International Arbitration 2019

Last Updated August 19, 2019

Contributed By NIEDERER KRAFT FREY

Trends and Developments


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NIEDERER KRAFT FREY is a leading full-service Swiss law firm based in Zurich with an international approach. The firm works closely with its clients in Switzerland and internationally, to implement strategic goals, strengthen businesses and navigate change effectively. Niederer Kraft Frey's dispute resolution team is a leader in the Swiss legal market for contentious matters and provides a comprehensive service. The team is known for being easy to work with, efficient and business-aware. The firm's client base includes global banks, leading technology firms and large international sports organisations. Members of Niederer Kraft Frey's dispute resolution group regularly serve as chairpersons, single arbitrators, party-appointed arbitrators and counsels in national and international arbitration proceedings. The firm's track record is particularly strong in high-stakes arbitration proceedings. Extensive experience with arbitral proceedings both as arbitrators and party representatives, in-depth knowledge of the different rules governing the proceedings, and strong ties with leading law firms all over the world allow Niederer Kraft Frey to represent clients' interests in national and international arbitral proceedings effectively.

Switzerland – an Important Venue for International Arbitration

Switzerland is one of the most important hubs for international arbitration. An empirical study of the European Parliament on arbitration in the EU and Switzerland came to the conclusion that Switzerland is among the most recommended places for arbitration and thus is without doubt one of the of the leading arbitration venues worldwide. A similar picture emerges from recent statistics of the International Chamber of Commerce in Paris (ICC) where Geneva was the most often chosen seat of arbitration after Paris and London. In addition, Swiss nationals were the third most frequently appointed arbitrators in these ICC arbitration proceedings. Switzerland is also often chosen as a place for commercial arbitration according to the Swiss Rules of International Arbitration of the Swiss Chambers' Arbitration Institution, and it hosts the Court of Arbitration for Sport (TAC/CAS) in Lausanne, which is the highest instance in sports-related disputes worldwide, as well as the WIPO Center for Arbitration and Mediation.

In the course of the preparatory work for the revision of the Swiss Private International Law Act (PILA) - which will be discussed in more detail below - the Swiss Federal Office of Justice interviewed various stakeholders of international arbitration in Switzerland. With regard to Switzerland's success in this area, the discussion partners cited the excellent legal framework as the most important factor for success in arbitration (in particular the 12th chapter of the PILA) and, at the same time, the high quality and consistency of the Swiss Federal Court's case law in the field of international arbitration. The size and dynamics of a constantly renewing pool of highly qualified and multi-lingual Swiss arbitrators were also mentioned as factors contributing to the success of Switzerland as an internationally recognised place for arbitration. All this is complemented, according to the interviewees, by the traditional quality factors of the Switzerland as a place for business, such as political neutrality and stability, the quality of the infrastructure and the accessibility of legal sources in the three official languages, German, French and Italian, with a number of these sources also being available in English translations.

Switzerland's tradition of arbitration ties in with the tradition of good offices in foreign policy. Within this framework, Switzerland has played, and continues to play, a role as facilitator and supports parties in the search for negotiated solutions without taking sides itself. While literature mentions first arbitration proceedings already occurring in the Middle Ages, the Alabama Arbitration Procedure of 1872 is commonly mentioned as the birth of modern public arbitration. At that time, the Governments of the United States of America and the United Kingdom submitted claims for damages arising during the American Civil War. Later, private international commercial arbitration reached its current significance with the upturn in cross-border trade in the twentieth century when all Swiss cantons regulated arbitration. The PILA came into force in 1989 and its 12th chapter regulates international arbitration in Switzerland. For the area of domestic arbitration, the Federal Constitution of 18 April 1999 cleared the way for a federal regulation, which came into force on 1 January 2011 as the third part of the Swiss Code of Civil Procedure (CPC), and replaced the regulations on cantonal level. The creation of a uniform arbitration law in the sense of a unique code (covering both international and domestic arbitration) was, however, deliberately waived at that time.

Revision of the Legislative Framework for International Arbitration in Switzerland

Almost 30 years after its adoption, the 12th chapter of the PILA continues to apply internationally as an innovative arbitration law of great quality. It is appreciated as a clear and concise law, which gives the parties great autonomy and flexibility in procedural design, while at the same time providing a transparent framework secured by the state courts. Thanks to these characteristics, the 12th chapter of the PILA is a suitable legal framework for different types of arbitration such as ad hoc proceedings, institutional arbitration, sports arbitration and investment arbitration.

Triggered by a motion of the Swiss Parliament, the legislation governing international arbitration was revised, and on 24 October 2018, the Swiss Federal Council released the report and the draft bill for the proposed revision of the 12th chapter of the PILA that aims at strengthening further the current strengths as well as at increasing legal certainty and clarity. The draft, in particular, enshrines the case law of the Federal Tribunal, removes ambiguities and makes the law more user-friendly. In addition, the draft also takes into account the developments in international trade and other arbitration laws worldwide and incorporates a number of innovations aimed at further optimising the Swiss law on international arbitration.

