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Sandra De Vito Bieri Liv Bahner lic.iur., LL.M., Attorney-at-Law LL.M., Maître en droit, Attorney-at-law Partner Associate Co-Head Arbitration Practice Group Phone +41 58 258 10 00 Phone +41 58 258 10 00 [email protected] [email protected]

Emergency in Arbitration

Is there an emergency before the arbitral tribunal has been constituted? Do you have to resort to state courts or does the arbitration clause in your agreement provide for quicker emergency relief? Skip the wait and request the appointment of an Emergency Arbitrator!

1. The Emergency Arbitrator

At the outset of a dispute there are many ways how the opposing party could jeopardize the resolution of a dispute and render a final award futile. The opposing party may e.g. dispose of evidence relevant to the resolution of the dispute, abusively call of a bank guarantee or infringe exclusivity or confidentiality obligations. In all those scenarios, once the arbitral tribunal is constituted the aggrieved party may claim interim relief from the arbitral tribunal. But what shall the aggrieved party do if it has not yet or just initiated arbitration proceedings, however, the arbitral tribunal is yet to be constituted and the party's interest may be irreparably harmed by the conduct of the opposing party?

Until a few years ago the only option was to seek interim relief in national courts, which most of the time rendered the request for interim relief very complex by involving several jurisdictions including alleged biases. Resorting to national courts may run counter to the entire spirit of arbitration desired by the parties, which is to resolve the dispute at an international level.

This is where the emergency arbitrator may come on the scene. Most arbitral institutions have acknowledged the need to fill in the gap between the moment when a dispute arises and the constitution of the arbitral tribunal and have adopted emergency arbitrator provisions. The emergency arbitrator is thus appointed to deal with requests for urgent interim relief prior to the constitution of the main tribunal. With the appointment of an emergency arbitrator the parties may resolve their dispute entirely at the international level.

In our experience emergency arbitration proceedings have not only proven to be an effective mean of obtaining urgent relief expeditiously prior to the constitution of the arbitral tribunal but also to serve for the parties and counsel as an early settlement tool.

Bratschi Wiederkehr & Buob Ltd. Basel Berne Lausanne St. Gallen Zug Zurich Arbitration Newsletter September 2016 The complete list of our attorneys at law is published on our webpage: www.bratschi-law.ch/team Especially the emergency arbitrator provisions under the Swiss Rules have proven to provide high flexibility as well as effectiveness as demonstrated in the case Giedo van der Garde versus Sauber Motorsport: The race car driver Mr. Van der Garde initiated emergency arbitrator proceedings under the Swiss Rules against Sauber Motorsport because the latter denied the driver a guaranteed seat for the Sauber team’s 2015 lineup in the Formula One. The Emergency Arbitrator decided in favor of Mr. Van der Garde. Following an appeal by Sauber just a few days before the start of the 2015 Grand Prix season in Melbourne, the Victoria Supreme Court backed the emergency arbitrators ruling, enforcing it in Australia.

Emergency arbitration is thus likely to remain a permanent part of the international arbitration landscape due to its in most cases distinct advantages over state court proceedings.

2. Advantages of Emergency Arbitration

2.1 Neutrality and competence: The emergency arbitrator is appointed by the arbitral institutions. Emergency arbitration proceedings serve, therefore, as a neutral forum. Further- more, the arbitral institutions are diligent when it comes to the selection of the emergency arbitrator. The emergency arbitrator appointed by the arbitral institution will not only be familiar with (emergency) arbitration proceedings and disputes between international business partners but will also have the specialized legal and technical knowledge required to decide the application and knows the language of the arbitration.

