Dynamic times for dispute resolution

Author: | Published: 24 Jun 2010
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These are dynamic times for dispute resolution in Switzerland. New Federal Codes of Criminal and Civil Procedure will enter into force on January 1 2011, replacing the different codes of the 26 Swiss cantons. The new Code also significantly modernises the rules governing Swiss domestic arbitrations, creating new possibilities for parties to chose between the legal frameworks on domestic and international arbitration.

Switzerland has long been a leading venue for international commercial arbitration. Switzerland has an arbitration-friendly lex arbitri and Swiss arbitral awards have a strong record of resistance to challenge. Over the last few years, Switzerland has experienced a veritable arbitration boom. This is partly due to the popularity of the Swiss Rules of International Arbitration, under which a record number of arbitrations were administered in 2009.

The new Code of Civil Procedure

The new Federal Code of Civil Procedure (CCP) was enacted by the Swiss Parliament on December 19 2008 and will enter into force on January 1 2011. The CCP will replace the 26 cantonal codes of civil procedure, and will be the first unified code of civil procedure to apply to proceedings before all Swiss civil courts.

The canton of Zurich, and particularly its specialised Commercial Court (Handelsgericht) is probably the most important and most frequently chosen state court venue in Switzerland for large, and very often international, commercial disputes. In addition to regular judges trained as attorneys, a typical panel at the Zurich Commercial Court includes specialised commercial judges (Fachrichter).

Commercial judges are recruited from a pool of professionals from various sectors of industry and commerce. The use of commercial judges is considered to reduce the costs of litigation and to increase the efficiency of the proceedings, for example, by dispensing with the need for court-appointed experts and by facilitating the taking of evidence in complex matters.

As considerable differences exist to this day between the procedural rules and practices of the different cantons, we will focus our analysis on how the CPP will change the rules and practices of civil procedure of the canton of Zurich, with particular emphasis on commercial litigation.

Sole cantonal judicial instance

The new CCP establishes the right of the cantons to create commercial courts as courts of first instance for commercial disputes. Pursuant to Articles 5(1) and 6(2) of the CCP, the Zurich Commercial Court will continue to have exclusive jurisdiction over nearly all commercial disputes exceeding a value of CHF 30,000 ($28,415), as well as matters falling into a category of specialised disputes such as intellectual property, company and antitrust law.

Article 6(1) of the CCP abolishes the option of a petition for annulment (Nichtigkeitsbeschwerde) to the Court of Cassation (Kassationsgericht) of the canton of Zurich, which has the power to quash or to reverse the decisions of inferior courts based on specific grounds of annulment. Decisions of the Commercial Court will now only be appealable directly to the Swiss Federal Tribunal.

Pre-suit conciliation

Like the previous codes of civil procedure in Zurich and other Swiss cantons, Article 197 of the CCP prescribes a mandatory attempt at conciliation (Schlichtung) prior to filing a lawsuit in court. While under the previous cantonal codes, conciliation typically took place before a state authority, the new CCP allows parties to chose private mediation in lieu of state conciliatory proceedings. Mediation is also expressly permitted at a later stage of the proceedings pursuant to a joint request by the parties. Mediation will stay ongoing proceedings until one party requests their continuation, or until the mediation ends.

There are a number of exceptions from the pre-suit conciliation requirement, including for proceedings before the Zurich Commercial Court.

A related change concerns the timing of pendency of proceedings (Rechtshängigkeit). Article 62(1) provides that a legal action is considered pending once "a request to attempt conciliation, an action, or an application..." is filed with the court. This means pendency may be attached earlier than under the current Zurich code. Article 62(1) provides a unified definition of pendency across the 26 cantons, reflecting a legislative intent to enhance certainty regarding jurisdiction and to minimise so-called forum running.

The date of pendency is decisive among other things for determining associated legal rights (such as compliance with time limits for bringing certain actions) and for the exclusive effects regarding the later exercise of jurisdiction by another court over the same dispute between the same parties.

Advance on costs

Under the current rules, a claimant only has to provide an advance of cost or similar security under certain circumstances. New Article 98 provides that the court "may order the claimant to advance a part or all of the prospective court costs." Despite the use of the discretionary "may", based on the legislative history of this provision, it is fairly likely that the courts will as a matter of practice require advances on costs.

Streamlining and front-loading of proceedings

As a general rule, there will be only one exchange of written pleadings. A second round of written replies and rejoinders will now be the exception. Instead, the second round of (oral) arguments will as a rule occur at the main hearing.

The CCP provides the Court with the authority to conduct a preparatory hearing (Instruktionsverhandlung). These hearings – somewhat unfamiliar to a common law audience – are conferences (typically held at the pre-trial stage) involving a fairly open discussion of the case between the Court and the parties, and may include presentation and clarification of evidence, the presentation by the Court of its preliminary assessment of the case, moderated attempts at settlement, and preparation of the hearing.