The main goals of the proposed amendment are the following:

Keeping Track of Court Practice and Clarification of Open Questions

In the almost 30 years since the PILA came into force, the Federal Tribunal has clarified various questions and supplemented the law in important points. In the interest of transparency and user-friendliness, the Federal Council deems it necessary to update or, where appropriate, supplement the jurisprudence in the law. At the same time, open issues should be clarified by law where appropriate.

These revision points include the following:

According to the draft, the legal remedies for corrections, explanation, amendment and revision of arbitral awards shall now be expressly regulated in the law. While today's PILA contains no provisions in this respect, the Federal Tribunal has recognised that decisions of arbitration tribunals in international arbitration can also be rectified, explained or amended and are also accessible for revision. By implementing the draft, the framework of legal remedies will be comprehensively dealt with in the text of the law. Consequently, the 12th chapter of the PILA will satisfy the claim of the historical legislator to regulate international arbitration comprehensively and conclusively in the PILA.

According to its Article 176, the PILA shall apply to arbitration tribunals domiciled in Switzerland "provided that at least one party has its domicile or habitual residence when concluding the arbitration agreement in Switzerland". In a decision on the question of the scope of applicability of the PILA, the Federal Tribunal examined the circumstances of the later parties to the arbitration (and not of the parties to the arbitration agreement). This decision was unanimously criticised by academic writers. According to that decision, the applicable arbitration law (CPC or PILA, depending on the domicile, seat or habitual residence of the parties) cannot be established until an arbitration procedure has been initiated. This creates legal uncertainty, particularly in contracts with several parties, because it is often impossible to predict which parties to the contract will be involved in a subsequent legal dispute. This legal uncertainty is a major weakness of the current system. Therefore, the revised PILA shall now explicitly refer to the parties to the arbitration agreement.

The current law does not clarify the applicable procedure for proceedings before the state court if it is acting as juge d'appui. The draft therefore expressly provides that the summary procedure according to the CPC shall apply in such cases in both domestic and international arbitration.

Strengthening Party Autonomy

The 12th chapter of the PILA grants the parties great freedom in the design of procedural matters. The aim of the proposed amendment of the PILA is to strengthen this characteristic by implementing the following:

Under the current law, an arbitration agreement shall be concluded in writing, by telegram, telex, tele copier or in any other form of transmission "which allows proof of the agreement by text". Initially, the preliminary draft of January 2017 stipulated that the formal requirement should be moderately simplified by allowing that only one party to the arbitration agreement shall have to fulfil the form. However, due to criticism expressed during the consultation process, such simplification was ultimately not adopted in the draft bill published in October 2018. In order to modernise the wording of the aforementioned provision on formal requirements for arbitration agreements, and in line with the already applicable formal requirements for domestic arbitration, the draft bill now merely stipulates that an arbitration agreement must be "in writing or in any other form that allows it to be evidenced by text".

The draft now also expressly provides that, in addition to the usual bilateral or multilateral arbitration agreement, jurisdiction may also be conferred to an arbitral tribunal based on an arbitration clause contained in a unilateral legal transaction such as a last will, a foundation, a trust and others, if that clause was effectively established in accordance with the substantive law applicable thereto.

Strengthening User-friendliness

The PILA competes with foreign legal systems. User-friendliness is therefore extremely important. The proposal for the partial revision of the 12th chapter of the PILA intends to address parties' needs further by implementing the following measures:

An arbitration is international in accordance with the 12th chapter of the PILA if at least one party to the arbitration is from abroad. That party may not be familiar with the Swiss legal system. For foreign parties it is, therefore, a decisive advantage if the lex arbitri is comprehensively settled in one specific decree. In the interest of user-friendliness, references to the CPC in the PILA shall, therefore, be replaced by direct regulations in the PILA itself, so that the PILA solely and comprehensively regulates international arbitration. In that sense, the PILA shall now regulate the appointment, the refusal and the dismissal of a member of an arbitral tribunal in cases where these proceedings require the assistance of state courts, ie, where the parties have not themselves stipulated the relevant provisions in their arbitration agreement.

English is the predominant language in international arbitration. In appeal proceedings, the Federal Tribunal already accepts submission of exhibits in English with the consent of the other parties. The draft proposes to make a further step in this context and provides that it shall now also be possible to submit the legal briefs to the Federal Tribunal in English in cases where it acts as the competent appeal body in arbitration matters. In view of the strict conditions for appeals against an arbitral award (cf below) it is not expected that the number of appeal proceedings brought before the Federal Tribunal will increase because of this change. However, the admission of legal documents in English will lead to a reduction in the translation workload for the parties, thus further enhancing Switzerland's attractiveness as a venue for international arbitration. As this proposed amendment was met with resistance from the Federal Tribunal, it remains to be seen whether the provision will be included in the revised law.

