Introduction

On 9 September 2011, Swiss company B entered into a Share Purchase Agreement (SPA) with French company L, which was later succeeded by French company X. Under the SPA, which was governed by Swiss law, B agreed to sell to L the quasi-totality of the shares in French company A.

The sale price comprised a fixed amount of one euro and additional earn-out payments. In particular, the earn-out clause of the SPA provided that the Seller was entitled to receive ‘50% of the after-tax profits of the Company … as set out in its compte de résultat in each of the fiscal years 2012, 2013 and 2014’. The clause further detailed the procedure to calculate the earn-out payments.

The calculation of the earn-out payments gave rise to a dispute. The SPA provided that any dispute regarding the earn-out payments should be resolved through arbitration under the rules of the Swiss Chambers’ International Arbitration Institution, the place of the arbitration being in Zurich, Switzerland.

Swiss company B (which was succeeded by the Swiss company Z during the course of the arbitration) filed three requests for arbitration against X, requesting earn-out payments in excess of EUR 4 million. The three cases were then joined by the institution.

For the arbitral tribunal, the calculation of the earn-out payments was an issue of contract interpretation to be resolved in application of Article 18 of the Swiss Code of Obligations, according to which the tribunal must attempt to determine the parties’ true and common intention (subjective interpretation). If this is not possible, the tribunal must determine the parties’ presumed intention in accordance with the principle of good faith (objective interpretation). Because the arbitral tribunal could not establish the parties’ true and common intention, it determined the method of calculating earn-out payments following the objective interpretation approach.

On 23 December 2016, the arbitral tribunal rendered its final award, partially admitting Z’s claims and thus ordering X to pay certain earn-out amounts plus interest to Z.

X filed an application for the annulment of the award arguing, inter alia, that the arbitral tribunal had violated its right to be heard within the meaning of Article 190(2)(d) of the Swiss Private International Law Act (PILA). In particular, the arbitral tribunal allegedly had failed to take into consideration several of X’s arguments and had based its award on reasons unforeseeable for the parties.

Decision

In its decision X. Holding SAS v. Z. Holding AG in Liquidation of 11 January 2018, the Swiss Supreme Court dismissed X’s application for annulment.1

Regarding the right to be heard under Article 190(2)(d) PILA, the Court recalled its position as continuously expressed in previous case law (see para. 3.1):

[A] party does not have the right to state its views on the legal assessment of the facts or, more generally, on the legal reasoning to be upheld, unless the arbitral tribunal considers basing its decision on a provision or a legal ground not discussed in the previous proceedings and which none of the parties raised and could anticipate to be pertinent in the case in dispute. Nor is the arbitral tribunal bound to advise a party specifically of the decisive nature of a factual element on which it is preparing to base its decision, provided that element was raised and proved in accordance with the rules. Moreover, the argument of a breach of the right to be heard should not allow the party who complains that the award’s reasoning is flawed to secure a review of the manner in which the tribunal applied the relevant substantive law.2

Failure to consider certain arguments

The Supreme Court did not admit that the arbitral tribunal had violated X’s right to be heard by not addressing two of its arguments. In particular, it did not agree that the arbitral tribunal should have interpreted the SPA restrictively, in application of the principle in dubio contra proferentem. As the arbitral tribunal had proceeded to an objective interpretation of the SPA, there was no room for this principle, which is subsidiary to the general rules of contract interpretation.

The Supreme Court also did not accept that the arbitral tribunal had failed to take into consideration X’s argument that B had allegedly accepted the absence of earn-out payments. For the Court, the arbitral tribunal had implicitly considered and rejected X’s argument. It thus had not violated X’s right to be heard.

Unforeseeable reasons (‘motifs imprévisibles’ and ‘effet de surprise’)

The Supreme Court rejected X’s argument that the arbitral tribunal had based its award on unforeseeable reasons. According to X, the arbitral tribunal had adopted the role of an accountant. It had decided the dispute based on an interpretation of the term ‘costs’ under the SPA, whereas the parties had focused their arguments on the applicable method of calculating earn-out payments. The parties could not have foreseen that, after having determined the applicable method, the arbitral tribunal would examine the various ‘costs’ referred to in the earn-out clause and then recalculate the amount of the earn-out payments without first consulting the parties (see para. 3.3.1).

