Kluwer Arbitration Blog » Georg von Segesser

CAS Decision sanctioning a ban by FIFA of a football player violates public policy

Georg von Segesser — Thu, 05 Apr 2012 14:40:49 +0000

With its decision of 27 March 2012, the Swiss Federal Supreme Court held unlawful a disciplinary sanction by which FIFA threatened the football player Matuzalem with a lifetime ban in case he failed to pay a damage claim of his former club and employer.

By an earlier decision of the CAS, Francelino da Silva Matuzalem, together with the football club Real Saragossa SAD, were ordered to pay an amount of over EUR 11 million plus interest as damage after Matuzalem had left his former football club Shakhtar Donetsk to join Real Saragossa without a reason and without giving notice. As both Matuzalem and Real Saragossa did not pay the damage, FIFA set a final deadline for payment and, failing payment, ordered that Matuzalem be banned from taking part in any kind of football-related activity. The order of the FIFA Disciplinary Committee was confirmed by CAS with its decision of 29 June 2011.

The examination of CAS decisions by the Federal Supreme Court in setting aside proceedings is very limited. Article 190(2)(e) of the Private International Law Act provides that an award may be set aside if incompatible with public policy (“ordre public”). An unlimited ban to exercise a profession, as threatened against the football player, in case he should not pay the high amount of damages, was held to cause an obvious and severe restriction of the personal rights of an individual. Additionally, the disciplinary measure disregards the fundamental bounds of legal commitments. With the failure to pay the damage, the personal freedom of the player would be restricted to an extent which would jeopardize his economic existence, and this without any justification by either the interest of FIFA or its members. The Federal Supreme Court further stated that it did not see a necessity for the disciplinary sanction, as Shakhtar Donetsk has the possibility to seek enforcement of the first CAS award based on the New York Convention.

The decision is available on the website of the Federal Supreme Court, www.bger.ch (search for 4A_558/2011).

CAS Code Amendments in force as from 01.01.2012 – CAS arbitrators selected more freely

Georg von Segesser — Tue, 17 Jan 2012 08:18:22 +0000

At its session of 15 November 2011, the International Council of Arbitration for Sports (ICAS) amended Article 14 of the Statutes of the bodies working for the settlement of Sport-related Disputes (Article S14) and abandoned the old regime which provided that with regard to the list of CAS arbitrators, the ICAS had to respect a specific distribution, namely 1/5th of the arbitrators selected from among the persons proposed by the International Olympic Committee (IOC), chosen from within its membership or from outside; 1/5th of the arbitrators selected from among the persons proposed by the International Federations for the Summer and Winter Olympics (IFs), chosen from within their membership or outside; 1/5th of the arbitrators selected from among the persons proposed by the National Olympic Committees (NOCs), chosen from within their membership or outside; 1/5th of the arbitrators chosen, after appropriate consultation, with a view to safeguarding the interests of the athletes; and 1/5th of the arbitrators chosen from among persons independent of the bodies responsible for proposing arbitrators, in conformity with this Article.

Under the new Article S14 which came into effect on 1 January 2012, the ICAS is free to call upon personalities with full legal training, recognized competence with regard to sports law and/or international arbitration, a good knowledge of sport in general, and a good command of at least one CAS working language, whose names and qualifications are brought to the attention of the ICAS, including by the IOC, the IFs and the NOCs. This is the major amendment of the January 2012 revision and is to be welcomed as it further enhances the already existing independence of CAS arbitrators.

Other significant modifications relate to the Consultation Proceedings and to consolidation. The special provisions applicable to Consultation Proceedings (Articles 60 – 62 of the Procedural Rules of the CAS), pursuant to which the above-named organizations and associations could request advisory opinions from the CAS, were indeed abandoned. Moreover a new subsection of Article 39 of the Procedural Rules now provides for the possibility to consolidate two arbitration proceedings.

How far does “any dispute related to the […] agreement” go?