The CCP makes litigation proceedings more front-loaded. Under the Zurich code, the taking of evidence usually occurs following issuance of an evidentiary order (Beweisauflagebeschluss). The order sets deadlines for the parties to provide evidence for specific evidentiary propositions that the Court considers relevant, offering the parties a kind of evidentiary roadmap. Under Article 154 and Article 228, it can be expected that the Court will now typically issue the evidentiary order (Beweisverfügung) after the parties have submitted their evidence and prior to the main hearing.

This places a greater burden on the parties to develop and present their evidence in their initial submissions. Following their written submissions and the preparatory hearing, new evidence will generally only be admitted if it has emerged since then or if the parties in the exercise of due diligence could not have discovered it earlier.

Domestic arbitration overhauled

The CCP significantly revises and modernises the Swiss law on domestic arbitrations. The CCP will replace the 1969 Concordat on Arbitration (Concordat). The revisions reflect modern arbitration best practices and aim to make domestic arbitration more attractive. Among the significant improvements are detailed rules on:

  • the appointment of arbitrators in multi-party proceedings (362(2));
  • the jurisdiction of the tribunal to decide counterclaims and set-off pleas (377);
  • joinder of parties (376);
  • provisional measures (374);
  • the power of the chairman to decide procedural issues by himself if authorised by the parties or by the co-arbitrators (373);
  • security for costs, in particular where the claimant appears insolvent (379)

The setting-aside of domestic arbitral awards will continue to be possible on limited grounds only. One ground of challenge available for domestic, but not for international arbitral awards, is an "award that is arbitrary in its result because it is based on facts obviously contrary to the record or because it constitutes an obvious violation of law or equity." (Article 393). Petitions to set aside a domestic arbitral award will be appealable to the Federal Tribunal only, unless the parties have agreed to refer such actions to the highest cantonal court at the seat of the arbitral tribunal. The CCP provides new detailed rules on the correction, clarification and supplementation of an award, and on the revision of an award.

In some instances, as in the rules on conflicts of interest, set-off pleas, and revision, the CCP addresses issues not explicitly regulated in Chapter 12 of the Swiss Private International Law Act (Pila) governing international arbitrations. This may well prompt efforts to revise Chapter 12 of Pila accordingly. Similarly, the interpretation of certain provisions of Chapter 12 of the Pila may be influenced by the new rules on domestic arbitration.

The CCP offers new possibilities for parties to choose between the two legal frameworks. Currently, parties to an international arbitration can opt out of Chapter 12 of the Pila and subject their arbitration to the rules of the Concordat (or, beginning January 1 2011, the CCP) but parties to a domestic arbitration cannot opt for Chapter 12 of the Pila. Under Article 352(2), parties to a domestic arbitration will now be able to select Chapter 12 of the Pila to govern their arbitration. Although such opt-out clauses would not become effective before January 1 2011, they can already be included in arbitration agreements.

In multi-party arbitration agreements involving Swiss and foreign parties, the ability to opt out of the CCP may be important, as it enhances predictability with respect to the applicable procedural regime. When entering into an arbitration agreement, parties to a multi-party relationship cannot predict whether a future dispute will involve parties domiciled in Switzerland or whether it will also involve foreign parties.

Under Swiss law, if a dispute in a multi-party relationship arises between two Swiss domiciled parties, the arbitration will be deemed domestic and subject to the CCP; but if the dispute involves a foreign party, the arbitration will be deemed international and subject to Chapter 12 of Pila. By opting for the arbitration to be governed by one of the two Swiss regimes, parties can eliminate this uncertainty from the outset.

Developments in international arbitration

Article 7 of Pila states that if the parties have entered into an arbitration agreement, a Swiss court must decline jurisdiction unless, among other reasons, the court finds that the arbitration agreement is null and void, inoperative or incapable of being performed. Article 7 of Pila only applies where the seat of the arbitration is in Switzerland. If it is, the Swiss court only undertakes a prima facie examination of the validity of the arbitration agreement.

This reflects the principle of negative competence-competence, leaving it to the arbitral tribunal to undertake the first full review of the validity of the arbitration agreement. If the seat of the arbitration is outside of Switzerland, however, pursuant to Article II(3) of the 1958 New York Convention on the Recognition and Enforcement of Foreign Arbitral Awards, a Swiss court engages in a full review of the validity of the arbitration agreement.

An initiative now before the Swiss parliament would eliminate the distinction between arbitrations seated in and outside of Switzerland. Under this initiative, the principle of negative competence-competence would apply regardless of the seat of arbitration, and in either case Swiss courts would only undertake a prima facie examination of the arbitration agreement. This would clarify the application of an important principle of international arbitration in Swiss law.

