In case of a conflict between contractual clauses and specific rules of the governing law, what approach the arbitrator should adopt? Does he have to strictly apply the law chosen by the parties or is a more flexible approach possible? In other words, what is at issue here is the extent of the arbitrator’s freedom in dealing with the constraints resulting from the governing law, an issue that has been the topic of an excellent article of Pierre Mayer.1

1. GENERAL CONSIDERATIONS

In his remarkable book “Flexible droit”, Jean Carbonnier made the point that “le droit est trop humain pour prétendre à l’absolu de la ligne droite”. One can only agree with Jean Carbonnier’s comment. The law is no Procrustean bed obliging a judge or an arbitrator to cast, at all costs, into the same mould concrete situations that only at first sight present certain common features. If the solution resulting from the application of a specific rule of law is unpredictable from the standpoint of the parties, i.e. if such solution goes against the common sense, the arbitrator should research the legal institution that appears to better meet this predictability requirement.2 In this regard, the opposition between strict or flexible application of the law appears to be a non issue. Indeed, an arbitrator must apply the law chosen by the parties and if such law imposes certain constraints, the arbitrator must abide by them, provided, of course, that such constraints really apply to the concrete situation at stake.

As Pierre Mayer rightly noted in his contribution, the risk that an arbitral award will be set aside does not belong to the constraints to be taken into account by an arbitral tribunal. In fact, arbitrators run practically no risk of having their award set aside even if they ignore, deliberately or otherwise, a specific rule of the applicable substantive law. It is common knowledge that the grounds for judicial review on the merits of an arbitral award are quite limited. For instance, in Swiss law, an award can be challenged on its merits only if it is contrary to public policy.3 In this respect, it is worth noting that when an arbitrator disregards a mandatory rule of the applicable law, his decision does not yet amount to a violation of public policy.4 It should be further noted that in its practice, the Swiss Federal Tribunal has consistently declined to review arbitral awards on the merits including cases where the reasons of the decision showed a blatant contradiction.5

This being said, the arbitrator who did not care enough about the applicable law would transgress the mission entrusted to him by the parties. Indeed, an arbitrator is required to act in accordance with the parties’ legitimate expectations and, therefore, must apply the substantive law that they have freely chosen, including all its constraints, provided that such constraints meet the predictability requirement already mentioned. It is true that in civil law countries and, in particular, in the Swiss legal system, case law is not a source of law, in the true sense of the term; that means that a state judge is not bound by decisions of a higher court in the judicial hierarchy, and thus can reconsider a point of law already decided by that court, even if he runs the risk of a reversal of its decision by the superior court.6 The arbitrator, like any state judge, may adopt a solution that differs from a well-established case law, except that he does not run the risk of having his decision set aside.

As stated before, constraints resulting from a specific rule of the applicable law do not necessary prevent the arbitrator from seeking the most appropriate solution consistent with the parties’ legitimate expectations. It is true that if the law does not permit any other interpretation than the one resulting from its literal wording, the arbitrator does not have any leeway and this is particular to the statute of limitation; as an example, one may mention the overly short one-year statute of limitation laid down by article 67 of the Swiss Code of Obligations (“CO”) relating to unjust enrichment, which an arbitrator cannot extend even if he feels that the brevity of such time limit may penalize the claimant in an unfair way. Accordingly, an arbitrator has to apply the statutory limitation period applicable to the legal relationship at issue of course inasmuch as such relationship has been correctly categorized.

2. DO ARBITRATORS HAVE TO APPLY THE MANDATORY PROVISION OF ARTICLE 404 OF THE SWISS CODE OF OBLIGATIONS WHEN THE MANDATE ENTERED INTO BY THE PARTIES HAS A DEFINITE TERM?

The example that best supports the general considerations expressed above can be summarized as follows: the parties execute a mandate agreement which they submit to Swiss material law, a so-called neutral law, even though they may not be aware of all its specificities. Such a choice of law may reveal itself unwise if the parties agree to insert a definite term in their agreement. Indeed, as per article 404 of the Swiss Code of Obligations (CO), a mandate may be resolved at any time by either party by giving a proper notice of termination. However, if such termination occurs at an improper time, the party which terminates the mandate is liable to the other party for damages thus caused. According to a well-established case law, article 404 CO is a mandatory provision so that any contractually agreed departure from the right to terminate the mandate agreement at any time should be considered as null and void.7 In this respect, it is worth noting that the prevailing Swiss legal teaching considers that this provision should apply only to the so-called “typical” mandate, i.e. a mandate based on a special relationship of trust, such as the mandate given by a patient to his doctor or by a client to his lawyer. On the other hand, the mandate is deemed to be “atypical” if it does not concern the private sphere of the principal. It has been thus suggested that consultancy agreements where the agent is providing to the principal valuable information of a technical or commercial nature, should fall into the category of atypical mandates to which article 404 CO should not apply; therefore, if these agreements contain a definite term, they cannot be terminated prior to the expiration of such term8 except in the case of one the parties’ should default in performing its obligations. However, and considering the mandatory character of the aforesaid legal provision, this interpretation is to be considered as being praeter legem.

