A party forfeits the right to invoke what was not raised in the arbitration proceedings

4A_597/20131

 

 

Judgment of June 19, 2014

 

 

 

First Civil Law Court

 

 

Federal Judge Klett (Mrs.), Presiding

Federal Judge Kolly

Federal Judge Niquille (Mrs.)

Clerk of the Court: Leemann

 

A.________ Kft.,

Represented by Dr. Mirko Ros and Yves Endrass,

Appellant

 

v.

 

B.________ GmbH,

Represented by Mr. Christoph Locher,

Respondent

 

 

 

Facts:

 

A.

A.a. A.________ Kft. (Defendant, Counter Claimant, Appellant) is a limited liability company incorporated in U.________, Hungary.

 

B.________ GmbH (Claimant, Counter Defendant, Respondent) is a limited liability company incorporated in V.________, Austria.

 

A.b. On July 21, 2011, the parties entered into a framework agreement as to commissioned work for the production of untreated and blank apple juice concentrate (hereafter: the Framework Agreement). A.________ Kft. thus undertook to produce and to deliver apple juice concentrate and apple aroma to B.________ GmbH exclusively. The Defendant had to secure the necessary apples itself at a price to be determined by the parties jointly in consideration of circumstances and indicators set in the contract. The Claimant undertook to pay in advance the amounts necessary to purchase the apples. The amount to be advanced contained the turnover tax due in Hungary, which would then be claimed back from the tax authorities by the Claimant later on the basis of the final invoice submitted by the Defendant.

 

In addition to the price mentioned for the apples, § 8(1) of the Framework Agreement obliged the Claimant to pay HUF 79.00 per kilo for the preparation of the raw material for the apple juice concentrate (the so-called processing rate). As to the aromas, §8(1) of the Framework Agreement merely provides that the processing rate of HUF 79.00 per kilo should be “aroma included.” The Framework agreement does not specify the quantity to be delivered; however, the parties assumed a total of 3’200 – 4’200 tonnes of apple juice concentrate per season. The framework agreement contains an arbitration clause.

 

A.c. The apple season of 2011 was between August and November. So that the Defendant could purchase the raw materials to produce the apple juice concentrate, the Claimant made several payments between August 16, 2011, and September 26, 2011, for a total amount of HUF 420 million. At least with part of these anticipated payments, the Defendant bought raw materials. During the contract period of 2011, the Claimant took delivery of 846.16 tonnes of apple juice concentrate from the Defendant but no aroma.

 

Eventually, there were differences of views. The Claimant alleged that the Defendant had delivered apple juice concentrate worth HUF 298’708’777.50 only, despite receiving payments of HUF 420 million; as to the difference amounting to HUF 121’291’222.50 (according to the Claimant’s calculation EUR 399’958.13 or CHF 479’949.74), it had not received apple juice concentrate or the restitution of the amount by the Defendant. Moreover, it had not received a proper invoice for the total amount of the goods delivered of HUF 298’708’777.50 with indication of the turnover tax, but only for the amount of HUF 63’010’500; as to the residual value of the goods delivered of HUF 235’698’277.50, it received no regular invoice and could not obtain the reimbursement of the turnover tax from the tax authorities.

 

On its part, the Defendant argues various contractual breaches by the Claimant, which led to loss of assets.

 

B.

On April 12, 2012, the Claimant initiated arbitral proceedings in the Zürich Chamber of Commerce and submitted that the Defendant should be ordered to pay EUR 399’958.13 (CHF 479’949.74 or HUF 121’291’222.50) with interest at 8% from September 26, 2011; moreover, the Respondent should be ordered to submit an invoice showing the turnover tax for the total amount of HUF 298’708’777.50. The Defendant submitted, in its submissions adapted during the proceedings, a counterclaim for damages amounting to HUF 302’026’779 corresponding to EUR 1’082’533, namely CHF 1’307’475 with interest at 8% from October 3, 2011.

 

On June 27, 2012, the Zürich Chamber of Commerce appointed a sole arbitrator. On May 27 and 28, 2013, the hearing took place in Sopron, Hungary, and witnesses were heard.

