19. März 2021

Arbitration Newsletter Switzerland: Schiedsspruch im dritten Anlauf vom Bundesgericht geschützt

1. Facts

In a recent case, the Federal Supreme Court (the „Supreme Court„) had to deal with the same domestic award for the third time! Twice it annulled the awards rendered¹ but, but, in the third attempt to overthrow such award, the aggrieved party failed and the Supreme Court rejected its action for annulment.²

The arbitration, in front of a three member tribunal (the „Arbitral Tribunal„), was between Georgian Copper AG („Georgian Copper„) as claimant and Glencore AG („Glencore„) as respondent³, both of them incorporated in the Canton of Zug (Switzerland). The seat of the Arbitral Tribunal was in Zurich and the Swiss Rules applied.

Until 1990 Glencore had been buying copper from Madneuli, a Georgian mining company, although with increasing difficulties, both financially and technically. On 26 February 2003, Glencore and Georgian Copper entered into a memorandum of understanding, according to which the latter was to buy Madneuli’s entire copper production and re-sell such production to Glencore. The memorandum was then incorporated into a supply agreement between Glencore and Georgian Copper for the period of 2004 up to 2013, entered into on the same day (the „Georgian Copper Agreement„).

On 8 July 2003, Georgian Copper and Madneuli entered into a supply agreement obligating Madneuli to sell its entire copper production for the years 2004 up to 2015 directly to Glencore (the „Madneuli Agreement„). The Georgian Copper Agreement and the Madneuli Agreement were referred to as „Back-to-Back-Agreements“ and were to become effective at the beginning of 2004.

Due to the rose revolution in Georgia, difficulties arose and the „Back-to-Back-Agreements“ were not executed. Instead, Glencore and Georgian Copper modified their contractual relationship on 5 February 2004 by entering into an „Assignment Agreement“ and an „Agency Agreement“ (together the „AA Agreements„). According to the AA Agreements, effective as of 1 March 2004, Georgian Copper assigned all its rights under the Madneuli Agreement to Glencore against an assignment fee and an agency fee. However, on 19 February 2004 and hence shortly after entering into the AA Agreements, Glencore and Madneuli agreed to extend the term of the existing delivery contract until the end of 2004.

On 26 May 2004, Georgian Copper requested from Glencore payment of the assignment fee and its agency fee for direct deliveries made by Madneuli to Glencore in the months March to May 2004 but Glencore refused payment, arguing that the AA Agreements had never entered into force and in eventu it terminated such agreements. Georgian Copper rejected such arguments.

Thereafter, but not until April 2011, Georgian Copper initiated arbitration proceedings against Glencore requesting payment of USD 106 Mio. In the First Award, the Arbitral Tribunal awarded Georgian Copper USD 26,462,387 (plus interest of 5% p.a. as of 31 January 2012). The Arbitral Tribunal noted the following termination terms in Art. 3 and 10 respectively of the AA Agreements:

Art. 3

„This agreement is entered into for an indefinite period of time and may be terminated any time by each party giving the other party sixty days prior notice of termination in writing upon the end of a calendar month.“

Art. 10

„[each party to the agreement] represents and warrants to the other parties: […] It has not concealed from the other party any financial or other information it is aware of that could materially affect the intent of the other party to enter into this Agreement.“

In addition, Art. 9 of the Assignment Agreement stated the following:

„In the event that, the Assignee and Madneuli wish to amend, alter, modify or terminate the Madneuli Contract or to provide for a new set-up or concept relating to the production and delivery of copper concentrates, the Assignor shall upon request by Assignee amend, alter, modify or terminate the Madneuli Contract accordingly, provided such request is commercially reasonable for both parties.“

Thereafter, the Arbitral Tribunal held in its First Award that Glencore failed having informed Georgian Copper of the extension of its direct contractual arrangements of 19 February 2004 with Madneuli. According to the Arbitral Tribunal, Glencore should have known that such extension causes a fundamental violation of its commitments towards Georgian Copper and violated the non-concealment clause in Art. 10 of the AA Agreements, as well as Art. 9 of the Assignment Agreement. In addition, this unilateral act by Glencore undermined the spirit and purpose of the AA Agreements in breach of good faith (treuewidrig).

Consequently, the Arbitral Tribunal concluded that due to Glencore’s breach of contract it was estopped, according to the principle of good faith, from executing its right of termination within 60 days with the consequence that Glencore’s notice of termination was invalid. The Arbitral Tribunal went on by noting that the termination notice period had to be determined by considering which notice period the Parties would have agreed upon, had they known that the termination provision stated in the Assignment Agreement would not apply. The Arbitral Tribunal was of the view that the termination clause stipulated in the Georgian Copper Agreement, subsequently replaced by the AA Agreements, was to be considered to that end, providing in its Art. 3 for a fixed term of five years. The Arbitral Tribunal hence concluded that Georgian Copper was entitled to be compensated for its fees which it would have generated under the AA Agreements within such five year period.

