Oliver Ciric, Michael Stepek

Hogan & Hartson LLP

Switzerland: New Procedure for the Challenge of International Awards

Jurisdiction of the Swiss courts over international arbitrations in Switzerland is governed by the Swiss Private International Law Act of 18 December 1987 (PILA), which provides a well-settled legal framework over international arbitrations, including a limited possibility of challenging arbitral awards. Until 1 January 2007, the procedure for challenging an award was governed by the Swiss Judicial Organisation Act of 16 December 1943 (JOA). However, the Act on the Federal Tribunal (RS 173.110) of 17 June 2005 (AFT) replaced the JOA as of 1 January 2007. The new legislation modifies certain procedures in regards to the challenge of international arbitration awards, and constitutes one of the most salient recent developments for arbitrations done in Switzerland.

This article is intended to provide insight into the new legislation. It addresses the different procedural aspects to the challenge of international arbitration awards in Switzerland. The article concludes with a discussion of a recent decision by the Federal Tribunal under the new Act, which highlights some remaining ambiguities in Swiss law governing the challenge of arbitration awards.

Challenge of international arbitration awards in Switzerland

In Swiss law, the challenge of an international arbitral award can be made pursuant to a narrow range of circumstances set out in article 190(2) of the PILA. An award may be set aside only if:

• the sole arbitrator was improperly appointed or the arbitral tribunal was not properly constituted;
• the arbitral tribunal wrongly accepted or denied jurisdiction;
• the arbitral tribunal has made a ruling granting relief beyond that sought (ultra petita), has granted relief different from that sought (extra petita), or has failed to adjudicate certain claims presented to it (infra petita);
• the principle of due process, namely the equal treatment of the parties or the right of the parties to be heard, was breached; or
• the award rendered is incompatible with public policy.

There is no right of appeal simply on the ground that the tribunal made an error of law, no matter how egregious, unless that error fits into one of the above categories. As opposed to certain other legal systems, under Swiss law international awards may be challenged only before the Federal Tribunal, the highest court in Switzerland (article 191 of the PILA). The Swiss Federal Tribunal has held that the aforementioned list of grounds is exhaustive, and that each ground is to be interpreted narrowly.1

It also should be noted that article 192(1) of the PILA grants the parties the right to waive, by an arbitration agreement or by a subsequent written agreement, any right to challenge an award rendered by an arbitral tribunal sitting in Switzerland, or to exclude certain grounds set out in article 190(2) PILA for challenging the award. Such a waiver is possible only if neither party had its domicile, its habitual residence or a business establishment in Switzerland at the time the waiver was made.2

The new act

With effect from 1 January 2007, the procedure pursuant to which a challenge is made is governed by the AFT. Although the AFT does not represent a major change, with the procedure it prescribes being to a great extent similar to that applicable under the JOA, the new legislation modifies certain procedural rules, and introduces several novelties, some of which may be the subject of controversy.

One of the most important provisions of the new AFT is contained in article 77, pursuant to which the procedure for challenging an international award is governed by a 'civil case appeal' procedure, and not the prior 'public law appeal' procedure rules (which have now been abolished) as was the case under the JOA.3 The practical differences between the two are not particularly substantive, but practitioners must take care to ensure compliance with a different set of court forms and rules lest an application be struck out for failure to comply with proper form.

In general, the Federal Tribunal may not review the facts,4 but is bound by the factual findings of the arbitral tribunal. 5 However, the Federal Tribunal has ruled (prior to the new law) that the factual findings can be reviewed in two instances:

• 'when one of the challenges set out in article 190(2) PILA is raised against factual findings';6 and
• in 'exceptional' circumstances.