 

In an arbitral award of November 1, 2013, the Arbitrator ordered the Defendant to reimburse HUF 121’291’222.50 (operative part, §1) and to submit an invoice showing the turnover tax for the amount of HUF 235’698’277.50 (operative part, §2). The Defendant’s counterclaim was upheld in part by the Arbitrator and the Claimant ordered to pay EUR 20’171.85 with interest at 8% from October 1, 2011, (for the processing of the apples into apple juice concentrate; operative part, §3) and EUR 18’227.70 with interest from October 1, 2011, (as the value of the aroma for which delivery was not taken; operative part, §4).

 

C.

In a civil law appeal, the Defendant submits to the Federal Tribunal that the arbitral award of November 1, 2013, should be annulled and that it should be held “that the Arbitral Tribunal has no jurisdiction to issue orders as to whether and for what amount an invoice must show the Hungarian turnover tax.” In the alternative, §2 of the operative part of the award under appeal should be annulled and the finding submitted should be made.

 

The Respondent submits that the appeal should be rejected insofar as the matter is capable of appeal.

 

The Arbitrator submits that, in his opinion, the appeal should be rejected.

 

The Appellant submitted a reply to the Federal Tribunal on February 24, 2014, and the Respondent a rejoinder on March 13, 2014.

 

D.

On February 11, 2014, the Federal Tribunal ordered a stay of enforcement as to §2 of the operative part of the award under appeal.

 

Reasons:

 

1.

In the field of international arbitration, a civil law appeal is permitted under 190-192 PILA2 (SR 291) (Art. 77(1)(a) BGG3).

 

 

 

 

1.1. The seat of the Arbitral Tribunal was in Zürich in this case. Both the Appellant and the Respondent had their seat outside Switzerland at the relevant time (Art. 176(1) PILA). As the parties did not expressly waive the provisions of Chapter 12 PILA, they are applicable (Art. 176(2) PIlA).

 

1.2. A civil law appeal within the meaning of Art. 77(1) PILA may, in principle, seek only the annulment of the award under appeal (see Art. 77(2) BGG, excluding the applicability of Art. 107(2) BGG insofar as this provision allows the Federal Tribunal to decide the manner itself). Insofar as the dispute concerns the jurisdiction or the composition of the Arbitral Tribunal however, there is an exception in this respect and the Federal Tribunal itself can determine the jurisdiction or the lack of jurisdiction of the arbitral tribunal or decide that the arbitrator should be removed (BGE 136 III 6054 at 3.3.4, p. 616 with references).

 

1.3. According to Art. 77(3) BGG, the Federal Tribunal reviews only the grievances which are raised and reasoned in the appeal brief. This corresponds to the duty to provide reasons contained in Art. 106(2) BGG as to the violation of constitutional rights and of cantonal and intercantonal law (BGE 134 III 1865 at 5, p. 187 with references). Criticism of an appellate nature is not allowed (BGE 134 III 5656 at 3.1, p. 567; 119 II 380 at 3b, p. 382).

 

1.4. The Federal Tribunal bases its judgment on the factual findings of the arbitral tribunal (Art. 105(1) BGG). In view of the very limited grounds for appeal in the field of international arbitration, this Court cannot 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, excluding the applicability of Art. 97 BGG and of Art. 105(2) BGG). However, the Federal Tribunal may review the factual findings in the award under appeal when some admissible grievances within the meaning of Art. 190(2) PILA are raised against such factual findings or when new evidence is exceptionally taken into account (BGE 138 III 297 at 2.2.1, p. 34; 134 III 5658 at 3.1, p. 567; 133 III 139 at 5, p. 141; each with references). Whoever wishes to claim an exception to 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 this basis must show, with reference to the record, that the corresponding factual allegations were already made in the arbitral proceedings in accordance with procedural rules (BGE 115 II 484 at 2a, p. 486; 111 II 471 at 1c, p. 473; each with references).

 

1.5. The Appellant disregards these principles in several respects when it relies on a statement of facts that, in various ways, is not found in the award under appeal. It argues repeatedly that the Arbitral Tribunal made inaccurate factual findings and submits its own view of the matter to the Federal Tribunal, yet without raising any admissible grievances according to Art. 190(2) PILA. Moreover, it raises in the appeal proceedings before the Federal Tribunal for the first time that the sole arbitrator and the secretary of the Arbitral Tribunal would not be capable of speaking Hungarian and had no connection to Hungarian law and it submits various new evidence in support to the Federal Tribunal. These submissions will therefore not be addressed.

