplementary tests upon being invited to do so by its contractual counterpart, would impact the latter’s right to liquidated damages or the due date of the last payment.
22.214.171.124 In its answer to the appeal the Respondent argues that the Arbitrators addressed the issue in dispute. As a preliminary, it emphasizes that they mentioned the Appellant’s arguments as to this disputed issue in the award. According to the Respondent the Arbitral tribunal would have held for various reasons that the Appellant was responsible for the fact that the additional performance tests had not been carried out, thus answering in the negative the question as to whether the Respondent’s behavior had caused the absence of new tests. Moreover it would have interpreted the contractual provisions as meaning that liquidated damages could be claimed only after a third performance test failed. Thus, according to the Respondent, the Arbitrators did not have to examine whether its refusal to carry out the supplementary tests had an impact on the Claimant’s right to liquidated damages.
Be this as it may, the Respondent takes the view that the Appellant did not show why the items allegedly omitted by the Arbitrators would have been pertinent to resolve the case at hand and that in reality, the Appellant is arguing that the award was not reasoned or incompletely reasoned as to the issue in dispute, a grievance that does not fall within Art. 190 (2) (d) PILA.
126.96.36.199 As presented, the argument cannot succeed.
Firstly it must be stated that its grounds are insufficient. It appears indeed from the award that the various contractual provisions dealing with the implementation of the performance guarantee and, particularly, with regard to the tests connected thereto – and perhaps those as to the due date of the last installment of the contractual price – raise some very complex issues as to their interpretation with a view to making them intelligible and free from contradictions. Thus the Appellant’s proposed interpretation is oversimplified when it appears to wish to deduct therefrom, without any further explanations, that the absence of additional performance tests within the prescribed time limit was sufficient to entitle the Appellant to liquidated damages, irrespective of the issue as to whether the failure of the first performance test was due to the party that had delivered the plant in dispute or to the one receiving it. Similarly, merely stating – as the Appellant does – that admitting its argument “would inevitably impact the [Respondent’s] right to liquidated damages” cannot substitute for a specific demonstration that the arguments are pertinent.
Moreover the Arbitrators specifically mentioned the issue raised by the Appellant (see nr 143 and 144 of the award), as the Appellant itself acknowledges (see appeal brief p. 13). Therefore they did not completely overlook the issue even though the mere fact of mentioning it does not by itself lead to rejection of the argument invoked (see ATF 133 III 235 at 5.3).
Finally and above all, the Arbitrators explained why, in their view, the absence of any tests of the guaranteed performance validly carried out within 15 months since the plant was commissioned – namely until September 14, 2009 – was due to the Appellant, so that pursuant to the paragraph before last of Art. 6.1 of Annex 11 to the Contract, the guarantee must be considered as fulfilled (award, nr 237 to 271). It is reasonable to conclude from this that the Arbitral tribunal thus rejected – at least implicitly – the Appellant’s argument that the Respondent should be held responsible for the failure to timely carry out the tests of the guaranteed performance prescribed by the Contract.
To demonstrate that the performance test carried out was null, the Respondent claimed that the Appellant had not complied with its instructions and applied an excessive level of starch. The Appellant claims to have objected that complying with the Respondent’s instruction would have resulted in a violation of the contractual requirements as to the starch level. However, the Arbitrators would have ignored the objection and invalidated the performance test without noticing that the starch level was within the contractually set limits.
The argument has no basis. The award under appeal shows that the issue was specifically addressed by the Arbitral tribunal, which considered that the Appellant should have complied with the Respondent’s instructions as to the starch level that prevailed over the – flexible – limits set in the Contract (award nr 259 ff).
Consequently the two arguments relating to the breach of the minimum duty to address pertinent issues appear unfounded.
The Appellant argues furthermore that the Arbitral tribunal would have violated its right to present evidence by refusing to accept its request for an on-site visit in order to see for itself that the equipment and the machines delivered by the Respondent were defective.
The right to be heard, guaranteed by Art. 182 (3) and 190 (2) (d) PILA does not differ in principle from the one consecrated in constitutional law (ATF 127 III 576 at 2c; 119 II 386 at 1b; 117 II 346 at 1a p. 347). Thus it was held in the field of arbitration that each party has the right to state its views on the facts essential for the judgment, to submit legal arguments, to propose evidence on pertinent facts and to attend the hearings of the arbitral tribunal (ATF 127 III 576 at 2c; 116 II 639 at 4c p. 643).
