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High Standards of Procedural Fairness vs. Judicial Review of the Merits of the Arbitral Award

Earlier this year, the Swiss Federal Supreme Court (the ″Supreme Court″) confirmed that, if an arbitral award has been issued that is entirely silent on elements which are apparently important for the decision on a dispute, it falls upon the arbitrator and the respondent in an action for annulment to justify such omission (Decision of 17 April 2013, BGer 4A_669/2012 [E. 3.1], the ″Decision″). The Supreme Court thereby continues to develop its case law with a view to strengthen the standards of procedural fairness. At the same time, however, it is at least questionable whether this approach de facto results in a judicial review of the merits of the arbitral award.

Introductory Note

Earlier this year, the Swiss Federal Supreme Court (the ″Supreme Court″) confirmed that, if an arbitral award has been issued that is entirely silent on elements which are apparently important for the decision on a dispute, it falls upon the arbitrator and the respondent in an action for annulment to justify such omission (Decision of 17 April 2013, BGer 4A_669/2012 [E. 3.1], the ″Decision″). The Supreme Court thereby continues to develop its case law with a view to strengthen the standards of procedural fairness. At the same time, however, it is at least questionable whether this approach de facto results in a judicial review of the merits of the arbitral award.

History of the Case


In summary, the background of the Decision was a contract under which the parties agreed upon the delivery of a certain amount of nickel products to a so-called “call-off stock” (“Abruflagerung”) whereby one of the parties (the ″Respondent″) was granted the right to purchase such nickel products for purposes of resale. The purchase price to be paid by the Respondent to the party (the″Appellant″) undertaking the delivery of the nickel products to the mentioned call-off stock was agreed to equal the purchase costs for such party on the market (Anschaffungskosten). The Appellant never delivered any nickel products to the call-off stock, causing the Respondent to commence arbitration proceedings. The Respondent claimed to have suffered damage from not being able to resell a total of 2,400 metric tons of the nickel products and calculated its lost profits (Entgangener Gewinn / lucrum cessans) at USD 1,050 per ton. The arbitrator generally followed the Respondent’s arguments, finding however, that the lost profit amounted only to USD 750 per ton, resulting in a total of USD 1,800,000 in damages. The Appellant filed an action for annulment with the Swiss Supreme Court, arguing that its right to be heard had been violated in the arbitration proceedings.

The Appellant's Arguments


In brief, the Appellant argued that the arbitrator (and implicitly the Respondent) had calculated the amount of lost profits in an incorrect manner. While the Respondent had in the arbitration proceedings argued that the relevant purchase costs for the Appellant would be USD 30 (per ton of nickel) as per a clause under the contract, the Appellant submitted that the amount of USD 30 referred only to (1) the delivery of uncut nickel products and (2) the delivery to a transfer station as opposed to the actual call-off stock. The Appellant went on to argue that the amount of USD 30 would in turn need to be increased by its additional purchase costs in order to get the real purchase price for Respondent. Further, this purchase price (in total USD 354 instead of USD 30) would then need to be deducted from a resale price of USD 525. Thus, according to the Appellant, the loss of profits would have to be calculated at an amount of USD 171 (USD 525 minus USD 354) per ton instead of USD 750 (as held by the arbitrator). On this premise, the Appellant argued that the arbitrator had entirely ignored such calculation criteria / elements for calculating the amount of lost profit and had based its award merely on the assumption of the purchase price being USD 30 (as claimed by the Respondent).

The Respondent's Arguments

The Respondent argued – presumably with a view to demonstrate that the arbitrator had at least implicitly considered the Appellant’s calculation criteria (see below regarding the principles applied by the Supreme Court) – that the arbitrator considered all elements but calculated the amount of lost profit on the basis of net margins as opposed to the Appellant’s calculation being based on gross margins. More specifically, the Respondent claimed that a calculation based on gross margins, taking into account (most of the) additional purchase costs alleged by the Appellant, would have resulted in lost profit of USD 756 per ton, which almost equalled the figure arrived at by the arbitrator.