Georg von Segesser — Wed, 30 Nov 2011 07:54:56 +0000

In a decision dated 20 September 2011, the Swiss Federal Supreme Court held that the arbitration clause contained in a License Agreement for boxing equipment, interpreted by the CAS arbitral tribunal as referring to any dispute related to the said agreement, could equally cover disputes arising out of other related contracts, such as the contract for the sale of the same boxing equipment (4A_103/2011).
Facts
In 2005, a boxing association entered into a Licencing Agreement with a manufacturer of sports goods according to which the manufacturer was entitled to manufacture and sell boxing equipment approved by the association against the payment of royalties. The contract contained the following arbitration clause: “Should a disagreement over the interpretation of any terms of this Agreement arise, the Parties agree to submit the dispute to the Court of Arbitration for Sport, Lausanne Switzerland, whose decision shall be final and binding on both parties. […]“. In 2005 and 2006, the association ordered boxing equipment from the manufacturer. In 2007, the association declared that the Licencing Agreement had come to an end in December 2006.
The manufacturer filed a request for arbitration before the Court of Arbitration for Sport (CAS) in January 2009, requesting amongst other claims payment for the sale of the boxing equipment. The association disputed the jurisdiction of the CAS. In its award dated 5 January 2011, the CAS panel determined that the arbitration clause was to be understood as applying to “any dispute related to the Licensing Agreement” and therefore confirmed it had jurisdiction and partially granted the reliefs sought by the manufacturer.
The association appealed against the award to the Swiss Federal Supreme Court. It mainly argued that the CAS panel did not have jurisdiction to rule on the sale of the goods since the sale was not covered by the arbitration agreement contained in the Licencing Agreement.
Decision
The Swiss Federal Supreme Court dismissed the appeal. It declared that the arbitration clause contained in the Licencing Agreement, although its wording could be seen as restrictive, was meant to extend to disputes related to the sale of boxing equipment covered by the Licencing Agreement and therefore that the dispute regarding the payment of the sales price fell under the jurisdiction of the arbitration clause.
Comment
This decision serves as a reminder of the rules applying to the interpretation of an arbitration agreement (notably regarding its scope) under Swiss law and of the Swiss Federal Supreme Court’s power of review when confronted with a jurisdiction objection.
Under Swiss law, when interpreting a contract (including the arbitration clause) a judge or arbitrator must first search the actual and mutual intent of the parties, which prevails over the wording (“subjective interpretation”). Only where it is not possible to ascertain the parties’ actual intent, a judge or arbitrator must, on the basis of the concrete circumstances of the matter, seek by “objective interpretation” what the parties should be deemed to have intended in good faith.
If an arbitral tribunal has determined its jurisdiction by objective interpretation of the content of the arbitration agreement, it has answered an issue of law which can be examined by the Supreme Court with unfettered power. If, however, the arbitral tribunal has based its decision on the finding of facts, i.e. the parties’ real intention, such finding will not be subject to any review upon appeal to the Supreme Court.
In the case under review, the CAS panel carried out a subjective interpretation when it determined that the wording “disagreement over the interpretation of any terms of this Agreement” contained in the arbitration clause should be understood as meaning “any dispute related to the Licensing Agreement”. As such, the CAS panel’s conclusion was final and not open to review by the Swiss Federal Supreme Court.
The review by the Supreme Court was therefore limited to deciding whether the arbitration clause, as interpreted by the arbitral tribunal, could encompass claims related to the sale of the boxing equipment.
When considering the scope of the arbitration agreement, the Swiss Federal Supreme Court shows flexibility. The Swiss Federal Supreme Court has ruled in previous cases that the wording “any dispute related to the agreement” is not restrictive and includes any dispute regarding the existence, validity and termination of contract as well as matters related indirectly to the dispute submitted to arbitration; such an arbitration clause can also extend to ancillary or accessory contracts except if such contracts contain a specific dispute resolution clause. That being said, no presumption of jurisdiction applies.
According to the Swiss Federal Supreme Court, the wording of the arbitration clause contained in the Licencing Agreement seemed to restrict its scope of application to disputes resulting directly from the Licencing Agreement such as e.g. the supply of approval labels. However, the circumstances surrounding the case and notably the statutes of the association, although the manufacturer was not a member thereof, showed that the association had expressly taken all steps to avoid recourse to ordinary tribunals and referred all matters to the jurisdiction of the CAS, a measure which was deemed to extend to all persons or entities involved in boxing, whether closely or remotely. The Swiss Federal Supreme Court noted a contradiction in the position taken by the association in its own by-laws and that argued in the proceedings. It went on to analyse what justification the association would have to recourse to ordinary courts instead of arbitration in the present case and found none.
What is interesting in the above analysis is that the Swiss Federal Supreme Court reviewed the association’s conduct with its own members, i.e. parties not involved in the arbitration, in order to determine the scope of the arbitration agreement it had entered into with the manufacturer. In doing so, the Swiss Federal Supreme Court reaffirmed its flexibility when considering the scope of the arbitration agreement.

