REUTERS | Denis Balibouse

Navigating the pitfalls of multi-tier arbitration clauses: the Swiss Supreme Court (finally) completes the circle

Multi-tier arbitration clauses are commonly found in commercial contracts. In the interest of reducing the costs of resolving a dispute, it is indeed increasingly common for parties to require an obligation to negotiate, explore possibilities of reaching an amicable settlement, or conduct a conciliation, mediation or adjudication, before commencing arbitration.

In Switzerland, when dealing with multi-tier arbitration clauses, the first question arising for determination is whether those agreements contain a binding obligation to take one or several pre-arbitral steps, or whether such steps are merely optional. If and when the binding character of a pre-arbitral tier has been established, the second question is whether it has been complied with and, if not, what consequences would result; or, put differently, what remedies are available to a party if the other ignores a mandatory pre-arbitral tier and resorts directly to arbitration.

The Swiss Supreme Court addressed these issues in a number of cases over the past few years. However, certain important questions have been left open (in particular the question of the consequences of a failure to comply with a pre-arbitral step) until very recently. As explained in greater detail below, the Swiss Supreme Court has now clarified those outstanding issues in a landmark ruling published on 29 March 2016.

In 2007 (case 4A_18/2007), the Swiss Supreme Court held that the first step when dealing with a multi-tier arbitration clause was to look at the common intention of the parties to determine whether those parties intended pre-adjudicatory tiers to be optional or mandatory. The Swiss Supreme Court also expressed the view that the absence of any time limit for initiating or completing the conciliation or mediation process was an indication of the non-mandatory character of the alternative dispute resolution (ADR) phase. However, the Swiss Supreme Court did not decide in that ruling whether such a requirement would affect the jurisdiction of the arbitral tribunal to hear the dispute in the first place.

In a 2011 decision (case 4A_46/2011), the Swiss Supreme Court examined again whether pre-arbitral steps (the appointment of an expert and the holding of a conciliation meeting) before initiating arbitration were mandatory, and discussed the possible impact of a failure to comply with those steps. After holding that this issue had to be examined under Article 190(2)(b) of the Swiss Private International Law Act (PILA) (pursuant to which an award must be set aside if the arbitral tribunal wrongfully accepted or declined jurisdiction), the Swiss Supreme Court immediately added that the consequences of a failure to comply with a mandatory pre-arbitral step was a delicate and controversial one. It then went on to observe that the prevailing view amongst Swiss authors was that the arbitration must be stayed and a deadline granted to the parties to remedy such failure. However, the Swiss Supreme Court left the question open because it found that the pre-arbitral steps in that case were not mandatory.

Similarly, the Swiss Supreme Court did not consider the consequences of non-compliance with a mandatory pre-arbitral tier in a 2014 decision (case 4A_124/2014), in which it found that while the Dispute Adjudication Board procedure detailed at Article 20 of the FIDIC Conditions of Contract was, in principle, mandatory, the parties would not have to go through that process if doing so would amount to an abuse of rights (that is, if the party seeking to rely on the non-compliance of the pre-arbitral tier has not acted in good faith).

In a landmark ruling published on 29 March 2016 (4A_628/2015), the Swiss Supreme Court decided for the first time on the sanction for non-compliance with a mandatory pre-arbitral tier. It annulled an award on jurisdiction, finding that the pre-arbitral tier agreed upon by the parties was mandatory but had not in fact been complied with, so that the arbitral tribunal lacked jurisdiction ratione temporis. The Swiss Supreme Court found that this should result in a stay of the proceedings pending the agreed pre-arbitral tier being followed. The Supreme Court went on to say that the modalities of the stay, and more specifically the timeframe within which the arbitration proceedings shall resume, shall be set by the arbitral tribunal.

This decision brings welcome clarification and certainty of the law and completes the Swiss Supreme Court’s line of case law regarding multi-tier arbitration clauses. It also confirms, if need be, that multi-tier arbitration clauses must be drafted carefully since these are likely to have a significant (practical) impact, in particular, in terms of the timing when the arbitration can be commenced. Against that background, if parties were to contemplate including a multi-tier dispute resolution clause, they should make clear whether they intend the pre-arbitration phase to be mandatory or merely optional. In the latter case, they should specify clearly a period of time for the pre-arbitral phase, triggered by a defined and undisputable event (for example, a written request), after which either party may resort to arbitration.

 

Schellenberg Wittmer Philippe Bärtsch Sebastiano Nessi

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