Dispute Resolution News

Challenge of arbitral award dismissed notwithstanding procedural error by the tribunal

On 20 March 2019, the Swedish Supreme Court dis­missed a chal­lenge of an ar­bi­tral award de­spite de­ter­min­ing that the tri­bunal had com­mit­ted a pro­ce­dur­al er­ror. The award in­volves a num­ber of is­sues, of par­tic­u­lar in­ter­est is that the Supreme Court ex­ten­sive­ly refers to in­ter­na­tion­al le­gal sources. This serves as a con­fir­ma­tion that the Swedish Supreme Court ac­knowl­edges that is­sues aris­ing in in­ter­na­tion­al ar­bi­tra­tion may have wide­spread in­ter­na­tion­al ap­plic­a­bil­i­ty.

Background

A Belarusian com­pa­ny (the ”Buyer”) and a Turkish com­pa­ny (the “Contractor”) had en­tered in­to a con­tract re­gard­ing the pro­vi­sion of in­ter alia con­struc­tion works in two mine shafts in Turkmenistan (the “Contract”). A dis­pute arose be­tween the par­ties and the Contractor de­mand­ed pay­ment of ap­prox­i­mate­ly USD 11,000,000 for pro­vid­ed ser­vices and USD 20,000,000 in dam­ages. The Buyer con­test­ed the claim and al­leged that the ser­vices were faulty and as a re­sult there­of was en­ti­tled to com­pen­sa­tion of rough­ly USD 10,000,000.

The dis­pute was re­solved by ar­bi­tra­tion un­der the Rules of the Arbitration Institute of the Stockholm Chamber of Commerce (the “SCC Rules”) and the seat was Stockholm, Sweden. The award was ren­dered on 3 April 2015, which or­dered the Buyer to pay the Contractor ap­prox­i­mate­ly USD 9,000,000 in ad­di­tion to the Buyer’s claims be­ing dis­missed.

The award was chal­lenged be­fore the Svea Court of Appeal and an­nulled to the ex­tent that the Buyer on­ly had to pay the Contractor ap­prox­i­mate­ly USD 7,500,000. The Buyer ap­pealed to the Swedish Supreme Court (the “Court”), claim­ing that the award should be an­nulled in its en­tire­ty (with an ex­cep­tion re­lat­ed to the costs of the ar­bi­tra­tion). In short, the Buyer claimed that the tri­bunal had; (i) de­cid­ed on is­sues that were not cov­ered by the ar­bi­tra­tion clause be­tween the par­ties, (ii) ex­ceed­ed its man­date or com­mit­ted a pro­ce­dur­al er­ror by not rul­ing on a cir­cum­stance that was in dis­pute, (iii) com­mit­ted a pro­ce­dur­al er­ror by not pro­vid­ing the Buyer with the op­por­tu­ni­ty to ar­gue its case and (iv) com­mit­ted a pro­ce­dur­al er­ror by ren­der­ing an award that was not sup­port­ed by ev­i­dence. The Contractor al­so ap­pealed and claimed that no part of the award was to be an­nulled.

The rea­son­ing of the Supreme Court

Had the tri­bunal de­cid­ed on is­sues not cov­ered by the ar­bi­tra­tion clause be­tween the par­ties?

The Buyer ar­gued that part of the re­mu­ner­a­tion that the Contractor was en­ti­tled to ac­cord­ing to the award con­cerned ser­vices that had been pro­vid­ed un­der sup­ple­men­tary agree­ments to which the ar­bi­tra­tion clause in the Contract did not ap­ply.

The Court stat­ed that an ar­bi­tra­tion clause must con­cern a spe­cif­ic le­gal re­la­tion­ship be­tween the par­ties to the agree­ment and that its ap­plic­a­bil­i­ty is de­ter­mined by means of in­ter­pre­ta­tion. Where nei­ther the word­ing nor oth­er rel­e­vant cir­cum­stances pro­vide any guid­ance, it may of­ten be as­sumed that the par­ties’ in­ten­tion is that any po­ten­tial dis­putes are to be re­solved in a quick and co­her­ent man­ner.