CAS amends its rules

On September 29 2009, the governing body of the CAS adopted the revised Code of Sports-related Arbitration. In addition to a number of procedural issues, the most important amendment prohibits CAS arbitrators and mediators from also serving as counsel before the CAS. According to the CAS, this prohibition of the double-hat arbitrator/counsel role was decided in order to limit the risk of conflicts of interest and to reduce the number of petitions for challenge during arbitrations. The issue dates back to a 2006 decision of the Swiss Federal Tribunal, in which the petitioner had challenged a CAS decision for lack of independence of an arbitrator. The counterparty was represented by an attorney who had, at the same time, sat on another CAS tribunal together with one of the arbitrators in the case at bar. While the Federal Tribunal declined to set aside the award for lack of independence, the case prompted a CAS recommendation to avoid double-hat situations. Matters did not change significantly, resulting in the 2009 change of rules.

Developments in jurisprudence

The Federal Tribunal, Switzerland's highest court, is the sole judicial instance reviewing international arbitral awards in Switzerland. This may account for the popularity of Switzerland as a venue of international arbitration, as many other jurisdictions provide for two or three instances of review. Swiss arbitral awards are also particularly resistant to challenge. A recent statistical survey found that only about 6.5% of all setting aside petitions are successful. The Federal Tribunal plays an important role in clarifying and developing the Swiss lex arbitri.

Several recent decisions are particularly noteworthy:

In Vivendi et al vs. Deutsche Telekom et al, the Federal Tribunal had to decide the effect of the bankruptcy of Polish co-respondent Elektrim on an ongoing multi-party arbitration in Geneva. After Elektrim was declared insolvent by a Polish Bankruptcy Court, it requested that the arbitral tribunal terminate the arbitration against it, arguing that under a Polish statute, an insolvent party lacks capacity (subjective arbitrability) and cannot continue as a party to ongoing arbitration proceedings. By interim award, the arbitral tribunal agreed and dismissed Elektrim. Vivendi petitioned to set aside the award, arguing that the effects of foreign insolvency proceedings on an international arbitration seated in Switzerland are governed by Swiss law (the lex arbitri).

In a three-to-two decision, the Federal Tribunal rejected the petition, confirming the arbitral tribunal's decision. Notably, in a separate proceeding on the same facts in England, the English High Court applied Article 15 of the EU Insolvency Regulation and came to the opposite result, continuing the arbitration against Elektrim. The outcome in Switzerland has created some controversy among arbitration practitioners. However, it may well be limited to its special facts, and does not appear to finally settle the question whether subjective arbitrability should not be considered a matter of the lex arbitri.

In a decision of October 6 2009, the Federal Tribunal for only the second time since entry into force of the Pila in 1989 revised an international arbitral award. Revision is a legal mechanism relatively uncommon in other national arbitration laws, under which the Federal Tribunal may under limited circumstances revise an award based on newly discovered facts (revisio propter nova) or where the award was influenced by criminal activity (revisio propter falsa). Here, criminal proceedings in France had resulted in an order finding massive fraud directed at an ICC arbitral proceeding seated in Geneva, which directly involved a party to the proceeding and which immediately and significantly influenced the outcome of the proceeding. Even though the main perpetrator of the fraud was not convicted as he had died during the criminal investigation, the Federal Tribunal found that the French investigation had established the objective conditions of a crime and that the other prerequisites of revision were met.

Among the limited grounds on which a Swiss arbitral award can be set aside is a violation of the right to be heard. Recent rulings confirm that the Federal Tribunal interprets this right very restrictively and that it is very difficult to prevail on right-to-be-heard challenges in Switzerland.

For example, in a decision of June 23 2009, the Swiss Federal Supreme Court held that the right to be heard is not violated where an arbitral tribunal bases its decision on a written submission of a third party, and the parties to the proceedings had enough time to comment on such written submission.

Right-to-be-heard challenges must be raised immediately during the arbitration proceedings at the risk of waiver. A decision of January 6 2010 illustrates this raise-it-or-waive-it principle. At the end of the arbitral hearing, the complaining party had indicated that everything was okay and that it had no objections to the arbitral procedure. The Federal Tribunal held that based on this statement, the party could not in good faith bring a right-to-be-heard petition against the arbitral award later.

The Federal Tribunal has long held that the parties have no right to be heard specifically on the arbitral tribunal's legal assessment of the facts. The only exception is if the tribunal bases its decision on a legal foundation that the parties have not addressed and that they could not have reasonably expected the tribunal would apply. However, in a decision of December 16 2009 the Federal Tribunal explained that when reviewing international arbitral awards, it exercises particular restraint in finding a "surprising" application of the law. The Federal Tribunal's recent case law reflects this restrictive approach: time and again, it finds that the parties could not have been "surprised" even by legal provisions that were only indirectly invoked or implicated.