Georg von Segesser / Alexandre Mazuranic

Formal requirements for witness testimony in arbitration proceedings in Switzerland

Georg von Segesser — Fri, 12 Aug 2011 14:50:33 +0000

The High Court of the Canton of Zurich had to examine in a recent case whether the allegedly false testimony of a witness in arbitration proceedings was punishable under the Article 307 of the Swiss Criminal Code as perjury.

Up to now, it was disputed by scholars whether the requirements for witness testimony in state court proceedings also applied in arbitration.

The Court referred to the Swiss Federal Supreme Court’s case law according to which the validity of a witness testimony is governed by the applicable procedural laws. In the absence of specific provisions, it is not required that the transcripts/minutes be read to the witness after his testimony and that the witness signs the transcripts, both of which are requirements for witness testimony before state courts.

The following conclusions can be drawn from the decision:

(i) The witness must be reminded of his/her duty to tell the truth;

(ii) The witness must be made aware of any privileges and of his/her possible right to refuse testimony;

(iii) The witness must be informed of the criminal consequences of perjury.

It is therefore recommended to clearly indicate in a procedural order that witness and expert testimonies or statements by translators and interpreters shall be recorded by court reporters and that the transcripts will be submitted to the parties, but that the transcripts will not be read to nor signed by the witnesses, etc.

(Decision of the Zurich High Court published in ZR 110 (2011) Nr. 27, p. 78 – 84)

Georg von Segesser

The right to a tribunal appointed expert

Georg von Segesser — Tue, 09 Aug 2011 13:44:58 +0000

In a decision dated 14 June 2011 and published on 7 July 2011, the Swiss Federal Supreme Court dismissed an appeal to set aside an arbitral award holding that the right to the appointment of an expert by the tribunal is not violated where the respective request was not made in a timely manner and in proper form (4A_617/2010).

Decision

X (a Turkish company) and Y (a Polish company) were in dispute over the question of which party was responsible for the delays in the execution of the contractual work. The dispute was brought before an ICC tribunal seated in Zurich. With respect to the disputed question, each party submitted to the arbitral tribunal a technical expert report.

In an award of 30 September 2010, the arbitral tribunal dismissed X’s claim. It partially granted Y’s counterclaim and ordered X to pay to Y EUR 6,587,442.70. In the award, the arbitral tribunal dealt with the submitted expert reports and found the expert report submitted by Y more persuasive than X’s expert report. It held X responsible for the delays in the execution of the contractual work.

X appealed against the award to the Swiss Federal Supreme Court. It argued that the arbitral tribunal, in its award, only dealt with the expert opinion submitted by Y thereby “completely suppressing” the expert opinion submitted by X. Moreover, according to X, the arbitral tribunal should have appointed an expert to receive the technical expertise necessary for the assessment of the decision-relevant questions. By not doing so, the arbitral tribunal violated X’s right to equal treatment and its right to be heard (Article 190(2)(d) PILA) as well as the public policy (Article 190(2)(e) PILA)*.

The Supreme Court dismissed the appeal. It found X’s complaint that the tribunal only dealt with the expert opinion submitted by Y and thereby “completely suppressed” the expert opinion submitted by X unfounded because, before the Supreme Court, X admitted that the arbitral tribunal on pages 96-114 of its award explained in detail why it did not follow the expert opinion submitted by X but gave preference to the opinion submitted by Y.

Also, in the arbitration, X submitted its comments on the expert report filed by Y without at the same time submitting a request that the tribunal appoint an expert to receive the technical expertise necessary for the assessment of the decision-relevant questions. Confirming its constant practice, the Supreme Court held that, if X, at that time, considered that its right to be heard or its right to equal treatment had been violated, it should have communicated its objection promptly.

Comment

This decision touches on an interesting issue, namely, when is an arbitral tribunal obliged to appoint an expert. In the present case, the tribunal did not have to decide this question (the appeal was rejected because the appellant had not pursued this request in a timely manner during the arbitration).

