Violation of due process
The ENUSA decision of the Federal Tribunal, which is the Supreme Court of Switzerland, related to a dispute between a Spanish company and an American company arising from a Marketing Agreement of August 1, 2003. The Marketing Agreement had been concluded between SHS CERAMICAS S.A., a Spanish company, which subsequently assigned its claim to ENUSA Industrias Avanzadas S.A. and LIPO CHEMICALS Inc. of New Jersey. The Marketing Agreement provided for an ad hoc arbitration in Geneva before three arbitrators. The Marketing Agreement did not provide for governing law.
A claim was brought in the Spring of 2005 and two Swiss arbitrators were appointed by the parties (Mr. Marcel Bersier and Dr. Elliott Geisinger). The arbitrators appointed Prof. Paolo Michele Patocchi as chairman. During the proceedings, the parties agreed that the case should be governed by Spanish law and the United Nations Convention on Contracts for the International Sale of Goods of April 11, 1980 (Vienna Convention). Two days of hearings were held and the Arbitral tribunal issued an award rejecting the claim on July 6, 2007. The Arbitral tribunal referred to Swiss law and to the Vienna Convention, albeit very briefly, with regard to the merits and the costs.
On September 10, 2007, ENUSA appealed to the Federal Tribunal. The issue before the Federal Tribunal was whether or not the Appellant’s right to be heard had been violated by the Arbitral Tribunal, to the extent that a number of arguments submitted by ENUSA had not been considered by the arbitrators. The Federal Tribunal issued the decision on December 10, 2007. The original opinion is in French.1
In rejecting the appeal, the Federal Tribunal reiterated that international arbitrators sitting in Switzerland do not have to address every single point of fact or law raised by the parties. A violation of the right to be heard – Swiss parlance for due process – is only found where the arbitral tribunal refuses or fails to consider some essential points. However, as will be seen in the opinion, the scrutiny of the award by the Federal Tribunal was far from superficial. This suggests that international arbitrators sitting in Switzerland should be careful to address all the important issues before them in the award. The reader should be aware that the reference by the Arbitral Tribunal to a Swiss law as opposed to Spanish law was not appealed per se.
Decision of December 10, 2007
1st Civil Law Court
Sitting: Judges CORBOZ, presiding, KLETT and KOLLY.
Clerk: Mr. CARUZZO
Represented by Mr. Otto GUTH.
Represented by Mr. Pierre-Yves GUNTER.
The Appellant is a company manufacturing various products, particularly a substance used in cosmetic applications (lipstick, eyebrow make-up, etc.). The Respondent is an important American company involved in distributing basis materials in the cosmetics, food and pharmaceutical industries. At the end of negotiations, the two companies signed a contract dated August 1, 2003, pursuant to which the Appellant granted to the Respondent an exclusive right of distribution of the aforesaid product. The contract, which was not fulfilled, was terminated by the Respondent on July 26, 2004.
Based on the arbitration clause inserted in the aforesaid contract, the Appellant initiated arbitral proceedings in the Spring of 2005, with a view to obtaining payment of EUR 964,396, plus interest, from the Respondent as loss of profit due to the breach of the Respondent’s contractual obligations.
The Respondent submitted that the claim should be completely rejected. It filed a counterclaim for the payment of USD 8,321.50 as reimbursement for half of an expert’s fee, which the Respondent had paid in full, despite the fact that it should have been divided equally between the two contracting parties.
In June 2006, the Spanish company assigned the claim to the Appellant, by which it was henceforth substituted as a Claimant in the pending arbitral proceedings.
On July 6, 2007, an ad hoc tribunal composed of three arbitrators and sitting in Geneva issued a final award. It rejected the claim and granted the counterclaim, which the Appellant had conceded. As to the main claim, the arbitrators held, in substance, that the Appellant had failed to prove that the product to be distributed met the contractual specifications, particularly with regard to the white color, which it was required to demonstrate and that the Respondent was accordingly entitled to terminate the contractual relationship in conformity with the clauses of the distribution agreement and with Swiss law.
On September 10, 2007, the Appellant filed a civil law appeal3 with the Federal Tribunal, with a view to obtaining the annulment of the aforesaid award.
The Respondent principally submits that the appeal is not admissible, and alternatively submits that if admissible, the appeal should nonetheless be rejected. The Arbitral Tribunal referred to the reasons contained in the award.
Considering in law:
The award under appeal was issued after the entry in force of the Federal Statute on the Federal Tribunal on January 1, 2007 (“LTF”), RO 2006, 1242, RS 173.110 and the appeal is accordingly governed by the new law (Art. 132 al. 1 LTF).
According to Art. 54 (1) LTF, the Federal Tribunal issues its decision in one of the official languages,4 as a rule in the language of the decision under appeal. When the decision under appeal was issued in another language (in this case English), the Federal Tribunal uses the official language used in the appeal. Before the Arbitral Tribunal, the parties used English, whilst in the briefs to the Federal Tribunal, they used French. According to its practice, the Federal Tribunal will consequently issue its decision in French.