 

2.

The Appellant argues that the Arbitrator had no jurisdiction as to the issue of whether and to what extent the invoice to be submitted by the Defendant had to show the turnover tax (Art. 190(2)(b) PILA).

 

2.1. The party wishing to challenge an arbitrator (see Art. 180(2)(2) PILA) or objecting to the jurisdiction of the arbitral tribunal (see Art. 186(2) PILA) or claiming to be affected by another relevant procedural deficiency according to Art. 190(2) PILA forfeits its right to raise the argument when it does not bring it up in the arbitral proceedings in a timely manner and does not undertake all reasonable efforts to remedy the deficiency 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; all with references). It is contrary to good faith to raise a procedural deficiency only in the framework of an appeal when there was the opportunity to do so in the arbitral proceedings, giving the Arbitral Tribunal a chance to remedy the alleged deficiency (BGE 119 II 386 at 1a, p. 388). A party acts contrary to good faith and particularly abuses its rights when it keeps the ground for appeal in reserve only to raise it if the case unfolds unfavorably and appears to be lost (see 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). A party taking part in an arbitral proceeding without questioning the composition or the jurisdiction of the arbitral tribunal even though it has the possibility to clarify this issue before the award is issued forfeits the right to raise the corresponding grievances in appeal proceedings to the Federal Tribunal (BGE 130 III 66 at 4.3, with references).

 

2.2. The Appellant did not question the jurisdiction of the Arbitral Tribunal during the arbitral proceedings. The award under appeal holds that the jurisdiction of the Sole Arbitrator was undisputed and this was acknowledged by the Appellant. The Appellant raised no objection at all as to the jurisdiction of the Arbitral Tribunal, whether generally or as to the claim concerning the submission of an invoice showing the turnover tax for the total amount of HUF 298’708’777.50. In doing so, the Appellant forfeited its right to raise this alleged deficiency in the proceedings in the Federal Tribunal.

 

 

 

3.

The Appellant argues that the Arbitrator violated the right to be heard (Art. 190(2)(d) PILA) in several respects.

 

3.1. Its first argument is that the Arbitrator did not know any Hungarian law yet failed to bring in an expert, and gave it no possibility to prove Hungarian law.

 

During the proceedings, the parties agreed that the United Nations Convention on Contracts for the International Sale of Goods of April 11, 1980, [SR 0.221.211.1] would be applicable to the dispute. The Arbitrator held that Hungarian law was applicable insofar as the Vienna Convention did not contain exhaustive rules.

 

In the arbitral proceedings, the Appellant did not question the legal knowledge of the Arbitrator or propose that an expert be brought in as to the Hungarian turnover tax law, although the computation of the amount to be presented on the invoice showing the turnover tax according to the framework agreement was in dispute. Insofar as it raises the alleged procedural deficiencies in the federal appeal proceedings only, although it could have raised them in the arbitral proceedings, it acts contrary to good faith and the corresponding grievance is excluded due to forfeiture.

 

The Appellant’s arguments show no violation of the right to be heard. They are mere unauthorized criticism of the award under appeal, where its orders are described as “obviously illegal” while the Appellant argues, with reference to various items in the record of the arbitration, that – contrary to the view of the Arbitral Tribunal – the amount of HUF 298’708’777.50 was not a gross amount but a net value. Nor indeed does it show a violation of the right to be heard or another ground for appeal pursuant to Art. 190(2) PILA when it argues that the value of HUG 121’291’222.50 mentioned in the operative part of the award at §1 was based on an inaccurate calculation and the amount of HUF 235’698’277.50 in §2 is much too low as it does not correspond to the actual quantity of goods delivered.

 

3.2. The Appellant argues that the Arbitrator breached his judicial duty to inform and question and submits that he overlooked some evidence.

 

3.2.1. First, it argues in vain that its Hungarian lawyer would not have been capable of handling the German language and that the translator it called upon was not properly qualified. Besides the fact that it does not base its factual allegations on the binding factual findings in the arbitral award (Art. 105(1) BGG), it was incumbent upon the Appellant to be represented by counsel with the necessary language capcity in the arbitration proceedings which, according to the agreement of the parties, were to be conducted in German.