General Principles applied by the Swiss Supreme Court

On a general basis, and before entering into the merits of the specific dispute, the Swiss Supreme Court held the following with reference to Article 190(2) (d) of the Swiss Act on Private International Law:

“The right to be heard does not require that an international arbitral award be reasoned.  However, the right to be heard does impose a minimal duty on the arbitrator to review and to deal with the relevant issues.  This minimum duty is violated if, by inadvertence or by misunderstanding, the arbitrator does not take the allegations, arguments, evidence or offers of evidence into consideration which have been introduced by one of the parties and which are important for the decision to be rendered.  If an arbitral award has been issued that is entirely silent on elements which are apparently important for the solution of the dispute, it is upon the arbitrator and the respondent in an action for annulment to substantiate such omission. It is their responsibility to demonstrate that, contrary to the assertions of the claimant in such action for annulment, the omitted elements were not relevant for the decision or, if they were, such elements have been disproved implicitly by the arbitrator.  However, the arbitrator has no obligation to discuss all arguments raised by the parties, such that the arbitrator cannot be criticized for not having disproved, even implicitly, an element objectively lacking of any relevance.”

Conclusions of the Supreme Court

The Supreme Court held that the arguments of the Respondent could not be upheld from a mathematical (calculatory) perspective based on the fact that the court’s own calculations would have led to a lower amount of lost profit even taking into account the alternative calculation method advanced by the Respondent in the annulment proceedings. More importantly, the Supreme Court held that its review of the award had yielded no grounds for assuming that the arbitrator had actually calculated the amount of damages based on net margins. Rather, according to the Supreme Court, the arbitrator appeared to have arrived at his lost profit figure of USD 750 per ton on the basis of an (equitable) assumption. In any event, the Supreme Court took issue with the fact that the arbitrator had not offered any reasoning as to whether and how the Appellant’s purchase costs had been considered in this calculation. As a result, the Supreme Court concluded that the Appellant’s right to be heard had been violated by the arbitrator and annulled the arbitral award.

Cursory Analysis of the Decision

On an overall level, the approach taken by Swiss Supreme Court in this decision appears to emphasize a rather strict understanding of the right to be heard in international arbitration proceedings. The necessity of (clear) references to the motives of the award, as postulated in the Decision, seems to be based on the following considerations: As a basic principle, the party alleging a violation of the right to be heard has to prove such violation in its action for annulment of the award. However, the Supreme Court held that proof for the disregard of an essential element by the arbitrator may become extremely difficult to prove, resulting in a so-called probatio diabolica. On this premise, the Supreme Court appears to consider it appropriate to reverse the burden of proof and require the responding party (or the arbitrator) to demonstrate that such essential elements have in fact not been simply disregarded but have been taken into account in the reasoning of the arbitral decision.

Notwithstanding this, the question arises whether the Supreme Court’s review might constitute a hidden review of the merits of the award in the guise of considerations relating to procedural fairness (i.e., specifically, the right to be heard). In respect of the judicial review of the merits on an international arbitral award, an annulment under Swiss law is solely contemplated as a matter of public policy (Ordre public; Article 190(2) (e) of the Swiss Act on Private International Law). With respect thereto, the Supreme Court hold in a precedent decision (Decision of 8 April 2005,  BGer 4P.253/2004 [E 3.1), in detailing the nature of review in an annulment proceeding, that “it is not sufficient that the evidence be improperly weighed, that a factual finding be manifestly false, that a contractual clause not have been correctly interpreted or applied or that an applicable principle of law has been clearly breached.”. Considering that the Supreme Court’s decision questions – to some extent, at least – the correctness of the calculation of damages, it is at least questionable whether this reasoning falls within the ambit of the “public policy test” or, rather, constitutes a question of the weighing of evidence or the incorrect application of a legal principle (applicable principles on the calculation of damages), both of which would not be sufficient to warrant an annulment of the award.

Finally, the fact that the Supreme Court’s decision hinged to a high degree on the fact that the arbitrator had not referred to the Appellant’s submissions regarding the calculation of purchase costs, is difficult to bring in line with the Supreme Court previous holding that an arbitral award need not be reasoned (see above). Notably, it was from the reasoning of the present award that the Supreme Court deduced that the Appelant’s right to be heard might have been violated by the arbitrator. In other words, the Supreme Court appears to (implicitly) require a certain degree of reasoning of an arbitral award. It is against this background that the Supreme Court’s decision creates uncertainty as to how detailed the reasoning of an arbitral award needs to be and how far the Supreme Court will go in reviewing this reasoning when deciding on an action to set aside an arbitral award.