An arbitration boom

Switzerland has long been a preferred venue for international arbitration. In recent years, international arbitration in Switzerland has been booming. For example, ICC statistics show a record 119 Swiss-seated arbitrations in 2009, making Switzerland the most frequently chosen location for ICC arbitrations worldwide. This "boom" is partly due to a marked increase in sports arbitration at the CAS, which administered a record 313 proceedings in 2008, up from 109 cases in 2003, and at the WIPO Arbitration and Mediation Center, with most of its 220 mediation and arbitration cases to date filed in the last five years.

There has also been an increase in ad-hoc arbitrations seated in Switzerland, although there are no official statistics tracking them. The Swiss arbitration boom also reflects the growing popularity of the Swiss Rules of International Arbitration. After they entered into force in 2004, the caseload grew moderately at first. But the Swiss Rules took off in 2008; in 2009, a record 104 cases were administered.

The Swiss Rules have been well received internationally, with over 75% of the 2009 cases involving non-Swiss parties. They are based on the well-known Uncitral Arbitration Rules and modified to reflect modern international arbitration practice. For example, the Swiss Rules contain provisions on multiparty arbitration, on the joinder of proceedings and the participation of third parties, on jurisdiction for set-off defenses, and on confidentiality.

Their popularity may also be due to the light administration by the Swiss Chambers of Commerce. For example, there is no scrutiny of the award (except on the decision on costs), no requirement to copy the Chambers on all communications, and no requirement to submit draft terms of reference for approval. The Rules also contain an expedited procedure for cases with a value in dispute of up to CHF 1 million, providing for the award to be rendered within six months from the date when the file was transmitted to the arbitral tribunal.

Approximately 30% of all Swiss Rules cases since 2004 have been administered pursuant to the expedited procedure. The Swiss Rules show that in international arbitration, a nimbler approach with a focus on expedited resolution holds considerable value to international commercial parties.

About the author

Georg von Segesser is a partner in the dispute resolution group of Schellenberg Wittmer and in the firm's private clients group in Zurich. He has acted as chairman, co-arbitrator, sole arbitrator and counsel in over two hundred domestic and international arbitrations (ICC, Swiss Rules, LCIA, UNCITRAL and others) and as co-director of the Claims Resolution Tribunal for Dormant Accounts in Switzerland. He is one of the permanent chairpersons for domestic arbitrations of the Zurich Chamber of Commerce.

In 1972, von Segesser graduated from Lucerne College and Zurich University. After serving as a district court clerk in 1971-72, he worked as an associate and partner in a large Zurich law firm from 1973 until 1982, and in 1974 to 1975 served as a foreign associate in a leading New York law firm. In 1982, Georg von Segesser as one of the founding partners established Schellenberg Wittmer.

He has authored publications on international arbitration, property and trust law, and cultural and art law. He is a member of the Swiss Arbitration Association, IBA, LCIA, the German Institution of Arbitration, the Chartered Institute of Arbitrators (Fellowship), and arbitration institutions in

Austria, Kuala Lumpur, and Hong Kong, the ICDR of the American Arbitration Association, and the Society of Trust and Estate Practitioners. He is president-elect of the International Academy of Estate and Trust Law.

Contact information

Dr Georg von Segesser
Schellenberg Wittmer

Löwenstrasse 19 / P.O. Box 1876 8021 Zurich Switzerland

Tel: +41 44 215 5252
Fax: +41 44 215 5200
Email:zurich@swlegal.ch
Web:www.swlegal.ch

About the author

James Menz is an associate in Schellenberg Wittmer's dispute resolution group in Zurich. His main area of practice is international commercial arbitration and litigation.

James Menz received his BA from St Olaf College (2000) and his MA from the University of Wisconsin-Madison (2001). He graduated with highest honours from the George Washington University Law School in Washington, DC (JD 2005). Prior to joining the firm in 2009, James Menz worked as an associate at Shearman & Sterling LLP in New York, where he gained experience in complex litigations and defending mergers and acquisitions before US and international competition authorities.

He also has experience advising clients on conducting internal investigations and designing and implementing compliance programs.

James Menz is a member of a number of professional associations, including the American Bar Association, the American Society of International Law, the Swiss Arbitration Association, and ICDR Young & International.

Contact information

James U Menz
Schellenberg Wittmer

Löwenstrasse 19 / P.O. Box 1876 8021 Zurich Switzerland

Tel: +41 44 215 5252
Fax: +41 44 215 5200
Email:zurich@swlegal.ch
Web:www.swlegal.ch