For the Supreme Court, the subject matter of the dispute ultimately concerned the determination of the amount of potential earn-out payments. Thus, the parties had to anticipate all imaginable scenarios and develop their position, if necessary through subsidiary lines of argument, in order to cover all possible hypotheses regarding the determination of the earn-out amounts. The Supreme Court stressed that ‘the principle iura novit curia does not only apply to state courts’. It further observed that the settlement of a company’s accounts largely pertains to the facts and the assessment of the evidence, to which the jurisprudence regarding ‘unforeseeable reasons’ does not apply. The parties could foresee that the arbitral tribunal would recalculate the amount of the earn-out payments based on its interpretation of the term ‘costs’ (see para. 3.3.2).

Comment

Since its landmark Westland Helicopters decision in 1994, the Swiss Supreme Court has continuously held that the maxim iura novit curia applies to international arbitral tribunals seated in Switzerland.3 Accordingly, arbitrators must ascertain the content of and apply the applicable law on their own motion.

In X. Holding SAS v. Z. Holding AG in Liquidation, the Supreme Court confirmed this long-standing case law. Thus, the parties’ right to be heard in an adversarial procedure does not require the arbitrators to seek the parties’ views regarding the legal reasoning they intend to adopt, unless they plan to base their decision on a legal theory that was not addressed in the proceedings and the relevance of which the parties could not reasonably foresee.

The Supreme Court’s position regarding the application of the iura novit curia maxim in international arbitration proceedings in Switzerland is not self-evident.4 The participants in the proceedings, be they parties, counsel or arbitrators, may come from different legal systems with varying approaches to the status of the substantive law governing the merits. While some legal systems regard foreign law as law, to be ascertained and applied ex officio by the courts, others regard it as a fact, to be proven by the parties.5

Parties and counsel in international arbitrations in Switzerland should be aware of the Supreme Court’s position as, in practice, the iura novit curia maxim primarily operates to reduce the scope of available annulment grounds against arbitral awards under Article 190(2) PILA: 5

  • An award is not ultra petita (Article 190(2)(c) PILA) although based on a legal ground not raised by the parties during the proceedings;
  • An arbitral tribunal does not violate the parties’ right to be heard (Article 190(2)(d) PILA) even though it has not consulted the parties on the legal reasoning underlying the award.6

An exception however applies as the arbitral tribunal violates the parties’ right to be heard if it grounds its decision on a legal theory that was not raised in the proceedings and the relevance of which the parties could not have reasonably foreseen.7 As illustrated in the Supreme Court Decision, it is not sufficient that parties did not raise a particular legal theory; they must have been unable to reasonably foresee its relevance.8 In effect, the parties must ‘anticipate all imaginable scenarios and develop their arguments accordingly, be it through subsidiary lines of argument, in order to cover all possible hypotheses’.9

The practical consequences of the iura novit curia maxim are less burdensome on arbitral tribunals seated in Switzerland than on parties and their counsel. The Supreme Court has previously held that arbitrators have a duty to apply the law ex officio.10 However, a failure to comply with such duty does not entail any particular sanction. An incorrect application of the law is not an annulment ground under Article 190(2) PILA and a breach of the iura novit curia maxim does not amount to a violation of public policy within the meaning of Article 190(2)(e) PILA.11

Parties may agree to exclude the arbitrators’ power to ascertain and apply the law ex officio and limit their mandate to legal arguments advanced by the parties.12 They should also be able to agree on the application by the arbitrators of apposite transnational rules, such as the 2008 Recommendations of the International Law Association on Ascertaining the Contents of the Applicable Law in International Commercial Arbitration,13 or the transnational rules proposed by Prof. Gabrielle Kaufmann-Kohler.14 Both recommend a balanced approach between a strict application of the iura novit curia maxim and a ‘law is fact’ approach: while the parties are primarily tasked with establishing the contents of the applicable law, the arbitral tribunal may conduct its own research to ascertain such contents, giving the parties an opportunity to comment on the results of its research.


1
Decision 4A_56/2017, available at https://entscheide.weblaw.ch/cache.php?link=11.01.2018_4A_56-2017.

2
English translation of the Decision ATF 142 III 360 available at http://www.swissarbitrationdecisions.com/agreed-upon-rules-procedure-do-bind-parties?search=ATF+142+III+360.