The Court held that the con­cept “le­gal re­la­tion­ship” ought to have a wide ap­plic­a­bil­i­ty, with ref­er­ence to in­ter alia the New York con­ven­tion on the recog­ni­tion and en­force­ment of for­eign ar­bi­tral awards. The Court re­ferred to a num­ber of its prece­dents where­in ar­bi­tra­tion claus­es were deemed to have a wider ap­plic­a­bil­i­ty than the le­gal re­la­tion­ship in the orig­i­nal agree­ment to which the ar­bi­tra­tion clause is ap­plic­a­ble. Lastly, the Court not­ed that it is typ­i­cal­ly the tri­bunal that is best equipped to de­cide whether the mat­ter at hand is cov­ered by an ar­bi­tra­tion clause.

The tri­bunal had held that the sup­ple­men­tary works had been car­ried out “with­in the con­trac­tu­al frame­work be­tween the par­ties es­tab­lished by the [Contract]” and that it had not been con­test­ed that the ad­di­tion­al works were con­nect­ed to the Contract in a num­ber of ways. The tri­bunal had there­fore ruled that the works were cov­ered by the ar­bi­tra­tion clause in the Contract.

The sup­ple­men­tary agree­ments al­so con­tained sep­a­rate dis­pute res­o­lu­tion claus­es that en­tailed that a Belarusian court was com­pe­tent to de­cide on po­ten­tial dis­putes. However, the tri­bunal had deemed that these claus­es be­stowed a right, but not a du­ty, to the Parties to pur­sue po­ten­tial claims in the Belarusian court. With ref­er­ence to the tri­bunal’s rea­son­ing, the Court held that the tri­bunal had not de­cid­ed on is­sues not cov­ered by the ar­bi­tra­tion clause in the Contract.

Had the tri­bunal ex­ceed­ed its man­date or com­mit­ted a pro­ce­dur­al er­ror by not de­cid­ing on a cir­cum­stance that was in dis­pute?

According to the award, the Contractor was en­ti­tled to a cer­tain in­ter­est that was cal­cu­lat­ed based on in­voic­es that the Buyer had been pro­vid­ed with. The Buyer claimed that the tri­bunal had er­ro­neous­ly as­sumed that the Parties were in agree­ment that the Contractor was en­ti­tled to in­ter­est from the date of each in­voice.

The Court stat­ed that the is­sue at hand (i.e. when it is al­leged that a tri­bunal has wrong­ly as­sumed that a cir­cum­stance was not in dis­pute) is a ques­tion of whether the tri­bunal has com­mit­ted a pro­ce­dur­al er­ror. As a start­ing point, an award will not be an­nulled if the claimant (in the chal­lenge pro­ceed­ings) is deemed to have caused the pro­ce­dur­al er­ror. Of rel­e­vance to this as­sess­ment is if the claimant can show that the tri­bunal’s as­sump­tion was un­found­ed and that this as­sump­tion like­ly had af­fect­ed the out­come of the ar­bi­tra­tion. Generally, it is al­so re­quired that the pro­ce­dur­al er­ror is of rea­son­able im­por­tance to the claimant.

The Court held that a pro­ce­dur­al er­ror had been com­mit­ted since the tri­bunal in the award had not­ed the Buyer’s re­jec­tion of the cal­cu­la­tion of the in­ter­est while at the same time stat­ing that the method of cal­cu­lat­ing the in­ter­est was not in dis­pute. However, the con­se­quences of the pro­ce­dur­al er­ror, with ref­er­ence to the out­come of the cal­cu­la­tions, did not amount to an er­ror of rea­son­able im­por­tance to the Buyer. The Buyer’s claim in this re­gard was there­fore re­ject­ed.

Had the tri­bunal com­mit­ted a pro­ce­dur­al er­ror by not pro­vid­ing the Buyer with the op­por­tu­ni­ty to ar­gue its case?

The Buyer claimed that the tri­bunal had re­ject­ed its re­quests for be­ing grant­ed ad­di­tion­al time to gath­er ev­i­dence and the ap­point­ment of an in­de­pen­dent ex­pert. The tri­bunal had there­fore not pro­vid­ed the Buyer with the op­por­tu­ni­ty of prov­ing that there were er­rors in the ser­vices pro­vid­ed by the Contractor. The Buyer ar­gued that this con­sti­tut­ed a pro­ce­dur­al er­ror.

