One of the central objectives of civil procedural law is to provide a mechanism for the final and conclusive resolution of disputes. In accordance with the res judicata principle, matters which have been judged on the merits are, therefore, deemed binding on the parties, and may no longer be re-litigated nor decided differently in subsequent proceedings.
Although this principle is very widely recognised, the effects of judgments, and the criteria for determining the identity of prior and fresh proceedings, vary between jurisdictions. For example, while the binding effect judgments emanating from civil law jurisdictions is generally limited to the actual holding, common law jurisdictions also know a broader concept (issue estoppel) which prevents parties under certain circumstances from questioning the reasoning of a prior judgment in subsequent proceedings. These divergences between national approaches can create particular challenges when identical or related matters are first litigated before the courts of one country and then again raised before an arbitral tribunal in another country.
Binding Effect of Foreign Court Decisions on Arbitral Tribunals
As far as Swiss law is concerned, it has long been recognised that arbitral tribunals seated in Switzerland must respect the res judicata principle, and that awards made in violation of this principle may be set aside on public policy grounds. It is equally established that this only applies to the extent that the foreign court judgment concerns a matter identical to the one pending in arbitration, and that it is susceptible of recognition in Switzerland in accordance with the requirements set forth in the Private International Law Act. By contrast, case law on the criteria relevant for determining the identity of prior and fresh proceedings, and on the law applicable to these questions, has so far been scarce. In a recent decision concerning a setting aside application (4A_508/2013, rendered on 27 May 2014), the Federal Supreme Court has now provided some important clarifications on these issues.
The case arose out of a dispute between a Ukrainian state-owned company and a Turkish contractor in relation to a large construction project in Ukraine. While the project was already underway, a prosecutor in Ukraine opened civil proceedings before a state court against both parties, and successfully challenged the validity of an addendum to the initial contract, on the basis that the representative of the Ukrainian party had lacked the necessary power to enter into the addendum. The High Commercial Court in Ukraine ultimately upheld the prosecutor’s arguments, declaring the addendum to be invalid.
About two years after the start of the Ukrainian proceedings, the Turkish contractor commenced an ICC arbitration in Switzerland, seeking compensation for outstanding payments and lost profits, and eventually obtaining an award in which the validity of the controversial addendum was upheld. In reaching this decision, the tribunal considered that it was not bound by the prior Ukrainian court decision because the parties and the relevant facts were not identical. The tribunal in particular noted that no identity of parties existed due to the participation of a public prosecutor in the first proceedings, and further found that the Ukrainian state entity had repeatedly treated the amendment as valid and binding, including after the completion of the Ukrainian court proceedings.
Standards Applied by the Federal Supreme Court
The Ukrainian party then sought to have this award set aside in Switzerland, arguing that the arbitral tribunal had erred in disregarding the res judicata effects of the Ukrainian court decision. The Federal Supreme Court rejected this application, holding that the foreign court proceedings did not involve the same parties. The Supreme Court also considered that there had in any event been no breach of the res judicata principle, as the Ukrainian party’s alleged acquiescence to the addendum had partly only arisen after the completion of the Ukrainian court proceedings, such that the dispute resolved through arbitration was not identical to the one previously decided in Ukrainian state courts.
To reach this outcome, the Federal Supreme Court not only restated the basic framework for the application of res judicata by Swiss arbitral tribunals, but also addressed the underlying civil procedure and conflict of law principles. Thus, it restated that a foreign court decision only prevents an arbitral tribunal from re-deciding specific claims and issues if such decision may be recognised in Switzerland, which in particular means that the foreign court must not have failed to refer the matter to arbitration pursuant to Article II (3) of the New York Convention, i.e., in spite of the existence of a valid arbitration agreement. In the present case, the potential recognition of the Ukrainian court decision did, however, not have to be analysed, as the arbitral tribunal could, according to the Supreme Court, indeed consider that the dispute was different form the one previously dealt with in Ukraine pending before it.
In this context, the Federal Supreme Court acknowledged that the conditions under which a foreign judgment becomes binding on the parties, and the specific scope of such binding effect, depend on the legal system from which the judgment emanates. However, a foreign judgment can never, according to the approach taken by the Supreme Court, deploy effects in Switzerland that would not equally be available to a Swiss domestic judgment. This in particular means that the res judicata principle only applies if the parties to the prior and subsequent proceedings, as well as the claims raised on the basis of a particular set of facts, are identical, according to the relevant standards which have been developed in Swiss domestic cases. Whether or not the required identity exists in other words needs to be decided in accordance with Swiss law, and this although Swiss arbitration law, as embodied in Articles 176 et seqq. of the Private International Law Act, does not expressly address res judicata issues.
At the same time, the Supreme Court signalled that it may under certain circumstance be appropriate for a Swiss arbitral tribunal to deviate somewhat from the rather formal criteria of Swiss procedural law when considering the relevance of a foreign court decision. This may in particular be appropriate when there is a suspicion that the foreign proceedings were only commenced to ambush a parallel arbitration in the same case. Without deciding whether this was relevant in the present dispute, the Supreme Court noted that the identity between the parties to the Ukrainian court proceedings and the subsequent arbitration did not, contrary to the arguments developed by the Ukrainian party, exist solely because both parties were involved as defendants in the proceedings initiated by the Ukrainian prosecutor. This suggests that the inquiry into the formal identity of the parties may, at least in certain cases, have to be completed by an analysis of the roles and interests of the parties concerned. Ultimately, the Federal Supreme Court did not have to resolve this issue because it found that the subject matter of the dispute submitted to arbitration was in any event also different from the one adjudicated in the Ukrainian proceedings.
In conclusion, the Federal Supreme Court has in this decision restated its position according to which Swiss arbitral tribunals must decline their jurisdiction if the same dispute involving the same parties has already been resolved by a foreign court judgment susceptible of recognition in Switzerland. Awards rendered in violation of this rule may be set aside on public policy grounds. Additionally, it has now been clarified that the potential identity of the dispute is to be determined in accordance with Swiss procedural law principles, as developed in domestic cases, although certain adjustments to these principles may on a case-by-case basis be acceptable, or even necessary, to duly take into account the international character of the proceedings, but also to protect arbitrations seated in Switzerland from unjustified disruptions.