The right to appeal for reasons of recusal – The Federal Tribunal maintains a strict approach

The right to appeal for reasons of recusal – The Federal Tribunal maintains a strict approach

A) Introduction

In its decision of September 11, 2023, the highest Swiss court, the Federal Tribunal in Lausanne, rendered a noteworthy decision in an appeal proceeding against an ICC award rendered by an arbitration tribunal seated in Geneva (Federal Tribunal Decision 4A_13/2023 of September 11, 2023). The decision touches an area of arbitration law that currently seems to evolve in step with the increasing exigencies of practitioners' dexterity in researching social media and internet data bases in preparation for and during arbitration proceedings.

Already in its decision of February 28, 2020 the Federal Tribunal had to deal with the question how far a party's duty of curiosity goes with regard to researching the backgrounds of arbitrators (Federal Tribunal Decision 4A_318/2020 of December 22, 2020). In the present decision, the Federal Tribunal had to assess whether an appeal lodged by a Chinese company based on connections between an arbitrator and a party representative was timely or delayed.

B) Facts of case

The appellant in the appeals proceedings before the Federal Tribunal, a Chinese manufacturing company, and its counterpart, an Italian company in the industry of aircraft construction, had entered into a "General Cooperation Agreement" on 9 November 2014. Based on this agreement, which contained an arbitration clause referring disputes to an arbitral tribunal with the UNIDROIT Principles of International Commercial Contract applicable, the parties intended to enter into a cooperation process, pursuant to which the Italian company would license to the Chinese manufacturer certain trademark rights and know-how relating to three of its aircraft models. In addition, in the parties agreed on the sale of ten airplanes to the manufacturer.

After conclusion of the agreement, disputes arose between the parties. On 16 September 2020, the Italian company (hereinafter "Plaintiff") terminated the agreement invoking breaches of contract by the Chinese manufacturer ("Defendant"), which were disputed. In its counterclaim, the Defendant in turn claimed breaches of the contract by the Plaintiff.

On 4 May 2021, the Plaintiff initiated ICC arbitration proceedings. In its prayers for relief, it requested a determination on the validity of the termination of the agreement as well as damages under several heads of argument. The Defendant filed a motion to dismiss the Plaintiffs claim and lodged a counterclaim for damages in exchange.

On 10 August 2021, the ICC Court confirmed the arbitrator nominations in the dispute. The ICC Court also accepted the attorney designated by the Plaintiff to act on its behalf. Jointly, the two arbitrators thereafter appointed the chairperson of the arbitral tribunal, who was in turn confirmed by the ICC Court on 6 September 2021. Between 30 May and 1 June 2022, the hearing in the matter took place. On 20 November 2022, the tribunal rendered its award, finding in favour of the Plaintiff, namely that it had been entitled to terminate the contract and that it was equally entitled to claim damages, inter alia for outstanding licence fees and damages for breaches of minimum sale and royalty obligations. On the other hand, the arbitration tribunal dismissed the Defendant's counterclaims.

The Defendant thereafter lodged an appeal against the award and requested its annulment by the Federal Tribunal for sake of partiality of the Plaintiff's arbitrator paired with a prayer to have the matter sent back to the arbitration tribunal for a new decision by a newly constituted tribunal.

C) Legal analysis by Federal Tribunal

1. Obligation to inquire / duty of curiosity

The Federal Tribunal noted that the Defendant had grounded its request to have the award set aside on art. 190 para. 2 letter a Private International Law Act (PILA), claiming the improper constitution of the arbitral tribunal, one of only five possible grounds to lodge such an appeal.

It held at the outset that based on the principle of good faith, that underlines the entire arbitration proceedings, parties wishing to challenge an arbitrator must assert the corresponding reason without any delay once becoming aware thereof. In addition, the Federal Tribunal held that the principle of good faith not only applied to actual grounds for a challenge but also to such grounds that a party should have been cognisant of if it had paid proper attention to such matters, as was to be expected of it. Depending on the circumstances, a party's frivolous blindness to potential recusal grounds could constitute behaviour not worthy of legal protection, comparable to holding back a motion for recusal despite awareness of such grounds.