 

The reasons of the award under appeal mentioned in the appeal brief do not show that its legal submissions were completely unintelligible as a consequence of counsel’s inadequate language capacity as the Appellant appears to assume now; instead it appears that – except for the answer to the claim – its briefs, in part, did not contain any specific legal submissions. In its incomplete reproduction of the corresponding reasons, however, the Appellant overlooks that the Arbitrator did not hold that it had submitted no sufficient submissions but instead assumed that, according to the Appellant’s enclosure B-51, the amounts claimed were the gross amounts listed in the final summary; he examined this submission just like the submission that the claim should be rejected. The Appellant does not explain how this would have been to its detriment and neither does it show at all, with regard to which specific requests or submissions, the Arbitral Tribunal should specifically have advised as to any ambiguities.

 

There can be no argument that the Arbitral Tribunal should have informed the Appellant in order to ensure its right to be heard that it was “obviously not sufficiently well represented” in the arbitral proceedings.

 

3.2.2. The Appellant cannot be followed either when, in reliance upon the right to be heard, it argues that the Arbitrator of his own initiative should have brought in an expert as to the lists it itself submitted as Enclosure B-15 giving “to the Arbitral Tribunal […] a breakdown to the day of the purchases of apples carried out with the amount of 420 million HUF received” because he “blatantly would not have known what to do” with the various tables and left them out of consideration.

 

The Appellant disregards that, in arbitral proceedings governed by the principle of party presentation, it is not the responsibility of the tribunal to make up ex officio for the possible omissions of the parties as to their duty to state their case and prove it (see judgment 4P.48/1992 of August 18, 1992, at 5b, not published in BGE 118 II 359), let alone to appoint experts on its own initiative as to the statements they submit.

 

Insofar as the Appellant then submits to the Federal Tribunal, on the basis of the aforesaid lists, further exhibits containing the appropriate computation of the claim in its view, it merely submits inadmissible criticism of the merits of the award under appeal. The same applies as to its claim for compensation for the aromas not taken by the Respondent. The argument of a violation of the right to be heard has no substance in this respect as well.

 

4.

The Appellant argues that the Arbitrator violated public policy (190(2)(e) PILA).

 

4.1. The substantive review of an international arbitral award by the Federal Tribunal is limited to the question of its compatibility with public policy (BGE 121 III 331 at 3a, p. 333). The substantive adjudication of a dispute violates public policy only when it disregards some fundamental legal principles and consequently becomes completely inconsistent with the important, generally recognized values, which, according to dominant opinion in Switzerland, should be the basis of any legal order. Among such principles are the sanctity of contracts (pacta sunt servanda), the prohibition of the abuse of rights, the requirement to act in good faith, the prohibition of expropriation without compensation, the prohibition of discrimination, the protection of incapables, and the prohibition of excessive or beyond measure commitments (See Art. 27(2) ZGB10) when they constitute a blatant and grievous infringement of privacy. The arbitral award under appeal may only be annulled when its reasons and also its result contradicts public policy (BGE 138 III 32211 at 4.1, also at 4.3.1/4.3.2; 132 III 389 at 2.2, p. 392 ff.; each with references).

 

4.2. The Appellant shows no disregard of these principles by the Arbitrator when it argues that it would have been obliged to submit a false statement for tax purposes and therefore ultimately to commit a crime insofar as it would have been prevented from complying with the rules of its own fiscal order. It was undisputed between the parties that the Respondent had paid HUF 420 million to the Appellant in advance, yet that eventually, it took delivery of goods worth only HUF 298’708’777.50 but merely received a final invoice from the Appellant indicating the turnover tax for an amount of HUF 63’010’500. The Arbitrator concluded from this that the Respondent had received no invoice for the difference between the goods delivered and the quantity actually invoiced, namely HUF 235’698’277.50 although it was entitled to it contractually. The Appellant merely submits criticism of an appellate nature as to the pertinent reasons in the award under appeal when it claims that the amount determined by the Arbitral Tribunal was wrong (as to the goods actually delivered but for which no final invoice was submitted) and presents its own computation to the Federal Tribunal.

