Arbitration is the most popular choice for dispute resolution in multinational commercial agreements.[1] At times, relevant arbitration clauses provide that arbitration proceedings can only be initiated after a failed attempt at an alternative dispute resolution (“ADR“). There is a broad variety of specific ADR mechanisms provided for in such multitier dispute resolution clauses. Nevertheless, a matter that commonly arises in disputes subject to such multitier dispute resolution clauses is the mandatory nature of such pre-arbitral ADR attempts. In the following, we provide a brief overview of the relevant case law in Switzerland, focusing on a recent decision of the Swiss Federal Supreme Court (“SFSC“) on this matter.
Conditions for the mandatory nature of a pre-arbitral ADR attempt
According to the standing case law of the SFSC, a pre-arbitral ADR attempt agreed upon by the parties to an agreement may be mandatory under certain conditions. This means that if the parties did not complete the agreed-upon ADR attempt, the arbitral tribunal lacks competence, and any decision may be appealed to the SFSC on the ground that the arbitral tribunal wrongly accepted jurisdiction (Art. 190 para. 2 lit. b of the Swiss Private International Law Act).
As it set out in its leading decision in this area (case no. 142 III 296 of 16 March 2016), the SFSC conducts any assessment of an agreement on a pre-arbitral ADR attempt based on four questions:
- Which requirements did the parties agree upon for the ADR attempt? Was it intended to be mandatory?
- Was the ADR attempt agreed upon by the parties completed correctly in the case at hand?
- If this is not the case, could the party arguing noncompliance do so without committing an abuse of rights?
- If this is the case, which is the adequate sanction for the parties’ failure to complete the agreed-upon ADR attempt?
With regard to the last question, the possible sanctions considered by the SFSC are either that the arbitral tribunal dismisses the claim for lack of competence, rejects it entirely or suspends the arbitral proceedings until the ADR attempt was completed. According to the SFSC, the preferable sanction in most cases is the suspension of the arbitral proceedings. For this purpose, the arbitral tribunal must indicate the conditions under which the pending proceedings will be resumed and set a time limit for the parties within which the ADR attempt must be completed, save exceptional circumstances. If this is not done, a noncompliant party could deprive the claimant — without any justification of its right to obtain an award on the merits within a reasonable period of time — by prolonging the ADR attempt as long as possible.
Recent case law
In a decision published on 9 September 2021, the respondent claimed that arbitration proceedings must be preceded by an ADR attempt. However, the SFSC concluded that the respondent behaved so abusively during the ADR attempt and dismissed a challenge to the jurisdiction of the arbitral tribunal (case no. 4A_90/2021 of 9 September 2021).
Factual background
The basis of the case was a consortium agreement (“Agreement“) concluded between the parties including a clause containing an agreement to arbitrate. This arbitration agreement stated that “in any case, prior to the commencement of arbitral proceedings, an attempt at conciliation shall be made between the parties, which shall be conducted by a conciliator designated by the parties.” A dispute arose between the parties and liquidation proceedings were initiated. After not reaching an agreement at a meeting with the consortium’s liquidator, the claimants initiated arbitration proceedings.
One of the respondents raised a plea of lack of jurisdiction, whereupon the arbitral tribunal limited the proceedings for the time being to the issue of jurisdiction. It was controversial between the parties whether a valid ADR attempt pursuant to the Agreement had taken place. After an oral hearing, the arbitral tribunal issued an interim award rejecting the plea of lack of jurisdiction. Thereupon, the respondent filed an appeal in civil matters to the SFSC against the arbitral award.
According to the arbitral tribunal, any conciliation attempt is sufficient
The arbitral tribunal considered that the Agreement in fact mandatorily provides that a conciliation procedure between the parties must be attempted “in any case” before the initiation of the arbitration proceedings. An interpretation according to the principle of good faith shows that the ADR attempt does not have to meet onerous requirements, but that any attempt to find an amicable solution by means of a conciliator jointly appointed by the parties is sufficient. According to the arbitral tribunal, a meeting prior to the commencement of arbitration proceedings and the subsequent written settlement negotiations — conducted by the appointed conciliator — constituted an attempt at conciliation within the meaning of the Agreement. Even if this were not the case, the objection that the conciliation procedure had not taken place would be deemed a manifest abuse of rights.
The SFSC on the abuse of rights
The SFSC found that the period before the initiation of arbitral proceedings was marked by efforts on the part of the claimants to reach a settlement agreement. After the meeting, the parties corresponded in writing for more than four months. The claimants then set a deadline, sent an invitation to another physical meeting and announced the legal steps to be taken if the deadline would not be met; the respondents still let the deadline expire unused.
The SFSC left open whether this exchange was an attempt at conciliation pursuant to the Agreement. However, it held “that it would have been up to the respondent to propose a conciliation procedure — corresponding to its ideas — if it should have been of the opinion that the conciliation efforts did not meet the requirements of the [A]greement.” It found that it was inconsistent with good faith to wait for the settlement efforts of the opposing party in order to allege after the initiation of arbitration proceedings that the ADR attempt did not meet the requirements. The SFSC thus confirmed the decision of the arbitral tribunal, by which it had declared itself competent, and rejected the appeal.
[1] “97% of respondents indicate that international arbitration is their preferred method of dispute resolution, either on a stand-alone basis (48%) or in conjunction with ADR (49%)” Queen Mary Arbitration Survey, 2021, p. 2.