2. Considerations of the Supreme Court

2.1 In the Frist Annulment Decision

The First Annulment Decision criticized the First Award for not even trying to provide any reasons in which respect Glencore’s execution of the termination right would fall under one of the case groups (Fallgruppe) to establish an abuse of right. It would be inconceivable why a breach of contract should prevent the breaching party from exercising it right for ordinary termination. Instead, it would be consistent for a party that no longer wanted to be tied to a contract to terminate such contract. The Supreme Court concluded in rather harsh terms, that a mere reference to the principle of good faith would not suffice as application of the law but goes more in the direction of decisionism (Dezisionismus) which cannot pass the prohibition of arbitrariness.⁴

2.2 In the Second Annulment Decision

In the Second Award the Arbitral Tribunal came again to the same result, after having added some more arguments in support of its view that Glencore’s termination was abusive. It qualified the behaviour of Glencore as „venire contra factum proprium„. However, the Arbitral Tribunal again failed, in the view of the Supreme Court, to advance consistent arguments in this respect, apparently basing its decision that the termination of the AA Agreements was invalid by referring simply to Art. 2(2)⁵, of the Civil Code („CC„).⁶ In doing so, the Arbitral Tribunal failed, in the view of the Supreme Court, to follow the directions established in Art. 395(2) of the Swiss Procedural Code („SPC„)⁷, namely that it had to base its new decision on the considerations rendered by the Supreme Court in its First Annulment Decision. Much to the dismay of the Supreme Court, the Arbitral Tribunal seemed to have simply ignored its considerations. This then resulted in a contradictory reasoning in the Second Award as well. On the one hand, the termination was again declared as ‚legally invalid‘ but on the other hand the termination provision in the AA Agreements was qualified as ‚discretionary right of termination‘. In doing so, the Second Award ended up with conclusions which had already been explicitly rejected by the Supreme Court in its First Annulment Decision. Consequently, the Second Award shared also the same destiny, namely: annulment.⁸

2.3 In the Second Annulment Decision

In the Third Award the Arbitral Tribunal moved its line of argument and held:

„The exercise of the discretionary termination right was effectively terminating the AA Agreements.⁹

The Arbitral Tribunal concluded that the two annulment decisions of the Supreme Court had not generally excluded the reasoning of its award on Glencore’s abuse of right so that the Arbitral Tribunal was only prevented from qualifying Glencore’s termination as „venire contra factum proprium„. It than added the following chronological summary of the events:

1. Glencore, Georgian Copper, and Madneuli¹⁰ first agreed in the MoU of 26 February 2003 to pursue a common Madneuli project concerning the delivery of copper concentrates.

2. The three parties mentioned above thereafter concluded Back to Back Agreements that were intended to be in place for at least five years.

3. Glencore was the driving force to replace the Back-to-Back Agreements with the AA Agreements.

4. Georgian Copper agreed to assigning its twelve-year exclusive contract with Madneuli to Glencore in exchange for fees that it was promised to receive for each cargo.

5. Glencore indicated that the switch from the five year termination period under the Back to Back Agreements to a 60-day termination period under the AA Agreements was motivated by the possible need for price arbitrage.

6. Upon first demand of fees by Georgian Copper, Glencore terminated the AA Agreements in reliance on the discretionary termination right.

7. As a final result Glencore obtained the twelve-year exclusive Georgian Copper-Madneuli contract [i.e. the Madneuli Agreement] and Georgian Copper suffered a total economic loss.„¹¹

This then led the Arbitral Tribunal to the following conclusion:

„Therefore, assessing the fairness of the termination, taking into account the sequence of the events, the circumstances at the conclusion of the AA Agreements and the terms of the AA Agreements, the Arbitral Tribunal comes to the conclusion that the termination of the AA Agreement[s] violates the requirement of good faith. On that basis the Arbitral Tribunal finds that this sequence of events and its final result demonstrate an unconscionable exercise of a contractual right falling into the category of significant imbalance.„¹²

The abusiveness of the termination was thereby put into a broader prospective. As a consequence, this new reasoning resulted in the damages awarded to Georgian Copper being reduced to USD 18,210,730, plus interest of 5% p.a. as of 1 September 2012. The Supreme Court was satisfied with this new approach via significant imbalance and rejected the arguments brought forward by Glencore, which was not in a position to establish that this new result was also „obviously untenable„.