In two arbitral awards, arbitrators sitting in Switzerland and applying Swiss material law, had to resolve the issue of whether article 404 CO should apply to an atypical mandate comprising a definite term. In the first of these awards, the sole arbitrator excluded such application on various grounds such as the exceptional nature of this legal provision as compared with the law of neighbouring countries, and its inconsistency with clause 8 of the contract, which sets a term of five years. In the second of these arbitral awards, the arbitrators reached the same conclusion, however with a different and more persuasive reason. The arbitrators’ solution was inspired by an isolated decision of the Swiss Federal Tribunal9 which in a dispute regarding the affiliation of a party to a pension plan, considered that the definite term contained in the parties’ agreement was valid and binding; besides in that case, the Federal Tribunal expressed some doubt as to the mandatory character of article 404 CO. For the arbitrators, the definite term contained in the mandate caused the contract to fall into the category of the so-called “mixed” or “innominate” agreements well known in Swiss law, even if its main features were that of a mandate. On this ground, the award excluded the application of article 404 CO while remaining within the scope of the law chosen by the parties. In short, in the first of these awards, the sole arbitrator considered that it was at liberty to purely and simply disregard the specific rule of article 404 CO whilst in the second one, the same exclusion resulted from a different categorization of the mandate at stake. Were these two arbitral awards in accordance with the parties’ legitimate expectations? The answer to this question must be an affirmative one. In this respect, the predictability requirement that should prevail upon any constraint of the applicable law is to be assessed exclusively at the time of the execution of the contract and not also when the dispute arose as suggested by Pierre Mayer. Indeed, what is decisive in this regard is the real and common intent of the parties, which was to conclude a contract with a definite term. If article 404 CO was to be applied to the issue of termination, the parties’ intent would thus be deceived and a contractual provision duly entered into by them would in that way be set at naught. What occurred later does not matter; for example, if one of the parties invokes article 404 CO to assert that the mandate has been validly terminated on notice, this contention would still be contrary to the other party’s legitimate expectation, which is to be protected. Therefore, by deciding that there was no room for an application of article 404 CO to the mandate at stake, the arbitrators in both awards reached a fair and legally correct decision.

3. DO THE ARBITRATORS HAVE TO APPLY THE MANDATORY PROVISION OF ARTICLE 1495 §3 OF THE ITALIAN CIVIL CODE WHEN THE PARTIES HAVE SUBSCRIBED A SPECIFIC WARRANTY WITH RESPECT TO THE CONSISTENCY OF THE PATRIMONY OF THE COMPANY IN AN AGREEMENT PURPORTING TO THE SALE OF ITS CAPITAL STOCK?