The draft for a revision of the 12th chapter of the PILA is to be submitted to the Swiss Parliament for discussion and approval and it is not clear at the time of writing when the revised law will come into force.

Jurisprudence of the Swiss Federal Tribunal

The Swiss Federal Tribunal in Lausanne is the last instance in arbitration matters.

According to Article 190 of the PILA, an arbitral award in international arbitration shall, in principle, be final when communicated. The PILA, however, allows a challenge to the arbitral award before the Federal Tribunal for some limited grounds. It can be challenged if:

  • a sole arbitrator was irregularly designated or the arbitral tribunal was irregularly constituted;
  • if the arbitral tribunal erroneously held that it had or did not have jurisdiction;
  • the arbitral tribunal ruled on matters beyond the claims submitted to it or if it failed to rule on one of the claims submitted;
  • the parties were not treated equally or the right to be heard in an adversarial proceeding was not respected; or
  • the award is incompatible with Swiss public order (ordre public).

In order to strengthen the power of arbitral tribunals in Switzerland, Article 192 of the PILA even allows the exclusion of appeals against an arbitral award if neither party has a domicile, place of habitual residence or place of business in Switzerland, provided the parties expressly agree so in the arbitration agreement or a subsequent written agreement.

Success rates of appeals against arbitral awards with the Federal Tribunal are low. In 2016 and 2017, a total of three challenges were successful.

In the author's view, the following decisions of the Federal Tribunal in arbitration matters during the past twelve months are worth noting:

Right to be Heard

A party's right to be heard is not violated, in the event that the arbitral tribunal applies legal reasoning to which no party had referred. Namely, the arbitral tribunal reduced the claim for damages due to fault on the part of the party claiming such damages, even though the opposing party had not expressly requested any such reduction.

Deviation from Agreed Procedural Rules

Procedural rules agreed upon by the parties to an arbitration proceeding are not mandatory procedural rules in the sense of Article 190 para 2 lit d of the PILA (regarding the equal treatment of the parties and their right to be heard). In consequence, the arbitral tribunal did not breach the right of the parties to be heard by deviating from procedural rules on the deadline for submitting new evidence or new arguments as agreed between the parties to be binding on the arbitral tribunal.

Jurisdiction of an Arbitral Tribunal to decide Retention Claims

An arbitral tribunal not only has jurisdiction to hear claims based on an agreement containing an arbitration agreement, but also in relation to retention rights raised by the responding party in defence against such claims, provided that those retention rights have a link to the respective claim as per the applicable Swiss substantive law.

Immunity of Foreign States in Attachment Proceedings

The Federal Tribunal rendered a landmark decision with regard to immunity of foreign states in enforcement proceedings of arbitral awards against state-owned assets located in Switzerland, as well as with regard to the relationship between Swiss procedural law and the New York Convention on the Recognition and Enforcement of Foreign Arbitral Awards of 10 June 1985, governing the enforcement of foreign arbitral awards in Switzerland. In summary, the Federal Tribunal found that the New York Convention does not prevent Swiss procedural law from applying restrictions in terms of enforcement proceedings against foreign states' assets located in Switzerland, and that consequently the prerequisites of the enforceability of a claim against a foreign state as per consistent Swiss case law, and in particular the requirement of a sufficient domestic nexus of the claim to be enforced to the territory of Switzerland, also apply within the area of application of the New York Convention.

Beginning of the 30-day Deadline for Filing an Annulment Action

The receipt of a courtesy copy (pursuant to the ICC Rules) of the arbitral award by email from the ICC secretary's office is not deemed to trigger the commencement of the 30-day period for filing an application for annulment of the award, but only the receipt of an original by mail or courier.

NIEDERER KRAFT FREY

Niederer Kraft Frey Ltd
Bahnhofstrasse 53
8001 Zurich

+41 58 800 80 00

+41 58 800 80 80

nkf@nkf.ch www.nkf.ch
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NIEDERER KRAFT FREY is a leading full-service Swiss law firm based in Zurich with an international approach. The firm works closely with its clients in Switzerland and internationally, to implement strategic goals, strengthen businesses and navigate change effectively. Niederer Kraft Frey's dispute resolution team is a leader in the Swiss legal market for contentious matters and provides a comprehensive service. The team is known for being easy to work with, efficient and business-aware. The firm's client base includes global banks, leading technology firms and large international sports organisations. Members of Niederer Kraft Frey's dispute resolution group regularly serve as chairpersons, single arbitrators, party-appointed arbitrators and counsels in national and international arbitration proceedings. The firm's track record is particularly strong in high-stakes arbitration proceedings. Extensive experience with arbitral proceedings both as arbitrators and party representatives, in-depth knowledge of the different rules governing the proceedings, and strong ties with leading law firms all over the world allow Niederer Kraft Frey to represent clients' interests in national and international arbitral proceedings effectively.

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