In these instances, the Federal Tribunal may decide to accept new facts7 or exhibits to the extent that they are relevant to the challenge to the award.8 According to the legislative history of the AFT, it is the intention that the above-mentioned findings of the Federal Tribunal rendered under the JOA remain applicable under the AFT. 9

Notwithstanding the new law, it remains the case that only serious procedural defects or rulings on substance which are contrary to international public policy are in practice likely to lead to a decision to overturn a tribunal's decision. Pursuant to the jurisprudence of the Federal Tribunal, a challenged award will not be overturned on the grounds that it has been rendered on the basis of factual findings that are obviously erroneous — even if these factual findings are contradicted by unambiguous evidence in the tribunal's record — or in violation of law or equity.10 The rationale of the Federal Tribunal for this uncompromising stance is that the parties to the arbitration agreement are bound by their agreement, and therefore should not be given the opportunity to reargue the merits of their case in court.11

General conditions of the appeal

Absent an agreement to exclude challenges of awards set out in article 192(1) of the PILA, an arbitration award may be appealed to the Federal Tribunal only if the award is rendered:

• in an international arbitral matter, that is, where at least one party had neither its domicile nor its habitual residence in Switzerland at the time of the conclusion of the arbitration agreement; and
• by an arbitration tribunal sitting in Switzerland.

Under the JOA, the parties were also able to challenge the award by appealing it before the Judge of the canton where the arbitral tribunal had its seat. This is no longer the case under the AFT, which provides that the Federal Tribunal is the sole authority to which Swiss international awards may be appealed.

Type of award that can be challenged

Unless agreed otherwise by the parties, the arbitration tribunal may render interim, partial and final awards (articles 188 and 189 of the PILA). In accordance with the Federal Tribunal's jurisprudence:

• final awards are awards that put an end to the arbitration proceedings. They may be challenged in the Federal Tribunal on the grounds set forth in article 190(2) of the PILA. The award is final and enforceable from the date of its notification to the parties,12 and any appeal must occur within 30 days of that notification;
• partial or interim awards are awards that rule finally on a limited part of the claims submitted, but do not bring the arbitration proceedings to a close, as other claims or issues remain outstanding. Like final awards, partial awards may be challenged before the Federal Tribunal on the grounds specified in article 190(2) of the PILA within 30 days after such award was notified; and
• interlocutory awards are awards that decide one or several preliminary issues, whether they be on procedure or on the merits. These are awards that fall short of deciding definitively on the claims or counterclaims, but are nonetheless expressed to be final on the issues they determine. Interlocutory awards may not be challenged immediately on all the grounds stated in article 190(2) of the PILA. Instead, they may be immediately challenged only on the grounds that the arbitral tribunal was irregularly constituted; or the tribunal wrongly decided on its jurisdiction (article 190(2)(a) and (b) of the PILA). To challenge any other part of the award on one of the grounds set out in article 190(2), the parties must wait for a subsequent final or partial award.

The Federal Tribunal confirmed these principles as recently as 2003,13 and the AFT generally incorporates them in its text.14 Therefore, it appears the new AFT does not change the legal landscape in respect of the types of awards that can be challenged with one potential exception.

The interplay between partial awards and interlocutory awards, and the appropriate time to file an appeal against them, remains an issue on which one must exercise caution as illustrated in a decision issued earlier this year which is discussed later. In addition to the difficulty in drawing a line between partial and interlocutory awards which sometimes manifests itself, the AFT has injected an additional item of uncertainty. In a 2003 opinion, the Federal Tribunal ruled that it was not possible to immediately challenge an interlocutory award which caused irreparable harm.15 The AFT, however, contains a clause which excludes certain principles from its general mandate that the civil case law appeal procedure applies to challenges to international arbitration awards.16 Curiously, this clause does not include in its exclusion the right to immediately challenge interlocutory awards should they cause irreparable harm, which decisions would be subject to immediate appeal if issued by a Swiss court. This limitation could infer at least that the AFT may have made a change in this regard, and have expanded the right to immediately appeal interlocutory international arbitral awards which cause irreparable harm.17 The legislative history of the AFT, however, does not manifest an intention to change either the regime provided by the PILA or the 2003 opinion of the Federal Tribunal. On the contrary, it expressed the view that the regime and the rights to challenge arbitral awards should remain unchanged.18 Thus, it is unclear whether an immediate appeal of such awards is now possible under the AFT or not.

The value in dispute

Article 74(1) of the AFT provides that an appeal to the Federal Tribunal in civil cases is possible only if the value in dispute amounts to at least 30,000 Swiss francs (e19,000) (15,000 Swiss francs in labour and tenant-landlord disputes). It is not clear whether this monetary minimum is also applicable to challenges of arbitration awards. While practitioners consider that the challenge of the awards should not be subject to such a minimum, the Federal Tribunal has not yet ruled on this point. Given the relatively low limit, however, this is not likely to be a practical issue in Swiss international arbitration, where the value in dispute is generally much higher.