The choice by the parties of Italian material law was at issue in the second example. Five arbitral awards, the most recent one issued on 7 August 2007, resolved in the same way the question of whether a warranty furnished by a seller of shares of stock about the state and the economic consistency of the target company could be interpreted as a promise of quality of the subject matter of the sale, within the meaning of article 1495 of the Italian Civil Code (CCI), or as a sui generis guarantee falling outside the legal regime of the sale of goods of article 1470 & foll. of the same code. At its core, the issue goes back to determining whether or not the patrimony of the target company belongs to the object of the sale together with the rights inherent to the quality of shareholder. Assuming that the sale was deemed to be inclusive of the assets of the target company, then the warranty given by the seller in this respect would be governed by article 1495 CCI. According to §1 of this legal provision, the buyer had to give notice to the seller of the non-conformity of the goods sold with the agreed upon warranty within eight days from the discovery of such non-conformity, under the penalty of forfeiture of its right — decadenza. It should here be noted that this legal provision is not a mandatory one to the difference of its §3 which imposes upon the buyer the obligation to initiate the proceedings against the seller for breach of the warranty within a deadline of one year from the date of delivery of the goods sold, the action being time barred upon the expiration of this deadline — prescrizione. Assuming now that the patrimony of the target company is not comprised in the subject matter of the sale, then the breach of the warranty shall fall within the scope of the ordinary regime of obligations of articles 1218 & foll. CCI, the statute of limitation of its article 2946 being a 10-year period. The various decisions of the Italian Court of Cassation on this matter were somehow contradictory until the year 2004 where the First Section of this Court held that the non-conformity of the goods with the seller’s warranty was to be governed by article 1495 CCI.10 The five arbitral awards referred to there above departed from the ruling of the 2004 decision of the Court of Cassation in holding that the patrimony of the target company was entirely foreign to the subject matter of the sale; accordingly, the breach of the seller’s warranty was subject to the 10-year statute of limitation of article 2946 CCI and not to that of one year of article 1495 §3 CCI as held by the First Section of the Court of Cassation. In support of their decision, the five arbitral awards relied not only on the prevailing Italian doctrine on that matter but also and above all, on the long-standing contractual practice inspired by the warranties and indemnity clauses of the Anglo-American law.11 Undoubtedly, the solution of these five awards met the requisite of the parties’ reasonable expectations as shown in particular by the 7 August 2007 award. In this case, the dispute concerned a warranty given by the seller as to the conformity of the real estate owned by the target company with the environmental laws in force at this time. Considering that a pollution is a damaging event which could be detected only after the expiration of a certain period of time, the parties agreed to extend the validity of the notice of non-conformity to five years from the date of the execution of the sale. It would be thus totally absurd to decide that the one-year statute of limitation of article 1495 (3) CCI had elapsed while the time limit granted to the buyer for the serving of the notice of non-conformity had not yet expired. The homogeneity of these five arbitral awards constitutes the best illustration of the existence of an arbitral case law as pointed out in the above referred article of Franco Bonelli.12 One may even consider that the ruling of these five awards was at the root of the radical change of trend adopted on that matter by certain State Courts. Reference is here made to the 29 September 2010 judgment of the Court of Rome13 as well as to the 26 August 2011 decision of the Court of Milan14 which both held contrarily to the 2004 decision of the Court of Cassation, that the contractual warranties subscribed by the seller were to be considered as a valid derogation to the rules instituted by the legal regime of the sale of goods.

4. MAY ARBITRATORS APPLY THE DOCTRINE OF A LOSS OF AN OPPORTUNITY ALTHOUGH SUCH DOCTRINE IS FOREIGN TO THE GOVERNING LAW?

Last example: what should be the reaction of an arbitrator sitting in Switzerland and applying Swiss material law, when he is confronted with the issue of the indemnization of a loss of an opportunity? In a decision issued in the year 2007, the Swiss Federal Tribunal held that the admission in Swiss law of the doctrine of the loss of an opportunity was somehow problematic, and that finding led the Swiss Federal Tribunal to decide that the decision of the lower Court negating the application of this doctrine was not arbitrary.15 It appears therefore that Swiss law on that issue differs from the law of certain neighbouring countries, such as France and Belgium, where this kind of indemnification is largely admitted. In this respect, it should here be noted that the reasons of the Swiss Federal Tribunal were based on the premise that the damage should be solely assessed in terms of the financial situation of the injured party, of which the lost opportunity is not a component. There is however a flaw in this premise because what is at issue is not the assessment of the loss as such, but the assessment of the causal link between such loss and the damaging event. Be that as it may, according to the majority of the Swiss legal teaching, there is still room for an application of the doctrine of a loss of an opportunity considering that the Swiss Federal Tribunal qualified as problematic the reception in Swiss law of this doctrine.16 Indeed, this theory provides for an adequate remedy where the causality appears to be uncertain. On the contrary, the all-or-nothing approach currently applied by the Swiss Courts is unfair for both parties because and despite the uncertainty of the causal link, the successful outcome of the claim of the injured party shall entirely depend on the issue of whether or not such causal link was a predominant one. But in cases where the causality is uncertain, such as the unjustified exclusion of a prospective bidder to participate to a tender procedure, or the breach of a duty to negotiate in good faith, if the conclusion of a final agreement could be seriously envisaged, only the application of the doctrine of a loss of opportunity can give a fair solution. Indeed and contrary to the all-or-nothing approach, this theory takes into account the degree of probability of the realization of the uncertain event and the claim of the injured party shall be awarded in a percentage corresponding to such degree of probability. As stated before, the 2007 decision of the Swiss Federal Tribunal does not give a definitive solution to this question. One may therefore consider that there is a gap in Swiss law which could be filled in by the recourse to transnational law, such as the UNIDROIT principles, which, at its article 7.4.3, par. 2, admits at certain conditions the indemnification of a loss of an opportunity.17 This may appear to be a rather bold solution but sometimes arbitrators should not hesitate to act with a certain boldness. In an ICC case No. 8795, a Swiss arbitrator made such a bold decision but his award was rendered much before the 2007 Federal Tribunal’s decision so that the question remains entirely open.