2.2 Speedy appointment: Emergency arbitrators typically issue their decisions expeditiously. Most arbitral institutions, which allow for emergency arbitrators require an arbitrator to be appointed within one or two days upon reception of the request. Many of them have also established deadlines for decisions to be issued, ranging from five days to 20 days after an emergency arbitrator is appointed. In one example from our practice, in an emergency arbitration under the Rules of the Singapore International Arbitration Center the emergency arbitrator was appointed one day after the application had been received by the institution. Within one day of his appointment the emergency arbitrator established a schedule for consideration of the application for emergency relief. As per the schedule, the parties made written submissions on the application and a telephonic hearing was conducted within one week of his appointment. The emergency arbitrator passed an order three days thereafter.

2.3 Confidentiality: Emergency arbitration proceedings as well as regular arbitration proceedings are often confidential, whereas court litigation proceedings are public. If the parties agreed to submit any dispute to arbitration, most of the time they chose arbitration proceedings with the intention to keep the business matter and any dispute arising thereof confidential. In light of the foregoing, the appointment of an emergency arbitrator fits the need for confidentiality while a request for interim relief in state courts would con- travene the parties’ aim to ensure the privacy of proceedings.

Arbitration Newsletter September 2016 Page 2 | 14 2.4 Standard and Scope of Relief: The emergency arbitrator may order interim relief to the extent sought by the applicant. The measures range from preserving or restoring the status quo, anti-suit injunctions, interim payments and freezing assets. However, measures to be taken are not limited to certain types of relief. The scope of relief might thus be broader than the scope of relief the parties could obtain from state courts, as the above enumeration shows. Also, emergency arbitrators are free to determine the test to be applied in order to decide whether interim relief shall be granted. They may apply the law of the seat of the arbitration but could also rely on a so-called international test (in a nutshell, including the following criteria: reasonable possibility of success with the main claim, risk of irreparable harm, urgency and proportionality). The application of such international test gives the emergency arbitrator therefore more flexibility in order to meet the business needs of the parties. Moreover, interim relief ordered by an emergency arbitrator may cover several jurisdictions while the effectiveness of a court order is limited to the territory of the court. This will also prevent the parties from hiring local counsel in multiple jurisdictions.

2.5 Cost Efficiency: The appointment of the emergency arbitrator could also be less costly than referring the application for interim relief to state courts. This may in particular be the case where the decision of a court order is appealed or the state courts of several jurisdictions may be involved.

2.6 Pressure and Settlement Tool: Commercial arbitration is generally considered to be a less adversarial approach than hauling the other party into court. Many arbitrations arise from contracts, and it is likely that the parties are going to want to preserve the business relationship after the dispute is resolved. Emergency arbitrators can therefore be a useful tool in cases where the parties only need a little nudge to get settlement discussions moving in the right direction. In our experience also a favorable emergency arbitrator decision may put significant pressure on the respondent, which may again lead to settlement negotiations. From the applicant’s perspective emergency arbitration may also serve as useful tool to put pressure on the respondent, given that the applicants may be well prepared when filing the application for emergency arbitration while the respondent has at best a couple of days to develop a defense. Furthermore, respondents may also encounter difficulties to quickly find an appropriate counsel familiar with emergency arbitration proceedings and with the substance of the dispute.

2.7 Voluntary compliance: Even though the enforceability of the emergency arbitrator’s decision is questionable enforcement issues do not emerge in most cases, given that the parties voluntarily comply with the orders rendered by the emergency arbitrator. Volun- tary compliance is deemed to be encouraged for the following reasons: The parties fear that non-compliance with the emergency arbitrator’s decision may have a bad reputa- tional effect as the arbitral tribunal subsequently appointed might not value the non-compliance with a decision issued in the same arbitral institutional framework. Also, parties

Arbitration Newsletter September 2016 Page 3 | 14 are likely to comply with the order because of the risk of cost awards and potential sanc- tions. Furthermore, the above mentioned case Giedo van der Garde versus Sauber Mo- torsport is a good example of a court’s willingness to provide effective and quick support to international emergency arbitration.