In keeping with its jurisprudence that it is not permissible to keep grounds for objection in reserve and to subsequently raise these when faced with an unfavourable arbitration outcome, the Federal Tribunal concurred that invoking an improper composition must be considered forfeited if it is not asserted immediately upon recognition.
In applying these principles to the case at hand, the Federal Tribunal found that similar to a request for revision pursuant to art. 190a para. 1 letter c PILA3, an appeal based on art. 190 para. 2 letter a PILA for alleged bias of an arbitrator could only be brought in relation to a reason for challenge that could not have been discovered by the appellant already during the arbitration proceedings if it had exercised the due diligence required by it under the given circumstances. Parties are required to make enquiries – in particular internet searches – in order to identify any elements that may indicate a possible risk of dependence or partiality of an arbitrator.

The question as to the extent of this duty of enquiry by the parties ("devoir de curiosité ") and the appropriate rigour of investigation incumbent upon a party in making such inquiries depended on the specific circumstances of the individual case. Consequently, where a party invoked a recusal ground after the conclusion of the arbitration process, such party is burdened with the obligation of demonstrating that it would not have been able to discover the recusal ground prior, even if it had applied all due care and proper attention to the issue.

2. Arguments by the appealing Defendant

The Defendant had submitted to the Federal Tribunal that subsequent to receiving the negative award and in preparation for its appeal to the Federal Tribunal, it had become aware of circumstances that suggested a lack of independence and impartiality of the Plaintiff's arbitrator. The Defendant claimed to have found out that this arbitrator and his law firm had several connections to the legal representative of the Plaintiff. Firstly, it was discovered that the arbitrator had offices in Rome and Naples, with the Naples office sharing the same address, telephone and fax number as the lawyer of the Plaintiff.

The Plaintiff's lead counsel appeared in legal search websites ("lawyers.com" and "martindale.com") as a lawyer for the arbitrator's law firm. In addition, a former lawyer of the Plaintiff's offices had worked for the arbitrator for nearly 15 years, whilst newspaper reports even made mention of the arbitrator's connection to the Plaintiff's attorney in connection with the arbitrator's commercial dealings in China.

None of these facts had been volunteered by the arbitrator during the disclosure phase after his nomination and were allegedly only discovered by the Defendant during painstaking research after the rendering of the award. Only because the Defendant had opted to seek Swiss representation for the appeal proceedings before the Federal Tribunal and thanks to their comprehension of Italian were such connections even discovered.

3. Findings of the Federal Tribunal in the case at hand
 

The Federal Tribunal dismissed the appeal by the Defendant in finding that it had not demonstrated that its discoveries made after the award could not have reasonably been made during the arbitration process. Any lack of linguistic skills of a party's legal counsel during the arbitration had to be attributed to the party itself. These days, where international arbitration proceedings are frequently held in English, prudence required parties to consult internet-accessible guides and perform checks on search engines focussing on the legal profession.

The Federal Tribunal found the Defendant's view unconvincing. Parties had a duty to undertake additional inquires and could not settle with the general declaration of the arbitrator's independence. Rather, it was incumbent on each party to ascertain whether an arbitrator provided sufficient guarantees of independence and impartiality. Based on the jurisprudence of the Federal Tribunal, consulting the most important online search engines and other accessible sources that could provide indications of possible bias on the part of an arbitrator, e.g. the websites of the most important arbitration websites of the most important arbitration institutions, the parties, their legal representatives and the law firms in which they in which they work could be expected by the parties. This was no different in the case at hand.

D) Conclusion

The Federal Tribunal's decision shows that these days doing a thorough background check on proposed arbitrators belongs to the standard repertoire of an attorney when faced with nominations in arbitral proceedings. Mindful of the fact that parties may have differing strategic objectives for and during arbitration proceedings, it is important to note that for appeals of awards to the Swiss Federal Tribunal, which already entertains only a limited number of grounds, holding back challenges of a procedural nature may prove very costly, be they on purpose or owing to a lack of professional thoroughness.