1
Pierre Mayer: “La liberté de l’arbitre”, in Rev. Arb .2013, p .339 & foll.

2
See in that sense L. Lévy/F. Robert-Tissot: “L’interprétation arbitrale”, in Rev. Arb. 2013, § 34, p. 875.

3
See art. 190 §2 (e) SPILA.

4
See G. Kaufmann-Kohler/A. Rigozzi: Arbitrage international, Berne 2010, No. 8471, p. 538 and the case law quoted therein.

5
See in this respect DTF 4A_464/2009 of 15 février 2010 published in ASA Bull. 2010, p. 282 & foll.; in that case, the Swiss Federal Tribunal rejected the challenge of the award although the arbitrators, after having duly affirmed the existence of a set-off between the parties’ respective credits granted moratory interests also on the part of the credit extinguished by the sett-off! Severe critics have been addressed to the lackness of the Swiss Federal Tribunal on that matter, in particular by P. Lalive in an article titled “L’article 192 al. 2 a-t-il une utilité?” published in ASA Bull. 2010, p. 726 & foll. In this respect, it is worth noting that in a decision of 5 August 2013 rendered in a domestic arbitration governed by part 3 of the new Code of Civil Procedure, the Swiss Federal Tribunal sets aside an award on the ground of the arbitrariness of its result as per article 393 litt. e) of the said code because of the “insoluble” contradiction of the reasons (see decision 4A_214/2013 reason 4.3.1). Since the parties to an international arbitration may agree to submit their dispute to the new Code of Civil Procedure as per its article 353 §2 pursuant to the opting out clause of article 176 al. 2 of the PIL Statute, the contradiction of the reasons could thus also lead to the setting aside of an international award.

6
See on that matter F. Perret: Is There A Need For Consistency In International Commercial Arbitration? in Precedent International Arbitration, IAI Seminar, Paris, 14 December 14 2007, p. 25, 32/33 and the case law quoted therein.

7
See DTF 4A_437/2008, reason 1.4; DTF 4C_447/2004, reason 5.4; DTF 117 II 466, reason 5.d); DTF 115 II 464, reason 2. It should here be noted that in the decision referred to at footnote 4 supra, the Swiss Federal Tribunal held that although the case law is not immutable, there must exist serious ground to modify it (see reason 4.3.1).

8
See in that sense F. Werro in Commentaire Romand, Code des Obligations I, 2nd ed., No. 16, p. 2446/2447 and the opus of other legal writers quoted therein.

9
See DTF 120 V 299, reason 3, p. 302 & foll.

10
See Court of Cassation, 1st Civil Section, Feb. 20, 2004, No. 3370, Emilio Giacomelli, Maria Domenica Mottini v. FIN. Recos S.R.L.

11
For a comment of these five awards, see F. Bonelli: “Acquisizioni di società e di pacchetti azionari di riferimento: le garanzie del venditore”, 21.2 Diritto del Commercio Internazionale, 293, 312 & foll. (2007) and the legal teaching quoted therein.

12
See F. Bonelli, op cit ad footnote N. 11.

13
See Court of Rome, 20.09.2010 in Banche Dati Foro It., 2013.

14
See Court of Milan, 26.8.2011 in Società 2012, p. 145.

15
See DTF 133 III 462.

16
See C. Muller: La perte d’une chance: Etude comparative en vue de son indemnisation en droit suisse, notamment dans la responsabilité médicale, Berne 2002; L. Thévenoz: “La perte d’une chance et sa réparation” in: C. Chappuis et al. (ed.) Quelques questions fondamentales du droit de la responsabilité civile: actualités et perspectives, Berne2002, p. 237; F. Werro: La responsabilité civile, Berne 2005, N. 131, p. 35.

17
See in that sense F. Perret: “La jurisprudence arbitrale peut-elle donner une nouvelle chance à la théorie de la perte d’une chance?” in Liber Amicorum Anne Petitpierre-Sauvain: Economie Environnement Ethique, Genève/Zurich/Bâle 2009, p. 289, 293 & foll.