3. What to consider when drafting the arbitration clause

Under most rules of arbitral institutions the emergency arbitration proceedings apply by default. That means that the emergency arbitration rules may be triggered if parties have opted to arbitrate their dispute under a certain set of institutional arbitration rules. However, not every arbitration agreement is deemed to include the potential appointment of an emergency arbitrator, e.g. under the Arbitration Rules of the International Chamber of Commerce the arbitration agreement must be concluded after January 1, 2012 to have the emergency arbitration provisions to be included. Thus, any already existing arbitration agreement has to be considered thoroughly as to the application of emergency arbitration provisions. Even though not recommended, if the parties wish to exclude the emergency arbitration provisions under most arbitration rules, they will have to opt-out explicitly.

4. Conclusion

The appointment of an emergency arbitrator may bring rapid interim relief. The provisions for the appointment of an emergency arbitrator have been invoked more often than originally expected inter alia due to its numerous advantages. It is proving to be an effective tool of obtaining rapid interim relief prior to the appointment of the arbitral tribunal despite doubtful enforceability, and, in contrast to applications for interim relief in court proceedings, offers the benefit of confidentiality and may also be a tool for early settlement negotiations.

Bratschi Wiederkehr & Buob Ltd. is one of Switzerland’s leading law firms with over 75 attorneys in six major business centers of Switzerland. Our experienced attorneys advise and represent national and international enterprises as well as private individuals and the public sector in all areas of commercial law, tax law as well as puclic law and notarial matters.

Basel Bern Lausanne St. Gallen Zug Zurich Lange Gasse 15 Bollwerk 15 Avenue Mon-Repos 14 Vadianstrasse 44 Industriestrasse 24 Bahnhofstrasse 70 Postfach Postfach 5507 Postfach 262 Postfach CH-4052 Basel CH-3001 Bern CH-1002 Lausanne CH-9001 St. Gallen CH-6300 Zug CH-8021 Zürich Phone +41 58 258 19 00 Phone +41 58 258 16 00 Phone +41 58 258 17 00 Phone +41 58 258 14 00 Phone +41 58 258 18 00 Phone +41 58 258 10 00 Telefax +41 58 258 19 99 Telefax +41 58 258 16 99 Telefax +41 58 258 17 99 Telefax +41 58 258 14 99 Telefax +41 58 258 18 99 Telefax +41 58 258 10 99 [email protected] [email protected] [email protected] [email protected] [email protected] [email protected]

Arbitration Newsletter September 2016 Page 4 | 14

Lukas Wyss Dr. iur., LL.M., ArbP, Attorney-at-Law Partner Co-Head of the Arbitration Practice Group Phone +41 58 258 16 00 [email protected]

Damages in international arbitration under Swiss law – do the parties get what they expect?

Arbitration is uncontestably the preferred means to resolve international disputes. In many instances, arbitral tribunals have to decide on damage claims. Therefore, the question of whether the parties get what they expect is of vital importance to arbitration stakeholders. In its report „Closing the gap between claimants and respondents“ of 2015, PWC examined this question after having analyzed 95 public awards – many of them investment treaty arbitration awards – and came to some interesting conclusions.

First, arbitral tribunals on an average award only 37% of the amount claimed1. Second, tribunals are increasingly willing to accept income based approaches such as DCF, which capture future profits or returns. These approaches were used by Tribunals in 69% of cases from 2011 to 2015, compared to only 17% of cases pre-20002. The PWC study further found that tribunals provide more in-depth explanations of their approach to damages than before3. It comes less as a surprise that over 80% of the awards are below USD 80 million. Finally, it is not very surprising that on an average, respondent’s experts quantified damages at 13% of the amount quantified by claimants’ experts, either.