However, it is worthwhile recalling that the position of the Supreme Court on this point is clear. The parties have a right to the appointment of an expert by the tribunal (such right being a part of their right to submit evidence and be heard) if the following preconditions are met: (i) the party who intends to rely on this right must have expressly requested the appointment of an expert; (ii) the request must be made in proper form and in a timely manner; (iii) if required by the tribunal, the requesting party must advance the costs of such expertise; (iv) the expert evidence must relate to facts relevant for rendering of the award; and (v) the expert evidence must be necessary and proper for proving such relevant facts.

This last precondition is met where the facts concern technical issues or matters which in some other way require special knowledge and cannot be proven otherwise, and where the arbitrators do not have such special knowledge (decision 4P.320/1994 of 6 September 1996).

Where these preconditions are met, and unless its members possess the necessary technical or other special knowledge, an arbitral tribunal violates the right of the parties to be heard if it rejects a request for the appointment of a tribunal-appointed expert (decision 102 Ia 493, unpublished note 8; decision 4P.23/1991 of 25 May 1992 note 5b).

_____
* Article 190(2) of the Swiss Federal Statute on Private International Law (PILA) permits a final award to be set aside for a limited number of reasons. Under Article 190(2)(d) PILA, an award can be set aside if the parties’ right to equal treatment or their right to be heard was violated and, under Article 190(2)(e) PILA, an award can be set aside if it violates public policy.

Georg von Segesser / Petra Rihar

Importing the “negative effect” of the principle of competence-competence into Swiss law?

Georg von Segesser — Thu, 14 Apr 2011 08:07:51 +0000

According to article 7 of the Swiss Private International Law (PILA), if the parties have entered into an arbitration agreement, the Swiss Court before which the action is brought shall decline its jurisdiction unless it finds that the agreement is null and void, inoperative or incapable of being performed. An initiative to amend article 7 of the PILA statute in the sense that in international matters the arbitrators should decide themselves on their competence, is pending already for some time in the Swiss Parliament and in the last month discussions and diverging opinions have increased. The topic has only just been debated at a meeting of arbitrators and arbitration practitioners at the ASA Group Mittelland in Berne. Bernhard Berger has also very recently published an article on the issue in ASA Bulletin Volume 29 2011 page 33 et seq on the issue. Those in favor of the amendment point out that it would strengthen the position of Switzerland as an arbitration venue. Those holding the opposite view question whether the amendment would be in the best interest of the Swiss economy. Referring to a recent decision of the Swiss Federal Supreme Court (BGer 4A_279 210), Berger in particular argues that the possibility for a respondent to delay proceedings before a state court in Switzerland by invoking that parties had agreed on arbitration with a venue elsewhere, could become very cumbersome Based only on the plausibility that such an arbitration agreement exists, a state court would have to stay proceedings. Berger suggests that instead of amending a national statute, an international solution should be explored, e.g., UNCITRAL could prepare an interpretation of article M (3) of the New York Convention.
The issue is apparently to be discussed at the Parliament at the session of 12/13 May.

Georg von Segesser

Swiss Federal Tribunal rejects multiple standards of independence and impartiality among arbitrators

Georg von Segesser — Tue, 25 Jan 2011 08:11:51 +0000

In a landmark decision dated 29 October 2010, published on 19 November 2010 (case 4A_234/2010), the Swiss Federal Tribunal dismissed a motion to set aside a Court of Arbitration for Sport (“CAS”) award based on the alleged impartiality of one of the co-arbitrators. The Court firstly clarified that the independence and impartiality expected from any arbitrator were the same, irrespective of his position within the arbitral panel. Furthermore, it stated that there was no justification to apply a more stringent standard of independence and impartiality to CAS arbitrators.