As to the right to introduce evidence, it must have been exercised timely and according to the applicable formal rules (ATF 119 II 386 at 1b p. 389). The arbitral tribunal may refuse to hear evidence without violating the right to be heard if the evidence is unpersuasive, if the fact to be proved is already established, if it is irrelevant or also if the tribunal, by weighing the evidence in advance, reaches the conclusion that it is already convinced and that the evidence proposed cannot change its mind (judgment 4A_440/20106 of January 7, 2011 at 4.1). An anticipated assessment of the evidence may be reviewed by the Federal Tribunal only from the very narrow perspective of public policy. The right to be heard does not encompass the right to demand the production of evidence unfit to deliver proof of the facts (judgment 4A_600/20107 of March 17, 2011 at 4.1).
The party claiming that its right to be heard was violated or that some other procedural error was committed, must raise the issue in the arbitral proceedings immediately, under penalty of forfeiture. It is indeed contrary to the rules of good faith to raise a procedural error only in the framework of an appeal against the arbitral award when the error could have been mentioned during the proceedings (judgment 4A_348/20098 of January 6, 2010 at 4). This principle is also contained at Art. 39 of the ICC Rules.
In the light of these principles of case law and on the basis of the arguments submitted by the Respondent, the Appellant’s argument cannot but be rejected.
Firstly, the Appellant’s claim that it would have demanded “without delay and repeatedly” the introduction of the evidence at issue (appeal p. 15) is doubtful. The only request to that effect quoted by the Appellant is a November 24, 2010 letter by counsel asking the Arbitral tribunal to consider an on-site visit. As worded, the request – made some 16 months after the start of the arbitral proceedings – was not binding at all as it merely evoked the possibility of an on-site visit by the Arbitrators. Also the Appellant does not indicate when and how the request would have been repeated.
Furthermore, as to the relevance of the evidence, the Arbitral tribunal states that it did not consider an on-site visit necessary (award nr 48). Therefore it did not “ignore” any essential evidence, contrary to what the Appellant claims (appeal p. 16) but assessed in advance the relevance of the evidence and concluded that it was superfluous. The result of this assessment cannot be reviewed by the Federal Tribunal (see above at 4.1, 2nd § in fine). Also, since the solution to the dispute in front of the Arbitral tribunal depended mainly upon the interpretation of the various contractual clause concerning the due date of the price and the finding that the performance guarantees promised had been honored, one hardly sees how – no matter what the Appellant says – an on-site visit two and a half years approximately after the plant was commissioned could have been of any use to the three jurists called upon to adjudicate the dispute.
Be this as it may, if the Appellant thought that its right to be heard had been violated, it should have solicited the Arbitrators pendente lite or, to the very least, when the Arbitral tribunal declared the proceedings closed on December 20, 2011 (award nr 55). It should have opposed the closing of the proceedings at that point in time, drawing the Arbitrators’ attention on the fact that they had not ordered the on-site visit it had requested. Instead of doing so, the Appellant waited until it knew the outcome of the dispute and only when it found that it was not in its favor did it raise the argument of a violation of its right to introduce evidence, which is not admissible.
In a last group of arguments, the Appellant invokes Art. 190 (2) (e) PILA and argues that the Arbitral tribunal issued an award inconsistent with public policy. More specifically it claims that the rules of good faith and the principle of pacta sunt servanda were violated.
The substantive review of an international arbitral award by the Federal Tribunal is limited to the issue of the compatibility of the award with public policy (ATF 121 III 331 at 3a).
An award is incompatible with public policy if it disregards the essential and broadly recognized values which, according to the opinion prevailing in Switzerland, should constitute the basis of any legal order (ATF 132 III 389 at 2.2.3). It is contrary to substantive public policy when it violates some fundamental principles of the law applicable on the merits to such an extent that it is no longer consistent with the determining legal order and system of values; among such principles are in particular fidelity to contracts and compliance with the rules of good faith. In order to be inconsistent with substantive public policy – a more restrictive concept than that of arbitrariness – it is not sufficient for a rule of law to be clearly violated (judgment 4P.71/2002 of October 22; 2002 at 3.2 and the cases quoted).
The principle of pacta sunt servanda, within the restrictive meaning given by case law relating to Art. 190 (2) (e) PILA, is violated only if the arbitral tribunal refuses to apply a contractual clause while admitting that it binds the parties or, conversely, if it requires them to comply with a clause that it considers as not binding. In other words, the arbitral tribunal must have applied or refused to apply a contractual provision in contradiction with the results of its own interpretation as to the existence or the contents of the legal instrument in dispute. Yet the process of interpretation itself and the legal consequences logically drawn therefrom are not governed by the principle of pacta sunt servanda, so that they cannot base an argument that public policy was violated. The Federal Tribunal has emphasized many times that almost all disputes concerning breaches of contracts are outside the scope of the pacta sunt servanda principle (judgment 4A_370/2007 of February 21st, 2008 at 5.5).
