28. August 2023

Arbitration Newsletter Switzerland: No Reasoning in the Award – no Review of the Award!

In June 2023, the Swiss Federal Supreme Court (the “Supreme Court“) published an interesting decision (4A_41/2023 dated, 12 May 2023, the “Decision“) on its website, wherein it decided on an action for annulment against an arbitral award, rendered by a rabbinical arbitral tribunal, that lacked any findings of fact (including procedural history) and legal reasoning. The Supreme Court dismissed the action for annulment, holding that, while the arbitral award in question could be challenged at the Supreme Court, it could not review said decision due to a complete lack of information in the decision itself.

The Decision was rendered by five members of the First Civil Chamber on 12 May 2023 and will be included in the Supreme Court’s publication of leading cases.

1. Facts

On 12 September 2022, individuals A, B and C signed an agreement to settle a dispute regarding monetary claims in connection with a real estate investment by a decision of a three-member rabbinical arbitral tribunal, seated in Zurich. The arbitration agreement stipulated that that the arbitral proceedings be conducted in accordance with Jewish procedural law.

On 7 December 2022, the rabbinical arbitral tribunal (the “Tribunal“) held a hearing in Zurich which lasted approx. one hour. The unsigned written minutes contain a part entitled “Decision (Psak Din)” wherein the Tribunal came to certain conclusions with regard to the relationship of the parties and the claims raised in the arbitration.

On 12 January 2023, the Tribunal rendered a decision “after hearing and considering all arguments of the parties“. The decision was signed by all three arbitrators but did not contain any reasoning, neither any statements to the facts nor any legal considerations.

Party A filed an action for annulment at the Supreme Court requesting the annulment of the decisions of the Tribunal of 7 December 2022 respectively 12 January 2023. Parties B and C requested the dismissal of such action.

After a double round of exchange of briefs, the Supreme Court dismissed A’s action for annulment insofar it considered it admissible. It also ordered that A has to bear the costs of the proceedings before the Supreme Court of CHF 6,500 and to compensate B and C with CHF 7,500 for their costs incurred in connection with the proceedings before the Supreme Court.

2. Considerations of the Supreme Court

The Supreme Court first assessed whether the decision of the Tribunal had qualified as an arbitral award in the sense of Article 189 Federal International Private Law Act (“PILA“), which presupposes that it has to be a decision of a non-state court, to which the parties have entrusted the adjudication of a dispute regarding an economic interest, with an international character, and that the decision had been rendered on the basis of an arbitration agreement. In addition, in order to qualify as an actual decision that can be considered equivalent to a judgment of a state court, the arbitral tribunal must offer sufficient guarantees of impartiality and independence. After an assessment, the Supreme Court concluded that all these criteria for an arbitral award in that sense were met in the case at hand.

The Tribunal was then also qualified as a lawful arbitral tribunal not falling under the prohibition of ecclesiastical jurisdiction. Such prohibition does not apply to a voluntarily agreed ecclesiastical arbitral tribunal, provided that it decides on a matter open to arbitration. That this is the case in the dispute at hand remained undisputed.

The Supreme Court then assessed whether the minutes of 7 December 2022 hearing qualify as a challengeable decision but rejected this. In the Supreme Court’s opinion the minutes did not contain any final decision on the matter in dispute for different reasons. Inter alia, the minutes were not signed, which – according to the agreed Jewish procedural law – is a requirement for a binding decision.

With regard to the decision of 12 January 2023, the Supreme Court held that it could be challenged at the Supreme Court but that the Supreme Court can de facto not review it. The Supreme Court explained this as follows:

Both the procedure as well as the form and content of an arbitral award are primarily subject to party autonomy under PILA. Depending on the procedural provisions chosen, this can lead to obstacles in challenging and enforcing the arbitral award. In particular, if the award is to be communicated only orally or does not have to contain any reasoning, the possibility of an effective (and successful) challenge of the award is put into jeopardy. This is because the Supreme Court cannot – without a reasoning in the award – assess whether any ground for a challenge, provided for under Articles 190(2) PILA, exists.

