Litigation and Alternative Dispute Resolution

By: Prof. Dr. H. Ercument Erdem

Introduction

The Swiss Federal Supreme Court (“Court”) with its latest decision dated March 16, 2016, numbered 4A_628/2015 and published on March 29, 2016 (“Decision”)[1] decided to stay the arbitration as a result of a failure to comply with a multi-tiered dispute resolution clause. This Decision is distinctive from other decisions rendered by the Court therefore it is a leading case and should be examined.

Background

The Claimant and the Respondent executed agreements for exploration, production, transport and commercialization of gas products.

Dispute Resolution Clause

The dispute resolution clause contained in all of the agreements executed between the parties is;

“All differences arising between the Parties […] that cannot be resolved by the Parties shall in the first instance be the object of an attempt of conciliation under the ADR (Alternative Disputes Resolution) Rules of the International Chamber of Commerce (ICC). All differences between the Parties […] not resolved by conciliation shall be decided as a last resort by way of arbitration according to the UNCITRAL Arbitration Rules by three (3) arbitrators nominated according to said rules. […]The seat of arbitration shall be Geneva, Switzerland.[2]"

In accordance with the above clause the parties have agreed on a multi-tiered dispute resolution clause providing an ad hoc arbitration under UNCITRAL Arbitration Rules. The seat of arbitration is Switzerland. The clause further provides that prior to arbitration parties shall first attempt to settle their dispute through conciliation in accordance with the Alternative Dispute Resolution Rules of International Chamber of Commerce in force as from 2001[3] (“ADR Rules”).

Facts

Pursuant to the dispute resolution clause the Claimant filed a request for conciliation with ICC International Center for ADR (“ADR Center”) on September 8, 2014. ADR Center requested parties to answer some procedural questions on October 16, 2014; thereafter the conciliator suggested holding a meeting. On November 20, 2014 the Claimant requested that the meeting to be conducted by means of a conference call and on the same day the Respondent indicated dates which it is available.

The following day conciliator set a conference call for December 17, 2014. The Respondent offered to the conciliator and the Claimant to use its dial in for the conference call and informed that its client’s representatives would also attend. The Claimant rejected to this proposal on the grounds that the conference call was planned between the conciliator and the counsel only. In this respect the Claimant suggested to hold the meeting as initially planned with the attendance of only the counsel and the conciliator or postpone the meeting to a later date with the participation of parties’ representatives and hold it physically in Paris. The Respondent agreed to postpone the meeting and stated that there was no such agreement that the party representatives could not attend.

On January 16, 2015 Claimant filed a request for arbitration and initiated arbitration proceedings against the Respondent. Claimant further informed the conciliator that it has no intention to pursue conciliation due to the failure of the Respondent. Even though the conciliator informed the Claimant that the conciliation proceeding could not be closed until the discussion under Art. (5)(1) of the ADR Rules are satisfied and communicated new dates for a meeting in Paris; the Claimant proceeded with arbitration in any event.

Following the conciliator informed the parties and ADR Center that Claimant’s position to be interpreted as a withdrawal of the request of conciliation. The ADR Center also interpreted as a withdrawal. Finally the ADR Center declared the proceedings terminated as a result of Claimant’s failure to pay its share of advance payment.

Arbitral Proceedings

Following Claimant’s request for arbitration the Respondent objected to the jurisdiction of the arbitral tribunal and claimed that it lacks jurisdiction. Respondent based its claim on the grounds that conciliation which is provided as a mandatory prerequisite of arbitration was not complied and the Art. 5(1) of the ADR Rules has not been fulfilled.

Art. 5 (1) of the ADR Rules provides that the neutral (in this case the conciliator) and the parties shall promptly discuss and seek to reach an agreement on the settlement mechanism and shall discuss the specific procedure to be followed.

Thereafter the arbitral tribunal with a preliminary award decided that it has jurisdiction. The arbitral tribunal found that conciliation included in the dispute resolution clause is mandatory. Further it resolved that a conciliation attempt had been realized pursuant to the ADR Rules and in good faith between the parties.

Following arbitral tribunal’s decision the Respondent filed a claim before the Court requesting the award to be set aside, alleging that the discussion provided under Art. 5(1) was not fulfilled. Respondent further requested from the Court to decline its jurisdiction ratione temporis or stay the arbitration proceedings.