3. Conclusions

3.1 Arbitrariness vs. violation of public policy

Yes, this is a domestic arbitration case ‚only‘, where the Supreme Court can, based on Art. 393(e) SPC, annul an award in a review of its merits, if such award is arbitrarily (willkürlich), whereas an international award rendered in Switzerland can be annulled only if it violates (international) public policy, as provided for in Art. 190(2)(e) PILA. The threshold for an annulment in the present case was therefore lower – at least, if the award was to be reviewed on its merits as it was. If it were to be reviewed e.g. for a violation of the right to be heard (due process), the benchmark for national and international awards would remain the same. That was the lesson an arbitral tribunal had had to learn some time ago in the international case of the Casino Oasis in the Westbank (Palestine). There too, the arbitral tribunal, seated in Zurich and acting under the Swiss Rules, saw, after its first award was annulled for violation of the right to be heard, its second award also annulled for the very same reason.¹³

3.2 The binding considerations of the Supreme Court

When an award is annulled, the case goes back to the arbitral tribunal – except if the Supreme Court holds that such tribunal had no jurisdiction. The arbitral tribunal is then under a duty to reconsider the case and to render a second award. In doing so, it can neither extend the subject matter in dispute nor put the dispute on a new legal basis, instead it has to base its new decision on the considerations made by the Supreme Court in annulling the first award. In doing so the arbitral tribunal is also not allowed to consider in its second award new factual assumptions – except for nova. All of this is embedded in Art. 395(2) SPC, applicable for international arbitral awards as well.

In its Second Award the Arbitral Tribunal had obviously not followed the signposts (but not instructions!) set by the Supreme Court. The harsh criticism by the Supreme Court in its Second Annulment Decision is that the Second Award had not even rudimentarily followed the binding considerations put forward in the First Annulment Decision. Therefore, an arbitral tribunal confronted with an annulled award must very carefully analyse the relevant considerations of the Supreme Court. By their nature such considerations cannot be very explicit, because the Supreme Court cannot issue instructions to the arbitral tribunal but it provides (binding) guidance.

In the Third Award the Arbitral Tribunal showed that it had learned its lessons by fundamentally re-arranging its reasoning, but still within the realm of Art. 395(2) SPC.

3.3 Stamina of the Arbitral TribunalThe binding considerations of the Supreme Court

It is deplorable that it took the Arbitral Tribunal four years(!)¹⁴ from the Second Annulment Decision to its Third Award. Nevertheless, it deserves praise that at least the majority held to its conviction.¹⁵ It remained of the firm view that the behaviour of Glencore towards Georgian Copper should be sanctioned and it finally found the right reasoning for this.

3.4 A valid termination can still  be abusive

The Confirmation Decision is – beyond its procedural values – also of general interest. It reveals a set of circumstances which turn a discretionary termination into an abusive one and may, therefore, serve as a useful benchmark in the application of Art. 2(2) CC on a termination. The relevant facts are succinctly summarized in the quote from the Third Award presented in the Confirmation Decision¹⁶ cumulating in the conclusion that Glencore, as ‚driving force‘, obtained the „twelve-year exclusive Georgian Copper-Madeuli contract and Georgian Copper suffered a total economic loss.„¹⁷

his outcome certainly qualifies as significant imbalance (krasses Missverhältnis). In subsuming the case now under this case group (Fallgruppe) of Art. 2(2) CC the Arbitral Tribunal (finally) satisfied the requirement set forth by the Supreme Court, namely to allocate the abusiveness of termination to a specific case group of Art. 2(2) CC¹⁸, and not to only make a simple reference to said statutory provision and/or to refer to „venire contra factum proprium“ as reason to qualify the termination by Glencore as abusive.¹⁹

3.5 Who pays for all of this?

inally, the question arises, who is going to pay for the triple access to the Supreme Court? Well, primarily the parties. Georgian Copper paid in round 1²⁰ and 2²¹ and Glencore in round 3²². But what about the responsibility of the Arbitral Tribunal, erring twice?

The case was under the Swiss Rules, which, as most of the institutional rules, provide for an exclusion of the arbitrator’s liability except in cases of intentional wrongdoing or gross negligence.²³

Arbitrator liability has been the subject of many scholarly writings²⁴ but, rather surprisingly, these contributions remain on a more general level, without providing practical answers as to the arbitrators‘ liability when their award has been annulled. However, there is a general understanding that the agreement to act as arbitrator is of a hybrid nature: on the one hand private law based – namely mandate – and on the other hand jurisdictional.²⁵

If one takes the standard of performance under a mandate the principal, i.e. the parties to the arbitration, can expect a diligent execution of the mandate by the arbitrators. If an award is subsequently annulled, one could argue that the arbitrators were not acting with the diligence required, even though the mere annulment does, of course, not establish this. But what would be the consequences of a lack of diligence?

We are now moving to untested waters – who has to pay for what? An arbitral tribunal should not be burdened with the costs incurred by the parties in obtaining the second award but, and as a minimum, the arbitrators having had to reconsider their misconceived award due to a clear lack of diligence should abstain from requiring further advances for costs for curing their flawed award.

 

2020-06-09-Arbitration-Newsletter-Switzerland.pdf (pdf 233 kB)