 

Contrary to its view, moreover, it is not clear how the order by the Arbitral Tribunal as to a contractual entitlement to a final invoice as to the total amount of the goods actually delivered would represent an infringement upon the tax sovereignty of a foreign state. Irrespective of the foregoing, the Appellant was free to argue the incompatibility of the order with Hungarian tax law in the arbitral proceedings (See BGE 133 III 139 at 5, as to the power of the arbitral tribunal to determine the preliminary issue of the existence of a criminal act). Its argument that §2 of the operative part of the award would oblige it to submit an “invoice showing the turnover tax” even though the Respondent in its adapted submissions sought the presentation of an “invoice consistent with the law and showing the turnover tax” is not convincing. Insofar as the Appellant wants to argue that the Arbitral Tribunal ordered an invoice inconsistent with the applicable tax law or one with tax rates too low, its submissions are unfounded. According to the reasons in the award under appeal, the issue was only the claim concerning the presentation of a regular and legally compliant invoice; the Arbitral Tribunal did not set the determining tax rates or order the submission of an invoice, which would disregard the applicable tax law.

 

4.3. In its additional arguments, the Appellant disregards the scope of the principle of sanctity of contracts in the framework of an appeal based on Art. 190(2)(e) PILA. The aforesaid principle is violated only if the arbitral tribunal admits the existence of a contract but disregards the consequences therefrom or – conversely – denies the existence of a contract but nonetheless upholds a contractual obligation (judgment 4A_76/201212 of October 11, 2012, at 4.2; 4A_14/201213 of May 2, 2012, at 5.2.1, not published in BGE 138 III 270; 4A_46/201114 of May 16, 2011, at 4.2.1; 4A_43/201015 of July 29, 2010, at 5.2; see also BGE 120 II 155 at 6c/cc, p. 171; 116 II 634 at 4b, p. 638). Yet, the Appellant shows nothing of this kind; instead it quotes literally and by the page from the award under appeal and submits appellate criticism of the reasons of the Arbitral Tribunal. Insofar as it questions the calculations in the award under appeal and submits its divergent view of the matter to the Federal Tribunal, it shows no violation of public policy (Art. 190(2)(e) PILA).

 

5.

The appeal proves to be unfounded and must be rejected insofar as the matter is capable of appeal. In such an outcome of the proceedings, the Appellant must pay the judicial costs and compensate the other party (Art. 66(1) and Art. 68(2) BGG).

 

 

 

 

Therefore the Federal Tribunal Pronounces:

 

1.

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

 

2.

The judicial costs of CHF 8’000 shall be borne by the Appellant.

 

3.

The Appellant shall pay CHF 9’000 to the Respondent for the federal judicial proceedings.

 

4.

This judgment shall be notified in writing to the parties and to the Arbitral Tribunal of the Swiss Chamber of Commerce sitting in Zürich.  

 

Lausanne, June 19, 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 A.________ Kft. v. B.________ GmbH, 4A_597/2013.
• 2. Translator’s Note: PILA is the most commonly used English abbreviation for the Federal Statute on International
• 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 English translation of this decision is available here: http://www.swissarbitrationdecisions.com/independence-and-impartiality-of-a-party-appointed-arbitrator-in
• 5. Translator’s Note: The English translation of this decision is available here: http://www.swissarbitrationdecisions.com/right-to-be-heard-equality-between-the-parties
• 6. 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
• 7. Translator’s Note: The English translation of this decision is available here: http://www.swissarbitrationdecisions.com/jurisdiction-of-the-cas-upheld-a-pathological-clause-has-to-be-s
• 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: ZGB is the German abbreviation of the Swiss Code.
• 11. Translator’s Note: The English translation of this decision is available here: http://www.swissarbitrationdecisions.com/landmark-decision-of-the-swiss-supreme-court-international-arbit
• 12. Translator’s Note: The English translation of this decision is available here: http://www.swissarbitrationdecisions.com/no-violation-due-process-when-arbitral-tribunal-properly-addresses-issues-hand
• 13. Translator’s Note: The English translation of this decision is available here: http://www.swissarbitrationdecisions.com/an-international-arbitral-tribunal-seating-in-switzerland-is-gen   
• 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: http://www.swissarbitrationdecisions.com/judicial-review-of-international-arbitral-awards-limited-by-art-