In order for the Supreme Court to be able to review the challenged arbitral award, it also requires factual findings on the course of the arbitration proceedings and the matter in dispute. In case of a lack thereof, the Supreme Court cannot correct or supplement the arbitral tribunal’s findings of fact, even if they are manifestly incorrect or based on a violation of law within the meaning of Article 95 Federal Act on the Supreme Court. Also, the very limited possibility of reviewing factual findings if admissible grounds within the meaning of Article 190(2) PILA are raised against them or nova are exceptionally taken into account cannot apply from the outset if the award contains no findings of fact at all. It cannot then be the task of the Supreme Court to gather the missing facts from the arbitral records or to take evidence on disputed submissions. The Supreme Court cannot take into account facts not stated in the challenged arbitral award.

The parties accept such an outcome when they agree on corresponding procedural provisions. When they do so in an area that is at their free disposition, i.e. arbitrable, there is no reason to intervene in a corrective manner by means of mandatory minimum rules. Depending on the procedural provisions chosen, the situation can arise that an arbitration decision can in principle be challenged by an action for annulment with the Supreme Court, but is in fact not reviewable.

This is the situation in the case under review as the parties referred in the arbitration agreement to the procedures regulated by Jewish law, wherefore the Tribunal proceeded according to Jewish procedural law, in which the principle of orality applies, i.e. that the spoken word prevails in such proceedings.

Accordingly, the only decision available to the Supreme Court is the decision of 12 January 2023, which contains however no reasoning at all; no findings on facts of the arbitration (procedural history), no factual findings on the merits and also no legal considerations were provided in the award. This makes the challenge in essence impossible, which, however, the parties have accepted by voluntarily agreeing to the application of Jewish procedural law.

The Supreme Court also pointed out that the challenged award is not void for lack of reasoning; neither party asserted the contrary. A different conclusion could only be reached in case of obvious lack of jurisdiction of the alleged arbitral tribunal.

The Supreme Court then tried to assess the different grounds raised by A in its action for annulment but was unable to do so due to the lack of reasoning. The Supreme Court even held that it could not examine the claim of violation of the principle of equal treatment and the right to be heard, since there are no findings on the course of the arbitration proceedings. The allegations in the action for annulment would not find any support in the challenged award and it cannot be the Supreme Court’s task to verify them on the basis of the submitted arbitration files and to reconstruct the course of the proceedings

3. Conclusions

The Decision highlights the importance of the parties’ agreement on the applicable procedural provisions: If the parties agree on procedural rules or provisions which foresee or have the consequence that the award is rendered only orally or in writing – but without any reasoning – the award can de facto not be annulled by the Supreme Court, except under very special circumstances.

This is a consequence of the Swiss lex arbitri, which gives great weight to party autonomy. As stipulated in Article 189(1) PILA, the award shall be rendered in accordance with the procedure and form that the parties agreed on. Only in the absence of such an agreement, the award needs to be in writing and have a reasoning (Article 189(2) PILA).

This may be problematic insofar as the parties can de facto waive the right to challenge the arbitral award by agreeing on certain procedural provisions without even addressing the question of challenges to the arbitral award at this point in time.

In the case at hand, this was not an issue as the parties agreed in the arbitration clause that they have no right to challenge the award, neither in front of a Jewish court nor any other court. While this waiver of recourse was not valid as one of the parties had its domicile in Switzerland at the time of the conclusion of the arbitration agreement (see Article 192 PILA), it may have been an important addition as the Supreme Court assumed that the parties knew what they were getting into with regard to the possibility to challenge the award when they agreed on the procedural provisions, i.e. the application of Jewish procedural law.

In any case, the Decision highlights the importance of an informed decision about the procedural rules and provisions that shall apply on the arbitration. To put it simple: You better know what you are bargaining for in the arbitration clause – if not, you may be surprised by severe consequences!

 

 

2023-08-28-Arbitration-Newsletter.pdf (pdf 5 MB)