Although located at the heart of Europe, Switzerland is not a member of the European Union. As such, from a Swiss law perspective, EU law is considered as a res inter alios acta (with the exception of the references to EU law contained in the 120 bilateral agreements entered into between Switzerland and the EU, where EU law has become part of Swiss law).
Against that background, under which circumstances would an arbitral tribunal seated in Switzerland consider applying provisions of EU law?
The first (and most obvious) scenario is when the law applicable to the merits of the dispute (the lex causae) is the law of an EU member state.
In this regard, Article 187(1) of the Swiss Federal Act on Private International Law (PILA) gives priority to the parties’ choice of law. Pursuant to that provision, unless the parties agree otherwise, the designated law must be applied by the arbitral tribunal in its entirety (including international treaties that are in force in the state to which the choice of law refers).
When the parties have chosen to apply the law of an EU member state, EU law is either part of an international (self-executing) treaty in force in said member state, or has become part of its national law. An arbitral tribunal seated in Switzerland will thus have to apply the relevant provisions of EU law as part of the lex causae.
In cases where the parties have not agreed on the applicable law, the arbitral tribunal will decide the dispute according to the rules of law with which the case has the closest connection (Article 187(1), PILA). Where the law of an EU member state has the closest connection with the parties’ dispute, the arbitral tribunal will apply the relevant provisions of EU law.
The second scenario is when Swiss-seated arbitral tribunals are asked to take into account “foreign” mandatory rules of law, that is, mandatory rules from a law other than the lex causae. This can lead arbitral tribunals sitting in Switzerland to apply mandatory provisions of EU law, even in cases where the dispute is governed by the law of a state that is not part of the EU.
The basis for applying foreign mandatory rules of law is Article 19(1) of PILA, which provides that when interests that are legitimate and manifestly preponderant (according to the Swiss conception of law) so require, a mandatory provision of a law other than that designated in the PILA may be taken into consideration, provided that the case at hand has a sufficiently close connection with such other law. Although this provision does not directly apply to arbitral tribunals sitting in Switzerland, the prevailing view is that arbitral tribunals should apply this provision by analogy.
In deciding on the application of foreign mandatory law (including EU mandatory law), arbitrators enjoy broad discretion. They will generally apply the following three-pronged test:
- The foreign mandatory rule “wants” to apply in the specific case (that is, it imposes its own application to any situation falling within its scope irrespective of the law otherwise applicable). In other words, the state enacting the rule intended it to apply to international situations such as the one before the arbitral tribunal.
- There must be a close connection between the particular case and the relevant mandatory provision (that is, the interest the provision seeks to protect must be substantially affected).
- The mandatory provision must pursue an objective that is worthy of protection (that is, it must represent a shared value and pursue a purpose that appears legitimate from a transnational point of view).
Even if those conditions are fulfilled, an arbitral tribunal has no obligation to apply the relevant mandatory rule. In other words, the arbitral tribunal enjoys full discretionary power when deciding whether or not a foreign mandatory law should ultimately apply to the case.
But what if the arbitral tribunal rules that it has no jurisdiction to apply a foreign mandatory law?
The Swiss Supreme Court has had the opportunity to delineate, in at least two cases, the contours of the relationship between EU law and the circumstances under which an arbitral award could be set aside for wrong ruling on jurisdiction. In those cases, the Swiss Supreme Court went on to conclude that an arbitral award could be set aside for wrong ruling on jurisdiction if the arbitral tribunal were to deny its jurisdiction to review the possible application of a foreign mandatory law, despite the fact that one of the parties relied on that mandatory law in the proceedings, and regardless of whether the parties had agreed to submit their contract to Swiss law (or another law that would not be EU law).
Can an award be set aside for breach of public policy if foreign mandatory provisions of EU law are disregarded by a Swiss-seated arbitral tribunal?
Article 190(2)(e) of PILA provides that an award may be set aside if it is incompatible with public policy. According to its case law to date, the Swiss Supreme Court applies a sort of “Swiss-flavoured supranational public policy” concept: the judge will seek to apply the concept of public policy that is detached from the lex fori, the lex causae or the law of a third state, but may in so doing be influenced by the essential and fundamental values and principles particular to the Swiss legal system. In summary, a public policy argument would require that a party show that the contents of the provisions of the relevant treaties, agreements or laws that were breached amount to fundamental principles of law that should be recognised in all civilised nations.
There has been a fair amount of discussion as to whether a failure by the arbitral tribunal to comply with or properly apply EU mandatory law, such as EU competition law, would render the award incompatible with public policy within the meaning of Article 190(2)(e) of PILA.
In its decision 4P_278/2005 of 8 March 2006, the Swiss Supreme Court made clear that EU competition law fell short of forming part of international public policy within the meaning of Article 190(2)(e) of PILA, even though it was considered a public policy issue from an EU perspective. After defining the notion of public policy under Article 190(2)(e) of PILA, the Swiss Supreme Court considered that it would be “presumptuous” to take the view that Western, European or Swiss notions of competition law should apply to the whole world.
The very narrow approach adopted by the Swiss Supreme Court makes it rather unlikely that awards issued by Swiss-seated arbitral tribunals in disregard of EU law (or mandatory provisions of EU law) would ever be set aside for breach of public policy, unless such EU rules of law pass the very high threshold test set out in Article 190(2)(e) of PILA.