Objections not raised in the arbitration are forfeited
In a share purchase agreement governed by German law and providing for ICC arbitration in Zürich, a dispute arose, involving a possible adjustment to the purchase price. In case of disagreement, the price adjustment was to be assessed by a “neutral auditor” whose determination would be “binding.” The parties could not reach an understanding and there was arbitration with claims and counterclaims. The Seller challenged the jurisdiction of the Arbitral Tribunal (chairman Bernd Ehle with arbitrators Jan Heiner Nedden and Daniel Busseto) to determine whether or not a prerequisite established by the contract was met.
However the very same Seller had also conceded the Arbitral Tribunal’s authority to do so with regard to another similar issue.
The Federal Tribunal simply recalled its well-established case law, according to which, if an arbitrator is to be challenged or if the jurisdiction of the arbitral tribunal is disputed, this must be raised in the arbitration itself and must be done immediately. If there is a procedural error, it too must be raised immediately so that the arbitral tribunal has an opportunity to correct it. A party that “holds in reserve” a procedural error or a challenge it could have raised in the arbitration forfeits the right to raise it before the Federal Tribunal.
Judgment of February 1, 2016
First Civil Law Court
Federal Judge Kiss (Mrs.), Presiding
Federal Judge Klett (Mrs.)
Federal Judge Kolly
Clerk of the Court: Leemann
Represented by Dr. Claudius Treibold and Mr. Philipp H. Haberbeck,
Represented by Dr. Christophe M. Pestalozzi and Mr. Tobias Zuberbühler,
A.a. A.________ (the Seller, the Claimant, the Counter-Defendant, the Appellant) is a company based in Luxembourg.
B.________ (the Purchaser, the Defendant, the Counter-Claimant, the Respondent) is a company in based in Dietzenbach, Germany.
A.b. On December 18, 2012, the parties entered into a Share Purchase Agreement (the SPA).
Paragraph 22.5 of the SPA contains an arbitration clause in favor of an arbitral tribunal sitting in Zürich. German law was adopted as the applicable law in the matter.
Paragraph 3.8 of the SPA provides a price adjustment mechanism with regard to the purchase price. According to this, a Preliminary Purchase Price is paid at first; the final purchase price (“Adjusted Purchase Price”) is determined subsequently on the basis of the calculation method agreed in the contract. If it turns out higher than the preliminary price, the Purchaser owes the difference to the Seller (“Adjustment Amount”); however, if the final purchase price is lower, the Seller is obliged to pay back the corresponding difference. With regard to the adjustment of the price, the Purchaser must provide, among other things, the “Closing Date Financial Statements” (“CDFS”) and the “Adjusted Purchase Price Determination Certificate” (“APPDC”) and then hand them over to the Seller.
The procedure for the price adjustment is set at Paragraph 4 of the SPA. The contractual clause regulates the exchange by the parties of the necessary documents for the determination of the final purchase price. In particular, paragraph 4.1.4 sets forth how the Seller must proceed in case of a disagreement with the Purchaser as to the “Closing Date Financial Statements” and the “Adjusted Purchase Price Determination Certificate”: in this case, it has 20 days to file a “Notice of Objection” spelling out in detail which items of the CDFS or of the APPDC are disputed.
Where a “Notice of Objection” has been filed according to paragraph 4.1.4 of the SPA and no agreement can be reached as to the disputed items, paragraph 4.2.1 provides for a determination by an expert-arbitrator. His decision as to the price adjustment is basically binding for the parties, pursuant to paragraph 4.2.3 of the SPA in accordance with German law:
--..] Except for manifest error or intentional malfeasance, the Neutral Auditor's decision on the Closing Date Financial Statements and the Adjusted Purchase Price Determination Certificate as determined by the Neutral Auditor shall be final and binding upon the Parties for the purposes of determining the Closing Date Financial Statements and the Adjusted Purchase Price Determination Certificate, including the Adjustment Amount, if any.2
A.c. Ultimately, the parties could not agree as to the price adjustment. The expert-arbitrator assessed the amount to be paid by the Purchaser to the Seller as “Adjustment Amount” to be EUR 2’473’613 in an expert opinion of December 23, 2013. The Purchaser rejected the request.
On February 11, 2014, the Seller initiated arbitration according to the Rules of the International Chamber of Commerce (ICC) and essentially submitted that the Defendant should pay EUR 2’473’613 with interest at 10% from January 15, 2014. The Defendant took the view that the Claimant failed to submit any “Notice of Objection” meeting the requirements of paragraph 4.1.4 of the SPA and that, accordingly, the “Closing Date Financial Statements” and the “Adjusted Purchase Price Determination Certificate” had become binding and that regardless of the expert opinion, the price adjustment fell in its favor. It opposed the purchase price claim and counterclaimed with a view to, among other things, obliging the Claimant to pay EUR 1’354’000 with interest at 10% from July 17, 2013.