Consequences of a successful appeal

If the Federal Tribunal rules that the challenge of an award is valid on the merits, it will set aside the award and remand the matter back to the arbitral tribunal for a new decision (articles 77(2) and 107(2) of the AFT). In such a case, the arbitral tribunal is bound by the findings of the Federal Tribunal. This means that the arbitral tribunal must reconsider the points of the award that led to its annulment in light of the considerations of the Federal Tribunal's ruling. It should be noted that the Federal Tribunal may also elect to only annul a portion of the award. The AFT does not address the issue on how to compel the arbitral tribunal to sit again, or who bears the costs related to the rendering of the new award.

Stay of enforcement of the appealed award

The award is final from the time when it is communicated to the parties (article 190(2) of the PILA). It is also enforceable as of the date of communication to the parties. The Federal Tribunal may, at its discretion, order a stay of the enforcement of the award, if requested by a party (articles 77(2) and 103(3) AFT). The request to stay will be granted only if the party shows that:

• the appeal itself presents a reasonable chance of success; and
• the immediate enforcement of the award subjects it to a risk of irreparable harm.

Costs

The AFT provides for the following in respect to costs. In respect to the court costs incurred in the challenge of the award, the appellant is required to make a cash deposit to cover court costs within the time limit set forth by the Federal Tribunal. Should the deposit not be made within this time limit, the challenge to the award shall be declared inadmissible without further recourse. The costs are generally capped at 100,000 francs, but can double for complex matters. The party which unsuccessfully attempts to challenge an award generally loses the amount deposited for court costs.

If requested by the respondent, the Federal Tribunal may order the appellant to provide security for the adverse party's costs (cautio judicatum solvi), provided that the statutory conditions for the deposit of such collateral are satisfied (article 62(2) AFT).

Finally, the losing party generally bears the court costs and the adverse party's estimated legal costs. This principle is applied seriously as in the past, the Federal Tribunal has ordered the losing party to contribute significant sums in respect of a successful party's legal costs.

The relationship between partial and interlocutory awards and the right to challenge

As outlined above, international awards issued in Switzerland can be final, partial or interlocutory. A partial award does not put an end to the arbitration, but definitively decides on one or more claims. In contrast, interlocutory awards determine preliminary issues, whether they be procedural or on the merits. Interlocutory awards may be appealed only if the arbitral tribunal was not regularly constituted or designated (article 190(2)(a) of the PILA), or if the arbitral tribunal erroneously assumed jurisdiction (article 190(2)(b) of the PILA). The time period for each award is limited to 30 days, failing which the award can no longer be challenged.

Difficulty in determining the time limits for appeal can arise, however, if it is not clear whether an award is partial, or interlocutory, or both. This was precisely the issue in a recent Federal Tribunal case, X v A and B.19 The appellant was a soccer player who had signed a training contract with a French club in March 2003 for a three-year period. The contract provided that the player would be trained to play football, and would also be trained for a profession in a school or university. In return, the contract obliged the player to sign his first professional player contract with that club. If the player refused to sign his first professional contract with that club within three years after his training contract expired, or if he were to sign a contract with another club, he would have to repay the club the training expenses it had incurred on his behalf.

The player and the club also signed an 'aspiring player'contract, by which the club undertook to provide the player with training as an 'aspiring player', and to pay him a monthly salary. The aspiring player contract expired in June 2004, and the player signed a contract with an English club, producing a dispute among the player, the French club and FIFA as to his right to do so and the financial consequences thereof. This dispute was heard by the Dispute Resolution Chamber of FIFA (the DRC), which found that:

• it had no jurisdiction over the training contract; and
• there was no longer a contractual relationship between the player and the French club after the 'aspiring player' contract expired in June 2004.

Therefore, it concluded, there existed no contractual prohibition to the player joining the English club. The DRC further found that since the player had signed a contract before he was 23 years old, FIFA regulations required the English club to compensate the French club for training.