The rules of good faith must be understood in the sense given by case law concerning Art. 2 CC9 (judgment 4A_488/2009 of February 15, 2010 at 3.1).
In a first argument entitled “double standard in applying the rule of good faith”, the Appellant argues in substance that the Arbitral tribunal resorted to “variable-geometry application” of this principle in interpreting the pertinent contractual provisions: it would have stuck to literal interpretation of the Contract as to the Appellant’s duty to comply with the Respondent’s instructions concerning the performance test, while departing from the Contract, notwithstanding its clear text, in interpreting the requirements concerning the due date of the last installment of the contractual price.
The argument is purely of an appellate nature and has nothing to do with public policy as defined by the aforesaid case law. In reality, it seeks to obtain a review by this Court of the accuracy of the interpretation the Arbitrators gave of the contractual provisions concerning the due date of the price and the modalities of the performance test. This is not the role of the Federal Tribunal when seized for an alleged violation of substantive public policy in an appeal concerning international arbitration. Moreover the Appellant overlooks in its argument that the alleged internal incoherence of the reasons of an award does not fall within the definition of substantive public policy (judgment 4A_464/200910 of February 15, 2010 at 5.1).
Consequently there is no need to examine the merits of the argument any further.
The argument that the rule of pacta sunt servanda was violated, raised by the Appellant lastly, is not better founded than the previous ones.
According to the Appellant the Arbitral tribunal would have awarded an amount of € 312’000 to the Respondent for additional engineering costs when the pertinent contractual provision subjected such a claim to a written agreement of the Parties, the absence of which the Arbitral tribunal would have implicitly acknowledged in this case. By doing so it would have refused to apply a contractual provision the existence of which it had acknowledged, thus violating the rule of pacta sunt servanda and consequently substantive public policy.
It is not so. The existence and the contents of the contractual provision in dispute were not overlooked by the Arbitrators. Yet they held that the Appellant could not avail itself of the absence of a written agreement as required by this clause in order to obtain certain services from the Respondent for free, simply by way of abstaining from confirming in writing its acceptance of the additional works without just cause for such abstention (award nr 304 and 305). By ordering the Appellant to pay the aforesaid amount, they accordingly took a decision that was perfectly consistent with their legal assessment of the situation. This cannot be seen as a violation of Art. 190 (2) (e) PILA.
The Appellant loses and shall pay the costs of the federal proceedings (Art. 66 (1) LTF) and the costs of the Respondent for the federal proceedings (Art. 68 (1) and (2) LTF).
Therefore the Federal Tribunal pronounces:
- The appeal is rejected.
- The judicial costs, set at CHF 39’000, shall be borne by the Appellant.
- The Appellant shall pay to the Respondent an amount of CHF 49’000 for the federal judicial proceedings.
- This judgment shall be notified in writing to the Representatives of the Parties and to Arbitrator [name omitted] for the ICC Arbitral tribunal.
Lausanne July 12, 2012.
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_150/2012. The original of the decision is in French. The text is available on the website of the Federal Tribunal www.bger.ch
- 2. Translator’s note: LTF is the French abbreviation for the Federal Statute of June 17, 2005 organizing the Federal Tribunal, RS 173.110.
- 3. Translator’s note: The official languages of Switzerland are German, French and Italian.
- 4. 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.
- 5. Translator’s note: Full English translation at http://www.praetor.ch/arbitrage/no-breach-of-pre-arbitral-procedures-failure-to-deal-with-an-arg/
- 6. Translator’s note: Full English translation at http://www.praetor.ch/arbitrage/claim-of-award-ultra-petita-rejected-claim-of-violation-of-publi/
- 7. Translator’s note: Full English translation at http://www.praetor.ch/arbitrage/cas-award-allocating-fees-and-costs-in-violation-of-the-right-to/
- 8. Translator’s note: Full English translation at http://www.praetor.ch/arbitrage/no-bias-of-arbitral-tribunal-based-on-premature-notification-of-/
- 9. Translator’s note: CC is the French abbreviation for the Swiss Civil Code.
- 10. Translator’s note: Full English translation at http://www.praetor.ch/arbitrage/no-waiver-of-the-right-to-appeal-to-the-federal-tribunal-in-the-/