Background

By decision of 11 May 2009, the famous Spanish cyclist Alejandro Valverde was given a two-year doping ban by the Anti-Doping Tribunal of the Italian Olympic Committee (“CONI”). The racer appealed against the decision to the CAS. The CONI designated its arbitrator, Prof. Ulrich Haas, who indicated in its letter of acceptance that he had been involved in the revision of the World Anti-Doping Code in 2006-2007. In its response to the claimant’s appeal, the CONI requested the participation of the World Anti-Doping Agency (“WADA”) and of the International Cycling Union (“UCI”). The request was granted by a preliminary decision of 12 October 2009. WADA’s joinder to the proceedings led the petitioner to question the independence of Prof. Haas. As a result, each arbitrator was requested to supplement his declaration of independence. Prof. Haas added that he had acted as Chair of the WADA independent observer team designated for the Athens 2004 Olympics Games. The petitioner brought a challenge against Prof. Hass.* But the Board of the International Council of Arbitration for Sport (“ICAS”) dismissed the claimant’s challenge stating that there was no element that could have raised suspicions regarding the impartiality or independence of Prof. Haas. The dispute was then referred to the CAS panel which unanimously upheld the two-year ban imposed by the CONI Anti-Doping Tribunal. Alejandro Valverde challenged the award before the Swiss Federal Tribunal on the basis of the alleged irregular constitution of the Arbitral Tribunal (art. 190(2)(a) SPILA) and violation of his fundamental procedural rights (art. 190(2)(d) SPILA).

The decision

The Swiss Federal Tribunal started by deciding on two preliminary arguments invoked by the petitioner. Firstly, it restated that, as an annulment court, its only mission is to examine whether the arguments raised to have the award set aside are founded. Therefore, the argument in connection with the constitution of the panel must be examined only in the light of the facts on which the ICAS Board based its decision. All further evidence adduced during the course of the arbitration could not be considered. Secondly, it did not see any major objection to the long-standing practice of the CAS, according to which observations on applications to challenge are drafted by the CAS Secretary General rather than by the arbitral panel that rendered the decision. However, the Court pointed out that it would be advisable for the ICAS Board to clarify this issue given the lack of codification of such practice.

The first issue examined by the Court has given rise to spirited debate between proponents of a “realistic” approach and those advocating a strict application of the standard of independence and impartiality. The question relates to the application of the standard within an arbitral panel: are all arbitrators bound by the same requirements, i.e. including party-appointed arbitrators? Whilst acknowledging that an absolute independence of all arbitral tribunal members would constitute an ideal that would rarely match reality, the Court strongly rejected the idea of “arbitrator-advocates”. The Court reasoned that such approach would indeed jeopardize the very fundamental of arbitration. In accordance with the foregoing, the Court enounced the principle that the independence and impartiality requirements are to be applied equally to all arbitral tribunal members.

Secondly, the Court examined the controversial issue of the application of a more stringent standard of impartiality and independence to CAS arbitrators in order to take into account the specificities of sports arbitration. The Court held that there was no reason to apply a different standard to CAS arbitrators. The specificities of sports arbitration, namely the limited choice of arbitrators engendered by the CAS closed list system and the requirements imposed to listed arbitrators (i.e. to have full legal training and recognized competence with regard to sport) must be taken into account. According to the Court, these peculiarities imply that CAS arbitrators may be led to have contacts with sports organizations, sports lawyers and other specialists. However, this is not sufficient ground to question their independence and impartiality and thus to apply a more stringent standard. The Court concluded by emphasizing that the independence and impartiality of an arbitrator will always depends on the concrete circumstances of each individual case. It would therefore be vain to seek to lay down immutable principles in this regard.

Finally, the Court decided another question, namely its own power to recuse an arbitrator (and not only to set aside the arbitral award). The Court admitted that its position as an annulment court did not prevent it from recusing an arbitrator, given the necessity of legal certainty and for the sake of procedural efficiency.
In the light of these clarifications, the Court analysed the decision at hand and found that the designation of Prof. Haas did not affect the regularity of the constitution of the CAS panel. The relief sought by the appellant was therefore denied, along with the alleged violation of his fundamental procedural rights.

Comment

The main conclusion to draw from this decision is the rejection of multiple standards of independence and impartiality among arbitrators: firstly, party-appointed arbitrators are to be treated the same way as chairmen and sole arbitrators; secondly, there is no reason to apply a more stringent standard to CAS arbitrators. As remarked by the Swiss Federal Tribunal, this is fully consistent with the modern approach advocated by the IBA Guidelines on Conflicts of Interest in International Arbitration and the provisions governing Swiss domestic arbitration enacted in the new Swiss Code of Civil Procedure (the new Code will come into force in January 2011). This will also strengthen the consistency of the Swiss international arbitration case law by avoiding the creation of an artificial “super independent and impartial” standard applicable only to CAS arbitrators.**

* The claimant filed a challenge against such decision before the Swiss Federal Tribunal. The Court dismissed it on the ground that the ICAS decision was not capable of appeal.
** In this regard, we point out the recent amendment of the CAS Regulations which prohibit the double-hat arbitrator/counsel role precisely to limit the risk of conflict of interests and to reduce the number of challenges of arbitrator during arbitral proceedings.

