International arbitral tribunals are often requested to construe legal concepts that have no precise definition in the law governing the merits of the case. In so doing, arbitral tribunals might seek guidance from other legal systems than the law governing the case. The Swiss Supreme Court quite predictably confirmed that such a practice does neither imply any excess of the arbitral jurisdiction, nor does it contravene the substantive public policy as it is known in Switzerland, either of which would justify the annulment of the ensuing award.
Facts
A fluorite mining company in South Africa (the "Supplier") and a US incorporated fluor-hydric acid producing conglomerate (the "Purchaser", collectively: the "Parties") had entered into a calcium fluoride supply/purchase agreement (the "Agreement") for an initial five-year contractual term, thereafter automatically renewed for an additional year unless either party terminated it at least six-month prior to the expiry of the initial contractual term. Upon the occurrence of a "material breach of the Agreement", the non-breaching party could terminate the Agreement. The Agreement contained an arbitration clause (ICC, Zurich) and a choice of law provision in favor of "the laws of Switzerland as applied between domestic parties provided, however, that the express agreements, understandings and provisions contained herein shall always prevail".
The Supplier terminated the Agreement weeks after the automatic renewal of the initial contractual term, on the grounds of the Purchaser's failure to settle two outstanding invoices and to release some of the prerequisite information to determine the price for the renewed contractual term. The Purchaser refuted the existence of any ground justifying the unilateral termination and filed for arbitration, claiming full compensation for the damage incurred as a result of the Supplier's failure to supply the agreed quantity until the expiry of the renewed contractual term. The Supplier filed a counterclaim for the full compensation of the damage incurred as a result of the Purchaser's alleged material breach.
The arbitral tribunal held that the alleged contractual infringements were not, individually considered or taken together, tantamount to any material breach within the purview of the Agreement, hence that the unilateral termination of the Agreement was not justified in law. Therefore, the arbitral tribunal granted part of the compensation claimed by the Purchaser on that account and denied any other claims filed by the Parties. In order to determine the intended meaning of the material breach test, the arbitral tribunal drew from the practice prevailing under the 1980 United Nations Convention on Contracts for the International Sale of Goods (the "CISG") and the 2004 UNIDROIT Principles of International Commercial Contracts (the "UNIDROIT Principles").
The Supplier deferred the award to the scrutiny of Swiss Supreme Court, arguing that the arbitral tribunal had exceeded its jurisdiction (PIL Act Art. 190 par. 2 lit. c), in referring to the CISG and UNIDROIT Principles whereas the Parties' choice of law agreement was to refer to "the laws of Switzerland as applied between domestic parties". In the Supplier's view, such clause should be construed as ruling out any reference to transnational rules such as the CISG and UNIDROIT.
The Swiss Supreme Court's Decision
The Swiss Supreme Court upheld the arbitration award. It denied that the arbitral tribunal exceeded its jurisdiction when construing the material breach test1 It also denied that the award was contrary to the international public policy as known in Switzerland (PIL Act Art. 190 par. 2 lit. e). The Court considered on the contrary that the arbitral tribunal had construed the Agreement in compliance with the general Swiss law principles governing contractual interpretation. In particular, it found the reference to transnational rules to determine the meaning of material breach test was not unreasonable considering the Parties' longstanding international commercial practice. The Court also denied that the arbitral tribunal's legal determination inspired from the international practice infringed the Parties' right to be heard insofar as such determination could hardly be considered as unpredicted and unpredictable to the Parties. The decision of the Court would not have be different had the award been challenged under the more apposite public policy ground since matters pertaining to contractual interpretation are largely beyond the scope of such annulment ground (see e.g. unpublished decision 4A_268/2007 of 14 November 2007, in the matter X c/ Y, ground 3 and references).
Commentary
The reported decision confirms the leeway that arbitrators sitting in Switzerland enjoy when construing contractual terms. Moreover, this decision is in line with the ICC Rules of arbitration 1998, which provide that in all cases, when applying the rules of law on the merits, the Arbitral Tribunal "shall take account of the provisions of the [...] relevant trade usages" (1998 ICC Rules, Art. 17 par. 2). Such relevant trade usages are often the necessary bridge between the Parties' contractual (and commercial) relationship, and the legal system chosen to govern it.
Decision 4A_240/2009 of the Swiss Supreme Court in X and Y v Z, dated December 16, 2009, released February 2010. The full text of the decision, which will not be published in the official reports of the Swiss Supreme Court's decisions, is available in its original (German) language at www.bger.ch/fr/index/juridiction/jurisdiction-inherit-template/jurisdiction- recht/jurisdiction-recht-urteile2000.htm
Footnote
1. The Swiss Supreme Court questioned that the lack of jurisdiction was the likely ground to challenge the award before the Swiss Supreme Court but it nevertheless examined the ground.
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