3
Westland Helicopters Limited v. The Arab British Helicopter Company (ABH), ATF 120 II 172, 175 of 19 April 1994. See also, e.g., Bank Saint Petersburg PLC v. ATA Insaat Sanayi ve Ticaret Ltd., Supreme Court Decision 4P.260/2000 of 2 March 2001; N.V. Belgische Scheepvaartmaatschappij-Compagnie Maritime Belge, à Anvers (Belgique) v. N.V. Distrigas, à Bruxelles (Belgique), Supreme Court Decision 4P.114/2001 of 19 December 2001; A. v. B. Ltd, ATF 130 III 35 of 30 September 2003; B. v. A., Supreme Court Decision 4P.168/2006 of 19 February 2007; X. v. A., B., C., D., Supreme Court Decision 4A_42/2007 of 13 July 2007; X. v. Y., Supreme Court Decision 4A_400/2008 of 9 February 2009; X. v. Y., Supreme Court Decision 4A_3/2009 of 20 March 2009; X., Y. v. Z., Supreme Court Decision 4A_240/2009 of 16 December 2009; X. v. Y., Supreme Court Decision 4A_464/2009 of 15 February 2010; X. v. Y., Supreme Court Decision 4A_214/2013 of 5 August 2013; X. v. Z., Supreme Court Decision 4A_446/2013 of 5 February 2014; A. v. B., Supreme Court Decision 4A_554/2014 of 15 April 2015; X S.p.A. v Club Y, Supreme Court Decision 4A_716/2016 of 26 January 2017.

4
S. Gabriel/A. Buhr, Iura Novit Arbiter: Application of the Law on the Tribunal’s Own Motion, in dRSK, 14 February 2018, para. 33 (available at http://www.gabriel-arbitration.ch/en/publications-and-speaking/iura-novit-arbiter ). For an overview of the Swiss position, see, e.g., M. Arroyo, ‘Which is the Better Approach to Jura Novit Arbiter – the English or the Swiss?’, in C. Müller/A. Rigozzi (eds.), New Developments in International Commercial Arbitration 2010, Zurich, Basel Geneva: Schulthess 2010, pp. 27-54.

5
For a short overview of the different approaches followed by national and international courts, see, e.g., G. Kaufmann-Kohler, ‘The Governing Law: Fact or Law? – A Transnational Rule on Establishing its Contents’, reproduced in G. Kaufmann-Kohler/A. Rigozzi, International Arbitration – Law and Practice in Switzerland, Oxford 2015, p. 378; International Law Association (ILA), ‘Report and Recommendations on Ascertaining the Contents of the Applicable Law in International Commercial Arbitration’, (2010) 26 Arbitration International, 191, 201-205.

6
G. Kaufmann-Kohler/A. Rigozzi, op. cit. fn 5, para. 7.87.

7
G. Kaufmann-Kohler, op. cit. fn 5, p. 379.

8
On this and other exceptions to iura novit arbiter, see the overview in M. Arroyo, op. cit. 4, pp. 45-48.

9
B. Berger/F. Kellerhals, International and Domestic Arbitration in Switzerland, 3rd ed., Berne: Stämpfli Publications Ltd. 2015, para. 1435.

10
Free translation of ‘[les parties] doivent bien évidemment envisager tous les scénarios imaginables et développer leur argumentation en conséquence, fût-ce en émettant des opinions à titre subsidiaire, de manière à embrasser toutes les hypothèses’ (at para. 3.3.2).

11
N.V. Belgische Scheepvaartmaatschappij-Compagnie Maritime Belge, à Anvers (Belgique) v. N.V. Distrigas, à Bruxelles (Belgique), Supreme Court Decision 4P.114/2001 of 19 December 2001, para. 3.a.

12
N. Voser/ E. Leimbacher, ‘No Violation of right to be heard where arbitrator used a legal concept not directly raised by parties which could have been reasonably anticipated (Swiss Supreme Court Decision 4A_554/2014)’, Legal update: case report Switzerland, published by Practical Law on 11 June 2015; G. Kaufmann-Kohler, op. cit. note 5, p. 380 with reference to D v. Bank C, Supreme Court Decision 4P.242/2004 of 27 April 2005, para. 7.3.

13
N. Voser/ E. Leimbacher, op. cit. fn 12; M. Arroyo, op. cit. fn 4, pp. 45-46; B. Berger/F. Kellerhals, op. cit. fn 9, para. 1437. See also X S.p.A. v Club Y, Supreme Court Decision 4A_716/2016 of 26 January 2017, para. 3.1.

14
ILA, op. cit. fn 5.

15
G. Kaufmann-Kohler, op. cit. fn 5, p. 381.