Georg von Segesser, Pierre Ducret

Swiss Federal Supreme Court sets aside CAS award for violation of the principle of procedural public policy

Georg von Segesser — Tue, 17 Aug 2010 12:26:19 +0000

In a landmark decision of 13 April 2010 (4A_490/2009, published on 2 July 2010), the Swiss Federal Supreme Court confirmed that the principle of res judicata is part of procedural public policy, and it set aside a CAS award for violation of that principle. At first sight, the decision of the Federal Supreme Court seems to weaken the primacy of the arbitral tribunal to decide on its jurisdiction as stipulated under Article 186(1)bis of the Swiss Private International Law Act (“PILA”). A closer look on the decision however reveals that the case before the Federal Supreme Court was not only one concerning the principle of res judicata, but in particular one dealing with the erga omnes effect of a court decision annulling a resolution of an association (the FIFA).

The case originated in 2000, when a Portuguese soccer player terminated his contract with Sport Lisboa E Benfica (Benfica) and transferred to the soccer club Atlético de Madrid SAD (Atlético). Based on the then applicable FIFA Regulations for the Status and Transfer of Players (FIFA Rules), Benfica claimed in 2001 a compensation from Atlético. The FIFA Special Committee upheld the claim and awarded Benfica USD 2.5 million, which decision Atlético appealed to the Commercial Court of the Canton of Zurich (Commercial Court). On the basis that the FIFA Rules were void as violating antitrust laws, the Commercial Court annulled in a decision of 21 June 2004 the decision of the FIFA Special Committee. A few months later, Benfica again sought a decision from the FIFA Special Committee as to payment of a compensation by Atlético Madrid, but this time the FIFA rejected Benfica’s claim. Benfica appealed the second FIFA decision to the CAS (i.e., not to the Commercial Court) as in the meantime the FIFA had introduced an arbitral review procedure for the decisions of the FIFA Special Committee. Notwithstanding the fact that Atlético opposed Benfica’s appeal by, inter alia, relying on the res judicata effect of the earlier judgement of the Commercial Court, the CAS upheld the appeal in part and ordered Atlético to pay a compensation in the amount of EUR 400’000. Atlético filed a petition with the Federal Supreme Court claiming that the CAS award violated public policy as it disregarded the binding effect of the previous ruling of the Commercial Court.

The Federal Supreme Court followed Atlético’s argumentation. By relying on previous case law, it confirmed that the principle of res judicata is part of procedural public policy and set aside the CAS award. The Supreme Court found that the proceedings in front of the Commercial Court did not involve an appeal against the first decision of the FIFA Special Committee, but the proceedings dealt with the annulment of a resolution of an association (the FIFA) under Article 75 of the Swiss Civil Code. Once a challenge of a resolution of an association is upheld and the resolution is annulled, this decision (as opposed to its rejection) has effect not only between the parties to the proceedings (that is the FIFA and Atlético) but erga omnes, which consequently put an end to Benfica’s claim for compensation on the ground of res judicata although Benfica was not a party to the proceedings before the Commercial Court. The fact that the FIFA subsequently introduced an arbitral review procedure for the decision of the FIFA Special Committee does not change the fact that the issue in front of the CAS had already been decided by the Commercial Court. In the same way as the Commercial Court would have been bound by its previous decision on the same issue, also the CAS obtaining jurisdiction for the second challenge could not examine anew an issue which had already been decided. The CAS award consequently disregarded the binding effect of the judgment of the Commercial Court.

