Swiss Federal Supreme Court confirms that not the tribunal’s legal reasoning, but only the outcome of the award can be reason for annulment for violation of public policy

In its decision published 6 January 2021, the Swiss Federal Supreme Court (“SFSC”) dismissed a challenge because in its view, the arbitrator had not violated public policy by finding in favour of a company that refused to pay commissions under an agency contract obtained through fraudulent behaviour (case no. 4A_346/2020 (in French)).

Factual background

The reported dispute originates from agency agreements between a principal company C and two agents, company A as well as its subsidiary company B. After C discovered that B had paid kickbacks to one of C’s employees to secure renewal of the agreements, C stopped commission payments to the agents and initiated ICC arbitral proceedings.

In its award, the sole arbitrator came to the conclusion that although A had acted fraudulently, the agreements had become binding because C had failed to invalidate them within the statutory time limit. Despite this, the sole arbitrator ruled that C was entitled to refuse performance based on a statutory exception according to which victims of a tortious act can refuse performance of an obligation created by that act, even if their own claims in tort are time-barred.

This award was consequently challenged by B, which filed an appeal with the SFSC to set aside the arbitral award. Company B requested the appeal on the grounds of violation of public policy, arguing that the sole arbitrator had not taken into account the principle of pacta sunt servanda.

Intrinsic contradictions in the arbitral award do not justify setting aside for a violation of substantive public policy

Pursuant to art. 190(2)(e) of the Swiss Private International Law Act (“PILA”), an award can be set aside for violation of public policy, which includes “substantive” public policy and “procedural” public policy. “Substantive” public policy relates to awards containing a specific result which is contrary to fundamental legal and moral principles, such as, inter alia, the principle of pacta sunt servanda (sancticy of contract).

The SFSC emphasized that the principle of pacta sunt servanda is violated only if an arbitrator refuses to enforce a contractual provision even though it deems as binding or, conversely, if it enforces a contractual provision that the arbitrator deems non-binding. In other words, the arbitrator must have applied or refused to apply a contractual provision by contradicting the result of its interpretation of the existence or content of the disputed activity. In the case at stake, however, there was no such contradiction, as the sole arbitrator had affirmed the validity of the agreement but allowed that performance of the agreement be refused based on a statutory exception.

In its recent case law, the SFSC has emphasized repeatedly that the principle of pacta sunt servanda cannot be relied upon to criticize the manner in which the arbitral tribunal interpreted a contractual provision (e.g. Decisions of 27 March 2014, 4A_448/2013, reason 3.2.2 or Decision of 15 February 2010, 4A_464/2009, reason 5.2). This latest precedent confirms this approach and again highlights that a public policy challenge based on Art. 190(2)(e) PILA does not entitle the SFSC to review whether the arbitral tribunal interpreted or applied certain contractual clauses correctly.