The French club appealed to the Court of Arbitration for Sport (CAS) as provided for in FIFA regulations, naming FIFA as respondent and asking for a finding that the French club had a contractual relationship with the player, that the player should be ordered to sign a player's contract with the club or be suspended until he did so, and that financial sanctions be imposed on all those involved in inciting a breach of the training contract. Thereafter, both the player and the English club intervened in the arbitration, with the former asking the CAS to confirm the DRC decision and declare that the financial and other sanctions requested by the French club in the action were of no concern to him. The CAS issued a 'partial' award on 27 October 2005, finding the DRC decision was capable of appeal and partially reversing the decision of the DRC, to the extent that the DRC had declined to determine the respective rights and obligations of the parties to the training contract. The October CAS award also found the player in breach of his contractual obligations, and it informed the parties they would be invited to make submissions on the possible additional compensation to be owed to the French club. This award was not appealed to the Federal Tribunal at that time, and subsequent proceedings led to a final award on 17 July 2007 against the player, ordering him to pay compensation to the French club. Shortly thereafter, the player filed a civil case appeal before the Federal Tribunal, seeking an annulment of the CAS award and a finding that the CAS had no jurisdiction to decide the claim for damages as against him.

The Federal Tribunal rejected the player's appeal as to the jurisdiction of the CAS, on the basis that this portion of the CAS October award had been subject to immediate appeal and thus could not be appealed in the context of a challenge to the final award. The court found that the October CAS award was a hybrid of a partial award and an interlocutory award. In the view of the court, as the October award found the appellant in breach of his contractual obligations and stated that the parties were soon to be invited to submit their positions in regard to compensation, the award had implicitly decided the issue of the CAS's jurisdiction to award damages against the appellant. In the view of the court, the appellant could not have reasonably believed that the CAS would subsequently deny its jurisdiction to award damages against him which the French club may have requested in the written proceedings to be filed, or, to put it another way, that the CAS would exclude the appellant from the potential debtors of the French club which was to be made in the final award. Therefore the appellant should have immediately appealed this portion of the award. Having failed to do so within the statutory time limit, the appellant could not make the same challenge in the framework of his civil case appeal against the final award.

As this recent ruling of the Federal Tribunal shows, awards can be both partial and interlocutory at the same time, and an interlocutory award may implicitly contain an assumption that the arbitral tribunal was properly constituted, or that it was deciding a jurisdictional issue. If so, the decision requires an immediate appeal on that issue lest the right to appeal be forfeited. Should one have any doubt as to whether an arbitral award prior to a 'Final Award' decides a question of jurisdiction or proper composition of the tribunal which one would want to appeal, the safer practice at present is to file the appeal within 30 days of notice of the award.

* *

Although the substantive grounds for challenges one can make to international awards has not significantly changed since the inception of the new law, the AFT introduces some procedural novelties. Challenges to arbitral awards continue to be possible on very narrow grounds, and the Federal Tribunal will set aside the awards only in exceptional circumstances. Certain of the new procedural rules, however, create some uncertainty, particularly with regards to the minimum value in dispute and the possibility to challenge an interlocutory award that may cause irreparable harm.

Notes
1. ATF 116 II 721; ATF 115 II 102.
2. Article 190(2) of the PILA.
3. Ruling of the Federal Tribunal E4 A450/2007, 9 January 2008, c 2.2.
4. Ruling E4 A450/2007 dated 9 January 2008, c 2.2.
5. Ruling of the Federal Tribunal in the Westinghouse case ATF 119 II 380, c 3c.
6. ATF 119 II 380, c 3c; ATF 128 III 50 c 2a ; ATF 129 III 727, c 5.2.2.
7. The term 'new facts' applies to the facts that occurred before the challenged award was rendered. Legislative history, FF 2001,p4137.
8. Legislative history, FF 2001, p4137.
9. ATF 119 II 380, c 3c.
10. ATF 115 II 102, 105 ; ATF 116 II 634, 636.
11. ATF 128 II 50, 58.
12. Article 190(1) of the PILA.
13. Ruling of the Federal Tribunal 4A. 370/2007 rendered on 21 February 2008.
14. AFT at articles 90-93.
15. ATF 130 III 76.
16. AFT at article 77(2).
17. AFT article 93(1)(a).
18. FF 2001, p4110.
19. X v A Association and SASP B, 4A 370/2007, Judgment of 21 February 2008.