Although this is not the first time that the Federal Supreme Court has held that the principle of res judicata is part of Swiss procedural public policy (see, e.g., the decision 4P.98/2005 of 10 November 2005, at consid. 5.1), this is the first time that the Federal Supreme Court has set aside an arbitral award on this basis. The Federal Supreme Court did so notwithstanding the fact that under Swiss law res judicata requires an identity of the parties in the previous and the subsequent proceedings which however was not the case in the proceedings before the Commercial Court and the CAS. Still, the decision should not be interpreted to open the door to the doctrine of “issue estoppel” known in the United States, under which, in certain circumstances, third parties may be precluded from re-litigating issues of fact and law that have been actually determined in the prior litigation. The Federal Supreme Court’s decision has to be read in light of the singular issue of the erga omnes effect of the previous decision of the Commercial Court, a fact which seems has not been sufficiently stressed by the Supreme Court. Taking this particularity into consideration, it remains to be seen to what extent (if at all) this decision will have the effect of weakening the principle set out under Article 186(1)bis of the PILA.

Georg von Segesser / Patrick Rohn

Swiss Federal Supreme Court Denies the Applicability of an Arbitration Clause in the Articles of Association to Liability Claims Against Board of Directors of an Insolvent Company

Georg von Segesser — Wed, 07 Jul 2010 13:11:28 +0000

In a decision dated 8 December 2009, published on 13 June 2010 (case 4A_446/2009, published as 136 III 107), the Swiss Federal Supreme Court held that persons acting as board of directors of a company that subsequently became insolvent cannot rely on an arbitration clause contained in the articles of association of that insolvent company for liability claims filed against them by the insolvent company’s creditors.

Background

The articles of association of corporation Y (“Y”) contain an arbitration clause which applies in case of a dispute between Y and its members of the board of directors or its shareholders. On 5 January 2004, Y was declared insolvent. In March 2007, Y’s shareholder and creditor A (“A”) filed a liability claim before the commercial court of canton of Bern requesting that the members of Y’s board of directors be ordered to pay CHF 1m. The respondent board member X (“X”), in turn, raised a plea of arbitration based on the arbitration clause contained in Y’s articles of association.

On 7 July 2009, the commercial court of canton of Bern decided that the arbitration clause did not include the dispute at hand and that the court had jurisdiction over the matter. Subsequently, X filed an appeal against the commercial court’s decision before the Swiss Federal Supreme Court.

Decision

The Federal Supreme Court dismissed X’s appeal and confirmed the commercial court’s holding that the arbitration clause did not apply. It held that by filing a liability claim against Y’s board members, A was not enforcing the rights of Y against its board members, but was enforcing the rights of Y’s creditors. For this reason, a board member could not bring forward all defenses it could have brought forward against a claim filed by Y itself. He could only bring forward the defenses he had against Y’s creditors.

The Supreme Court held that the plea of arbitration was not a defense X could bring forward against Y’s creditors. It was a defense X could only bring forward against a claim filed by Y itself. If such a defense could be brought forward against Y’s creditors, there would be a risk that, due to an arbitration clause in the articles of association, the enforcement of liability claims of creditors could be hindered. Since Y’s creditors had no influence on the content of the articles of association, they were not bound by the arbitration clause contained therein.

Comment

Liability claims against members of the board of directors can generally, in domestic and in international cases, be submitted to arbitration. This, however, is only the case where the arbitration clause satisfies the form requirements and where, e.g., the shareholders or board members – later a party to the dispute – validly consent to the respective arbitration clause. The consent requirement can be satisfied if a shareholder, when purchasing the company’s shares, or a member of the board, when accepting the appointment, at least by way of referral to the arbitration clause in the articles of arbitration consent to such arbitration clause. On the contrary, an arbitration clause is neither binding on those shareholders who purchased their shares prior to inclusion of the arbitration clause in the articles of association nor is it binding on the company’s creditors. With respect to the latter, it is established in legal literature that an arbitration clause is in particular not binding in the case of an insolvent company, where a creditor files a liability claim against the board members on behalf of all creditors of an insolvent company. The present case, published in the official Federal Supreme Court Case Reporter, confirms the existing view.

Georg von Segesser / Petra Rihar

The Swiss Federal Court Dismisses Two Appeals Concerning the Constitution of an Arbitral Tribunal

Georg von Segesser — Wed, 07 Jul 2010 13:08:40 +0000

In two decisions both dated 11 January 2010, published on 16 April 2010 (cases 4A_256/2009 and 4A_258/2009), the Swiss Federal Supreme Court dismissed two appeals regarding the irregular constitution of an arbitral tribunal by stating that the complainant failed to sufficiently substantiate his allegations.