In the field of international arbitration, a civil law appeal is admissible against the decisions of Arbitral tribunals under the conditions set forth at Art. 190 to 192 LDIP5 [Art. 77 (1) LTF]. In this case, the venue of the arbitration was Geneva. At least one of the parties (actually both of them) did not have a domicile in Switzerland at the decisive time. The provisions of Chapter 12 LDIP are accordingly applicable [Art. 176 (1)].
The Appellant is directly concerned by the final award under appeal, which rejected its monetary claims. It accordingly has a personal, present, and legally protected interest to ensure that the award was not issued in violation of the guarantees arising from Art. 190 (2) LDIP, which gives it standing to appeal [Art. 76 (1) LTF].
Filed in a timely manner [Art. 100 (1) LTF] in connection with Art. 46 (b) LTF, in the appropriate legal format [Art. 42 (1) LTF], the appeal is admissible in principle. However, the admissibility is challenged by the Respondent as to the critics proposed to the Appellant towards the arbitral award.
An appeal may only be made on one of the grounds exhaustively set forth at Art. 190 (2) LDIP (ATF 128 III 50 at 1a p. 53, 127 III). The Federal Tribunal reviews only the grounds invoked and substantiated by the Appellant [Art. 77 (3) LTF]. The Appellant must accordingly formulate its grounds for appeals and substantiate them in accordance with Art. 42 (2) LTF. The strict requirements set forth in case law relating to Art. 90 (1) (b) OJ6 (see ATF 128 III 50 at 1c) remain valid under the new Federal Procedure. The appeal remains merely capable of being returned for a new decision [Art. 77 (2) LTF], which rules out the applicability of Art. 107 (2) LTF. The Federal Tribunal decides the appeal on the basis of the facts as established by the arbitral tribunal [Art. 105 (1) LTF]. It may not ex officio rectify or supplement the factual findings of the arbitrators even if the facts were established in a manifestly inaccurate way or in violation of the law [Art. 77 (2) LTF], which rules out the applicability of Art. 105 (2) LTF. However, as was already the case under the Statute Organizing Federal Courts (ATF 129 III 727 at 5.2.2; 128 III 50 at 2a and the cases quoted), the Federal Tribunal retains the capacity to review the facts on which the award under appeal is based if one of the grounds for appeal mentioned at Art. 190 (2) LDIP is raised against the factual findings or when new facts or evidence are exceptionally taken into consideration in the framework of the civil law appeal procedure [Art. 99 (1) LTF]. With regard to the power of review of the Federal Tribunal as to the facts in civil law appeal see Sébastien BESSON, Le recours contre la sentence arbitrale internationale selon la nouvelle LTF (aspects procéduraux) in Bulletin ASA 2007, p. 2 ss, 24 to 26, n. 55 to 59.
The Appellant relies on Art. 190 (2) (d) LDIP and blames the Arbitral Tribunal for a violation of its right to be heard as its only ground of appeal. It alleges a number of pertinent arguments amongst those submitted by the Appellant were not examined by the arbitrators.
From the right to be heard, case law has also implied a minimal duty for the authorities to examine and to deal with pertinent problems (ATF 126 I 97 at 2b). Such a duty was extended to international arbitration (ATF 121 III 331 at 3b p. 333) and it is violated when, inadvertently or due to a misunderstanding, the arbitral tribunal does not take into account some statements of facts, arguments, evidence, or offers of proof presented by one of the parties and important for the decision to be issued. The party claiming to have been harmed must establish that the arbitral tribunal did not review certain elements of facts, evidence, or aspects of law, which it had regularly put forward in support of its submissions and that those elements were of a nature that could have influenced the decision. If it succeeds in doing so, the arbitrators or the opposing party will have to justify the omission by showing that the elements omitted were not pertinent to decide the dispute or, if they were, that the arbitral tribunal rejected them implicitly. However, the arbitrators do not have the obligation to discuss all the arguments relied upon by the parties. They cannot be criticized for a violation of the right to be heard in contradictory proceedings if they do not reject, even implicitly, a submission objectively deprived of any pertinence (ATF 133 III ch. 135 at 5.2 and the cases quoted).
With the Respondent, it must be emphasized at the outset that the complicated structure of the appeal brief hardly permits an easy understanding of what the arbitral tribunal is being accused of. Indeed, the Appellant starts by giving his own version of the facts, repeating a long excerpt of the statement of claim submitted to the arbitrators. Then, in the section devoted to setting forth its grounds for appeal, the Appellant reproduces various arguments drawn from its briefs in the arbitral proceedings and extensively quotes various statements made by some witnesses. Finally reaching the actual formulation of its grounds for appeals, spelled out on one and a half pages, the Appellant merely refers to its previous developments, through a simple reference to the letters introducing them, to explain in a few lines the criticisms of the arbitrators the Appellant believes to be entitled to make. It is doubtful that such a singular presentation would still be consistent with the requirements of case law as quoted above with regard to the admissibility of a civil law appeal against an international arbitral award. Moreover, the critics made by the Appellant are essentially of an appellate nature and above all, they relate to the reasons of the award, causing doubts as to their admissibility. It appears clearly from its brief that the Appellant mistakes the Federal Tribunal for a second degree arbitral jurisdiction empowered to freely review the facts and the law. This being said, assuming it is admissible, the appeal should be rejected anyway for the following reasons.