On March 26, 2014, the Secretary General of the ICC Court of Arbitration confirmed the two Arbitrators appointed by the parties as well as the chairman of the Arbitral Tribunal on May 2, 2014.
A hearing took place in Frankfurt between March 23 and 26, 2015, during which numerous witnesses were heard.
In an arbitral award of July 30, 2015, the ICC Arbitral Tribunal sitting in Zürich found that the Claimant did not submit a “Notice of Objection” corresponding to the requirements of paragraph 4.1.4 of the SPA and that the “Closing Date Financial Statements” prepared by the Defendant and the “Adjusted Purchase Price Determination Certificate” were final and binding upon the parties (operative part of the award, §1). It upheld the counterclaim and ordered the Claimant to pay EUR 1’354’000 with interest at 10% from June 17, 2013, (operative part of the award, §2). The Arbitral Tribunal also disposed of various submissions (operative part of the award, §3-13), it assessed the costs and awarded them (operative part of the award, §14) and rejected all other claims of the parties, including the Claimant’s monetary claim (operative part of the award, §15).
In a civil law appeal, the Claimant submits that the Federal Tribunal should annul paragraphs 1, 2, 14, and 15 of the dispositive part of the arbitral award of the ICC Arbitral Tribunal sitting in Zürich of July 30, 2015.
The Respondent submits that the appeal should be rejected insofar as the matter is capable of appeal. The Arbitral Tribunal waived the right to submit a brief.
In a decision of November 12, 2015, the Federal Tribunal rejected the Appellant’s application for a stay of enforcement.
According to Art. 54(1) BGG,3 the judgment of the Federal Tribunal is issued in an official language,4 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 chosen by the parties. The award under appeal is in English. As this is not an official language and the Appellant used German before the Federal Tribunal, the judgment of the Federal Tribunal shall consequently be issued in German.
In the field of international arbitration, a civil law appeal is available pursuant to the requirements of Art. 190-192 PILA5 (SR 291) (Art. 77(1)(a) BGG).
2.1. The seat of the Arbitral Tribunal is in Zürich in this case. Both parties had their seat outside Switzerland at the relevant time (Art. 176(1) PILA). As the parties did not expressly waive the application of Chapter 12 PILA, the provisions of this chapter are applicable (Art. 176(2) PILA).
2.2. The only admissible grievances are listed in Art. 190(2) PILA (BGE 134 III 1866 at 5, p. 187; 128 III 50 at 1a, p. 53; 127 III 279 at 1a, p. 282). According to Art. 77(3), the Federal Tribunal reviews only the arguments raised and reasoned in the appeal brief; this corresponds to the duty to provide reasons contained at Art. 106(2) BGG for the violation of constitutional rights and of cantonal and intercantonal law (BGE 134 III 1867 at 5, p. 187 with reference). Criticism of an appellate nature is inadmissible (BGE 134 III 5658 at 3.1, p. 567; 119 II 380 at 3b, p. 382).
The Appellant argues that the Arbitral Tribunal violated the provisions concerning jurisdiction (Art. 190(2)(b) PILA).
3.1. The party wishing to challenge an arbitrator (see Art. 180(2)(2) PILA), or objecting to the jurisdiction of an arbitral tribunal (see Art. 186(2) PILA), or claiming to have suffered harm due to a relevant procedural error, forfeits its grievances if it does not raise them in a timely manner in the arbitration and does not undertake all reasonable efforts to remedy the error to the extent possible (BGE 130 III 66 at 4.3, p. 75; 126 III 249 at 3c, p. 253 f.; 119 II 386 at 1a, p. 388; each with references). It is contrary to good faith to raise a procedural error only in the framework of an appeal when it would have been possible to do so in the arbitration, giving the arbitral tribunal the opportunity to correct the alleged error (BGE 119 II 386 at 1a, p. 388). A party acts contrary to good faith and in an abusive manner when it holds the grievance in reserve only to raise it in case the course of arbitration is unfavorable and a loss appears foreseeable (BGE 136 III 6059 at 3.2.2, p. 609; 129 III 445 at 3.1, p. 449; 126 III 249 at 3c, p. 254). When a party participates in an arbitration without challenging the jurisdiction of the arbitral tribunal or the arbitrator, even though it has the opportunity to resolve the matter before the award is issued, it cannot raise the corresponding argument in the federal appeal proceedings because they were forfeited (BGE 130 III 66 at 4.3 with references).