Background

In 2006, two ICC arbitrations were initiated. They had the same factual background, but were based on different (yet interconnected) agreements. In the first arbitration (dealt with in the decision 4A_256/2009), AY (“AY”), a company incorporated under the laws of the Czech republic, initiated an arbitration against X (“X”), a Czech citizen. In the second arbitration (dealt with in the decision 4A_258/2009), X (Respondent in the first arbitration) initiated an arbitration against Y (“Y”), a Czech citizen, sole owner of AY (Claimant in the first arbitration).

In both arbitrations, the arbitral tribunal was composed of arbitrator Q (“Q”) (nominated by X), arbitrator P (“P”) (nominated by AY in the first arbitration and by Y in the second) and of the Chairman O (“O”) (nominated by the co-arbitrators). The tribunal decided not to consolidate the proceedings.

After the tribunal rendered the awards, X appealed before the Federal Supreme Court against both awards. In both proceedings, X argued that P and O were biased and that, therefore, there was no guarantee that the arbitral tribunal was impartial and independent of the parties.

Decision

The Federal Supreme Court dismissed both appeals.

As to P’s lack of independence, X argued that, end of Mai 2007, the Czech media reported that P had been nominated as arbitrator by Y or by persons connected with Y in approximately ten different arbitration proceedings. In fact, P had become the “house arbitrator” (“Hausschiedsrichter”) of Y. With respect to two (out of ten) proceedings, X personally knew of such nominations as he was acquainted with the proceedings. X further argued that in one further ICC arbitration between AY and a certain Mr. Z, P’s nomination had not been confirmed.

X had challenged P’s nomination as co-arbitrator in both arbitrations for lack of independence before the ICC Secretariat pursuant to Article 11 of the ICC Rules. The ICC Court nevertheless confirmed P’s nomination without stating the grounds for dismissal of the challenge submitted by X.

The Federal Supreme Court held that X’s appeal was insufficiently substantiated and that X failed to sufficiently show circumstances giving rise to justifiable doubts as to the independence of P. X’s assertion that P had “recently” been nominated in numerous cases of Y or by persons connected with Y was based solely on a newspaper article of 20 May 2007 which was too vague to serve as evidence in an evidentiary hearing purposed to clarify whether or not X’s assertion was true. Whether or not P lacked independence could thus not be decided based on said article. The Federal Supreme Court continued that X should have named the different arbitrations proceedings by specifying the timing and the involved parties, by stating which party had appointed P and by showing what the relationship of that party to Y or to persons connected to Y was. Also the fact that P’s nomination in another ICC arbitration between AY and a certain Mr Z had not been confirmed did not lead to any conclusions as to P’s independence in these proceedings the Federal Supreme Court concluded.

As to O’s lack of independence, X brought forward that, end of October 2008, at the occasion of an arbitration in London between a trust established by X and a company B, X learned of several interconnections of O with companies (where O served as a member of the board of directors) and with persons who were connected to or closely worked with Y. In particular, X argued that O was a member of the board of directors of a company C collecting for Y (or one of the companies controlled by Y) one of the largest claims in the Czech Republic and that said company was receiving instructions from Y. To substantiate his allegations X submitted e-mails showing the described interconnections and dependencies.

The Federal Supreme Court held that X’s arguments were insufficient to show O’s lack of independence. In particular, X had not shown to what extent the connection of the company C to Y was supposed to influence O’s impartiality and independence in these proceedings. Rather, the Federal Supreme Court held, the cooperation described by X did not go beyond an “ordinary business relationship”.

Comment

Switzerland is known as an arbitration friendly place among others because the Federal Supreme Court only rarely interferes with the work of the arbitral tribunals. In these two cases, however, the commentators cannot escape the impression that the Federal Supreme Court circumvented the actual problem by stating that the complainant did not sufficiently substantiate his allegations. It seems somehow unsatisfactory to require a strict proof regarding the question of the number and time frame of previous appointments of an arbitrator by the same party or an affiliate of it . Such proof will not be possible for the complainant. For this reason, at least if it refers to past appointments, the exact fact should be established before the course of the ICC confirmation procedure. It should also be kept in mind that, to the knowledge of the authors, situations of “house arbitrator” do exist which is sometimes used as an argument against arbitration as a method of dispute resolution.

Georg von Segesser / Petra Rihar