The Court not­ed that ac­cord­ing to the SCC Rules a pre­lim­i­nary time­line is to be laid out for the ar­bi­tra­tion, which the par­ties and the tri­bunal ought to ad­here to. A par­ty may, how­ev­er, be grant­ed ad­di­tion­al time to e.g. gath­er ev­i­dence, pro­vid­ed it is not in­ap­pro­pri­ate. The Court held that, in gen­er­al, the tri­bunal is best suit­ed to de­cide whether ad­di­tion­al time ought to be grant­ed. Accordingly, the tri­bunal’s de­ci­sion is to be ac­cept­ed as­sum­ing it does not ap­pear to be in­de­fen­si­ble. A fur­ther re­quire­ment is that the need for ad­di­tion­al time is not to be as­cribed to the re­quest­ing par­ty’s own ac­tions; the need for ad­di­tion­al time must be due to cir­cum­stances be­yond the par­ty’s con­trol which the par­ty could not rea­son­ably have fore­seen. Finally, it is al­so re­quired that no ac­cept­able al­ter­na­tives to pur­sue the par­ty’s po­si­tion are avail­able. As re­gards a dis­missed re­quest to ap­point an in­de­pen­dent ex­pert, the Court held that this can­not con­sti­tute a pro­ce­dur­al er­ror, un­less oth­er­wise agreed be­tween the par­ties.

The Court held, with ref­er­ence to the cir­cum­stances in this par­tic­u­lar case, that no pro­ce­dur­al er­ror had been com­mit­ted and there­fore re­ject­ed the Buyer’s as­ser­tion to the con­trary.

Had the tri­bunal com­mit­ted a pro­ce­dur­al er­ror by ren­der­ing an award that was not sup­port­ed by ev­i­dence?

Lastly, the Buyer claimed that the tri­bunal had ac­cept­ed part of the Contractor’s claim de­spite that no ev­i­dence had been pre­sent­ed there­to, ef­fec­tive­ly con­sti­tut­ing a pro­ce­dur­al er­ror. The Court held that a tri­bunal’s as­sess­ment in ev­i­den­tiary is­sues can­not be deemed an is­sue of pro­ce­dure (or ex­ceed­ing of man­date). The Buyer’s claim was there­fore re­ject­ed in this part as well.

To sum­marise, all of the Buyer’s claims were dis­missed by the Court and the Svea Court of Appeal’s award was over­ruled. Accordingly, no part of the tri­bunal’s award was an­nulled.

Commentary

It is in­ter­est­ing to note that the award was not an­nulled in part, notwith­stand­ing that a pro­ce­dur­al er­ror had been com­mit­ted. The pro­ce­dur­al er­ror was such that it was easy to es­tab­lish how it had af­fect­ed the Buyer (i.e. by means of a sim­ple com­par­i­son be­tween the two al­ter­na­tives of cal­cu­lat­ing the in­ter­est). The Court held that the award was not to be an­nulled with ref­er­ence to the pro­ce­dur­al er­ror not be­ing of rea­son­able im­por­tance to the Buyer. The Court’s as­sess­ment amounts to a rea­son­able dis­tri­b­u­tion of risk be­tween the par­ties to an ar­bi­tra­tion and serves as a re­minder that not all pro­ce­dur­al er­rors com­mit­ted by a tri­bunal are worth pur­su­ing in chal­lenge pro­ceed­ings.

From a method­olog­i­cal point of view it ought to be not­ed that the rul­ing ex­ten­sive­ly refers to in­ter­na­tion­al le­gal sources, in par­tic­u­lar with re­gard to the is­sue of whether the tri­bunal had de­cid­ed on mat­ters that were not cov­ered by the ar­bi­tra­tion clause be­tween the par­ties. Accordingly, the rul­ing con­firms that the Swedish Supreme Court ac­knowl­edges the in­ter­na­tion­al char­ac­ter of (in­ter­na­tion­al) ar­bi­tra­tions and that is­sues that arise in chal­lenge pro­ceed­ings may have wide­spread in­ter­na­tion­al ap­plic­a­bil­i­ty. This ac­knowl­edge­ment serves to make ar­bi­tra­tion in Sweden more ac­ces­si­ble to for­eign par­ties, which is in line with the leg­is­la­tor’s in­ten­tions with ref­er­ence to the re­cent changes to the Swedish Arbitration Act (for a sum­ma­ry of these changes, please click here).

The au­thors are Johannes Ericson and Jakob Andersson.