The Appellant blames the Arbitral Tribunal for not examining certain weighty arguments, particularly the fact that the correspondence exchanged by the parties did not show that the product in dispute would not have met the specifications set forth at Annex A of the contract; that the Respondent relied on the lack of conformity of the contract not in Annex A but on other criteria, which was not decisive with regard to its obligation to acquire the product but which determined the minimal quantities to be acquired during the contract; and that the Respondent, in its ad hoc letter, indicated as ground for termination the non-conformity of the product, not with regard to Annex A of the Distribution agreement, but to some specifications unknown to the Appellant.
At pages of 43 to 59 of the award (162 to 226) the Arbitral Tribunal set forth in detail the circumstances which preceded, surrounded and followed the execution of the distribution contract involved. From its review of the circumstances, it then draws a conclusion thus formulated (229: “It is common ground between the parties that the agreed specifications are set out in Exhibit A to the Agreement”).7 Then, the Arbitral Tribunal reviewed the meaning of the word “white” contained in Annex A, found that it was a technical matter and in the absence of a specific definition of the term, held pursuant to Art. 38 [recte 35] (2) (a) of the UN Convention on Contracts for the International Sale of Goods (RS 0.222.211.1) that the goods had to be germane to the use which would have normally been made of goods of the same type (230 ff). Reviewing the correspondence exchanged between the parties before and after the execution of the contract, the arbitrators reached the conclusion that the Appellant, which had the burden of proving that fact, did not establish that its samples of the product in dispute ever met the specifications in Annex A of the contract (233 to 251). Lastly, they reviewed whether or not that circumstance was sufficient to justify the termination of the contract by the other party, based on the contract and on Swiss law, which led them to answer the question in the affirmative (252 to 265). The arbitrators’ reasoning implies at least implicitly that the aforesaid arguments put forward by the Appellant were rejected. It was tantamount to saying that the white color imposed by Annex A to the contract executed by the parties was for them a necessary quality, which each product object of the distribution agreement would have to meet and that it was not merely a criterion applicable to determine, in conformity with Art. III/B of the contract, what were the minimal quantities to be acquired by the Respondent, but that it was a necessary element of the agreement binding the parties and that the absence of that element was sufficient to justify the termination of the distribution agreement based both on the clauses of the agreement and on Swiss law. Therefore, the Appellant is not entitled to claim that one or the other of its arguments, assuming they were pertinent, were ignored by the arbitrators. As to whether or not the white color provided for at Annex A was a constitutive element of the distribution contract, whether or not the samples provided by the Appellant reached the prescribed degree of whiteness and, in the negative, whether the Respondent was entitled to terminate the aforesaid contract, these are all issues pertaining either to the weighting of evidence or to the application of the law and, as such, they have nothing to do with the guarantee of the right to be heard invoked by the Appellant. Under such conditions, this appeal is rejected to the extent that it is admissible.
The Appellant shall pay the judicial costs of the Federal proceedings [Art. 66 (1 LTF)] and pay a share of the costs to its opponent [Art. 68 (2 LTF)].
Based on these reasons, the Federal Tribunal pronounces:
1. The Appeal is rejected to the extent that it is admissible;
2. The costs of the CHF 17,000 shall be borne by the Appellant;
3. The Appellant shall pay to the Respondent an amount of CHF 19,000;
4. This decision shall be notified to the representatives of the parties and to the chairman of the ad hoc Arbitral tribunal.
Lausanne, December 10, 2007.
In the name of the First Court of Civil Law of the Swiss Federal Tribunal
The presiding Judge: The Clerk:
- 1. Translator’s note: the Federal Tribunal does not publish the names of the parties in order to protect privacy. In the translation, ENUSA will be referred to as “Appellant.”
- 2. Translator’s note: the Federal Tribunal does not publish the names of the parties in order to protect privacy. In the translation, LIPO CHEMICHALS will be referred to as “Respondent.”
- 3. Reference is made here to the new provisions of the Swiss Statute Organizing Federal Courts, Art. 77 of which contained the rules for appeals against international arbitral awards.
- 4. Translator’s note: French, German or Italian.
- 5. Translator’s note: LDIP is the abbreviation for the Swiss Private International Law of December 18th, 1987.
- 6. Translator’s note: this is a reference to the statute previously applicable.
- 7. Translator’s note: in English in the Opinion.