Claimant in contrary alleged that Respondent’s reliance on the dispute resolution clause should be considered an abuse of rights.

Decision

The Court examined whether parties attempted to resolve their dispute by means of conciliation and exhausted this prerequisite for arbitration.

In this respect the Court accepted Respondent’s application. Primarily the Court evaluated the type of alternative dispute resolution mechanism that the parties agreed on. After establishing that the parties agreed on conciliation the Court examined whether the discussion foreseen under Art. 5 (1) of the ADR Rules is fulfilled.

Art. 6(1)(b) of the ADR Rules provide that the conciliation proceeding shall be terminated upon the notification in writing to the conciliator by one or more parties, at any time after the discussion referred to in Article 5(1) has occurred, of a decision no longer to pursue the ADR proceedings.Pursuant to this article none of the party can terminate the conciliation proceeding unless the discussion stated under Art. 5(1) has taken place.

The Court was on the view that even though there were exchanges of correspondence between the parties and the conciliator, exchange of views in an in-person meeting or at least through video conference or teleconference in a way to satisfy Art.5 of the ADR Rules did not take place.

The Court also analyzed whether Respondent’s objection to the arbitral tribunal’s jurisdiction is an abuse of right. In this respect the Court in its previous case numbered 4A_18/2007[4] dated June 6, 2007 found that challenging an award for the failure to comply with the conciliation as the prerequisite for arbitration is an abuse of right if the party who is challenging the award did not request conciliation prior to arbitration. Further Court stated that this case is distinguished from its previous decisions since the Respondent has taken place in conciliation and immediately raised an objection to the jurisdiction of the arbitral tribunal.

The Court had to decide upon the consequences of the failure to comply with the conciliation as a prerequisite for arbitration. The consequences of such non-compliance should be procedural rather than damage claims or declaration of inadmissibility, dismissal of the claim based on merits. One of the possible procedural consequences is to stay of the arbitration pending on compliance with the dispute resolution clause. Accordingly the Court considering cost and time issues found that the proper consequence would be to stay of the arbitration proceedings.

Conclusion

The Decision is considered a leading case that would be a precedent for arbitral tribunals and counsels. It is the first time that the Court set aside an award for the failure to comply a dispute resolution mechanism as a condition precedent with arbitration.

In its previous decisions such as case numbered 4A_ 46/2011[5] dated May 16, 2011 the Court dismissed the claim to set aside for the breach of a prerequisite for arbitration but set aside the award for violation of right to be heard. In another case numbered 4A_124/2014[6] dated July 7, 2014, the Court have examined Article 20 of the FIDIC Conditions of Contract and the jurisdiction of the arbitral tribunal prior to FIDIC Dispute Adjudication Board (“DAB”) procedure, the Court concluded that even though DAB procedure is a mandatory prerequisite parties do not have to fulfill it in case it is an abuse of rights. This approach is abandoned in the Decision.

Another important consequence of the Decision is that it shows the sanction for non-compliance with a prerequisite of arbitration which is considered appropriate and right by the Court which was unsettled under Swiss Law. Non-compliance with a multi-tier dispute resolution clause is disputed under Swiss Law. The Court in its previous decision numbered 4A_18/2007, emphasis that there are two possible consequences for non-compliance with a prerequisite for arbitration. The Court stated that deciding on damages is not an appropriate consequence considering that it could be difficult to prove the damages; non-compliance with a multi-tier clause would not necessarily cause damages, besides even this solution is preferred the dispute would not be resolved. The Court further pointed out that in case the parties decide to arbitrate without an attempt to solve the dispute with the alternative methods provided prior to arbitration, it is a risk that the arbitral tribunal rejects the claim. In case arbitral tribunal decides the request of arbitration as inadmissible or that the tribunal is incompetent, a new arbitral tribunal would need to be constituted which could make thing complicated. Additionally there could be issues with regard to time limitations. Therefore the Court did not find that damages or rejection of the request of arbitration as suitable sanctions. With these following reasons the Court in line with the majority view in the Swiss doctrine decided that the appropriate sanction for non-compliance with the prerequisite provided under a multi-tier dispute resolution clause as stay of the arbitration pending compliance with the conciliation procedure.