REUTERS | Hannibal Hanschke

Seeking a second bite at the apple in setting aside proceedings: Swiss Supreme Court voices concern and sets the record straight

An oft-cited advantage of arbitration is the finality of the process: arbitration is a one-stop dispute resolution mechanism, subject to the (usually) limited grounds under which an award may be challenged at the seat of the arbitration. The attractiveness (and suitability) of a country as a seat for international arbitration depends, amongst other things, on the extent to which an arbitral award is subject to judicial review by the courts of the country where that award was made.

In line with its arbitration-friendly tradition, Swiss arbitration law offers very restrictive grounds for challenging awards rendered in Switzerland. Article 190(2) of the Swiss Private International Law Act sets out only five (exhaustive) grounds to challenge an arbitral award. Under that provision, an award may be set aside:

  • If the arbitral tribunal was constituted irregularly.
  • If the arbitral tribunal wrongly accepted or declined jurisdiction.
  • If the arbitral tribunal’s decision went beyond the claims submitted to it (ultra petita), or failed to decide one of the claims submitted to it (infra petita).
  • If the parties’ fundamental rights of due process (viz. the parties’ “right to be heard” in adversarial proceedings) or the parties’ right to equal treatment were violated.
  • If the award violates public policy.

The underlying reason for this very restrictive approach is that the parties, having agreed to arbitration, should be held to their agreement and should not be afforded an opportunity to re-argue the merits of their case in court. As a result, the number of successful challenges is extremely low in Switzerland. In 2013, for example, less than 8% of the challenges resulted in the annulment of the arbitral award.

Nevertheless, the number of challenges brought against arbitral awards has increased significantly over the past few years. In that context, the violation of the parties’ “right to be heard”, and more specifically its branch prohibiting “formal denial of justice”, has become one of the most “popular” grounds for challenging an award in Switzerland. Under Swiss law, although the parties have no right to a reasoned award, they are nevertheless entitled to have relevant arguments properly addressed by the arbitral tribunal. For that reason, if the arbitral tribunal fails to take into account relevant allegations of fact or of law made by a party and if such allegations could have had an impact on the outcome of the dispute, there can be cause for setting aside the award on grounds of “formal denial of justice”.

The reason why that branch of the “right to be heard” lies at the heart of many challenges is simple: it constitutes one of the rare possibilities to re-open the award on the merits and, as such, to criticise the reasoning of the arbitral tribunal.

That situation prompted the Swiss Supreme Court to voice concern, in a recent decision (TF 4A_520/2015), about the ever-increasing trend to challenge arbitral awards under the cover of “formal denial of justice” in the hope of creating a backdoor to have the merits of the award reviewed at the setting-aside stage.

In that specific case, the petitioner had claimed that the award resulted in a “formal denial of justice” because the arbitral tribunal had declared irrelevant an argument (consistently raised by the petitioner over the course of the arbitration proceedings) which was obviously not only material, but also relevant to the outcome of the dispute. The Supreme Court dismissed the petition to set aside the award, finding that the arbitral tribunal had not violated the petitioner’s right to be heard by rejecting an argument which it considered to be irrelevant. Crucially, the Supreme Court made it plain that it does not sit as an appellate court over arbitral awards; for that reason, the Supreme Court held that it is not empowered to determine whether the tribunal erred in declaring irrelevant an argument put forward by a party over the course of the arbitration, regardless of the time and efforts devoted by a party to articulate and substantiate that argument in the arbitration.

That decision reaffirms, in no uncertain terms, that a party cannot seek the review of the merits of the case under the cover of a challenge based on an alleged violation of its right to be heard. Practitioners would be well advised to read into the lines of this decision the (strong) determination of the Supreme Court to discourage petitioners from seeking to have a “second bite at the apple” in the context of setting aside proceedings.

Schellenberg Wittmer Philippe Bärtsch Sebastiano Nessi

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