3.2. Before the Federal Tribunal the Appellant takes the view that the Arbitral Tribunal did not have jurisdiction, according to Art. 22.5 of the SPA, to ignore the expert opinion issued pursuant to paragraph 4.2 of the SPA because the requirements of a “Notice of Objection” according to paragraph 4.1.4 would not have been fulfilled.
It cannot be followed when it claims to have already raised the alleged lack of jurisdiction in the arbitral proceedings. The Appellant itself appeared before the Arbitral Tribunal in order to claim the amount of EUR 2’473’613 determined by the expert-arbitrator in the arbitral proceedings against the Respondent. In doing so, it stated that, in its view, the expert opinion was not an enforceable legal title having res judicata effect, but that a decision of the Arbitral Tribunal was needed in this respect. Consequently, it did not question in the arbitration that the Arbitral Tribunal had to decide whether the expert opinion was invalid for a reason contemplated in the contract despite its basic binding nature upon the parties. Accordingly, the Appellant did not challenge the jurisdiction of the Arbitral Tribunal to decide the validity of the expert opinion but merely submitted that, according to the determining provisions of the SPA, the computations in the expert report were to be rejected. In doing so, the Appellant did not challenge the jurisdiction of the Arbitral Tribunal to assess the validity of the expert opinion issued or the contractual requirements as to the “Notice of Objection” according to paragraph 4.1.4 of the SPA. To the contrary, at the outset of the arbitration, it signed paragraph 7 of the Terms of Reference of June 17, 2014, and specifically agreed that the issue as to whether its “Notice of Objection” met the requirements of paragraph 4.1.4 of the SPA was among the issues to be decided by the Arbitral Tribunal, as rightly pointed out by the Respondent in its answer to the appeal. Accordingly, the Appellant also cannot be followed when it claims before the Federal Tribunal it could not have anticipated “that the Arbitral Tribunal would award itself the power to ignore the expert opinion by way of the aforesaid argument that the Notice of Objection would not have met the requirements of Article 4.1.4 of the SPA as to its contents.” Simply in view of n. 2a/aa of the counterclaim, this objection proves irrelevant as this is specifically aimed at a finding that the Appellant failed to submit a “Notice of Objection” meeting the requirements of paragraph 4.1.4 of the SPA (“Find that Claimant failed to submit a Notice of Objection in accordance with Section 4.1.4 of the SPA […]”10). Moreover, the award under appeal points out that the Respondent challenged the validity of the “Notice of Objection” of the Appellant and reserved the right in the proceedings in front of the expert-arbitrator to rely on its invalidity in a possible arbitral proceeding.
Since the Appellant did not challenge the jurisdiction of the Arbitral Tribunal in the arbitration but instead raised a claim itself before the Arbitral Tribunal and addressed the merits without any reservation, it has forfeited the right to argue the lack of jurisdiction of the Arbitral Tribunal in these proceedings before the Federal Tribunal.
The matter is not capable of appeal. According to the outcome of the proceedings, the Appellant must pay the costs and compensate the other party (Art. 66(1) and Art. 68(2) BGG).
Therefore the Federal Tribunal Pronounces:
The appeal is not capable of appeal.
The judicial costs set at CHF 25’000 shall be borne by the Appellant.
The Appellant shall pay to the Respondent an amount of CHF 30’000 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 1, 2016
In the name of the First Civil Law Court of the Swiss Federal Tribunal
Presiding Judge: Clerk:
Kiss (Mrs.) Leemann
- 1. Translator’s Note: Quote as A.________ v. B.________, 4A_428/2015. The original text of the 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: BGG is the German abbreviation for the Federal Statute of June 17, 2005 organizing the Federal
- 4. Translator’s Note: The official languages of Switzerland are German, French and Italian.
- 5. Translator’s Note: PILA is the most commonly used English abbreviation for the Federal Statute on International
- 6. Translator’s Note: The English translation of this decision is available here: http://www.swissarbitrationdecisions.com/right-to-be-heard-equality-between-the-parties
- 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
- 8. Translator’s Note: The English translation of this decision is available here: http://www.swissarbitrationdecisions.com/extension-of-arbitration-clause-to-non-signatories-case-of-a-gua
- 9. Translator’s Note: The English translation of this decision is available here: http://www.swissarbitrationdecisions.com/independence-and-impartiality-of-a-party-appointed-arbitrator-in
- 10. Translator’s Note: In English in the original text.