The PWC report suggests that as a rule, arbitral tribunals examine damages claims diligently and are open to well-founded arguments of the parties, in particular when based on state-of-the-art economic analyses. It did not confirm the sometimes heard complaint that arbitral tribunals tend to “split the baby”. However, The PWC report also shows that party-appointed experts are often not neutral, but support the position of the party who has chosen it – which doesn’t come as a surprise though – has anyone ever seen a party filing a report which is obviously detrimental to its position? It further established that the outcome of an expert report is in particular influenced by the legal basis of the case, the background of the expert and the questions as well as the instructions underlying the report. Such factors may include assumptions on the development of the market, of prices, of margins etc. largely determine the result of the expert report. It further confirmed the

1 There are of course cases where full or almost full compensation was granted. 2 See in this context also NEAL MIZRAHI, The Perils of Using Market-Based Data in Business Valuation and Damages Quantification, global arbitration review, The Arbitration Review of the Americas 2015, p. 9 et seq. 3 34 pages in the last five years compared to 8 pages pre-2000.

Arbitration Newsletter September 2016 Page 5 | 14 common wisdom that experts in many instances have different opinions on legal, technical or fi- nancial matters.

This leads us to the following conclusions:

5. Legal concept of damages and proving principles

The starting point of a damage claim is the applying legal concept of what constitutes damages and the principles on how to prove them. When asking whether a party gets what it expects in terms of damages in international arbitration, the starting point is what a party may expect under the given legal and factual circumstances.

In civil law, what constitutes damages and how to prove them is defined by the law applying to the case at issue (“lex causae”). The arbitral tribunal has to apply the law applicable to the case, unless the parties have explicitly agreed on an “ex aequo et bono” decision (which is rarely the case). The concept of damages varies from country to country, which may result in substantially different compensation. Consequently, the choice of law agreed in the contract matters and should carefully be examined by a party when drafting the contract. Empirical data shows that legal certainty has top priority when it comes to the choice of law4. Swiss law, e.g., follows the principle of party autonomy and defines damages as the difference between the status of assets before and after the damaging occurrence (“Differenztheorie”). It differentiates, among others, between the positive loss, e.g. costs incurred, less value of an investment, compensation for costs incurred in view of a project5 etc.; so-called “damnum emergens”, and the negative damages, such as loss of profit (“lucrum cessans”). In general, Swiss substantive law aims at awarding a party full compensation for damages occurred.

6. Claiming damages means proving damages

The arbitration proceedings are governed in the first instance by the procedural law of the arbitration (“lex arbitrii“) and the parties’ arbitration agreement, which includes the institutional arbitration rules chosen by the parties. Although the factual circumstances are essential to the outcome of an arbitration, most arbitration rules only contain cursory language on how the facts are to be established. As an exception may be mentioned, inter alia, the UNCITRAL Rules, art. 24(1) and the Swiss Rules, art. 24(1) which provide that each party shall have the burden of proving the facts relied on to support his claim or defense. Most national arbitration laws, arbitration rules and even the decisions of arbitral tribunals are almost uniformly silent on the subject of the burden of proof. However, it is generally accepted that in international arbitration the rule of “actori incumbit proba- tion” (the fact needs to be proven by the party who relies on it) applies.

4 see, e.g., Queen Mary – White & Case Survey on International Arbitration 2010, p. 11; LUIZ GUSTAVO MEIRA MOSER, Global Empir- ical Survey on the Choice of Law in Practice 2015 5 Liability for breach of trust, “Vertrauenshaftung”; see, e.g., BGE 2A.303/2000 of 15 February 2001, E. 6; ZBl 116/2016, p. 388, sect. 4.6.3

Arbitration Newsletter September 2016 Page 6 | 14 Whereas for the standard of proof civil law arbitrators rather expect a degree of “almost certainty”, common law rather requires a degree of “preponderant probability”.

In order to render an award, the arbitral tribunal needs to weigh the evidence, i.e. the facts that have been established in the course of the evidentiary proceedings. There is no generally accepted international standard as to the weighing of the evidence and in general, developed arbitration regimes provide that the disposition of this issue is within the discretion of the arbitrators. Also, in order to be persuasive, evidence needs to be clear, easy readable and understandable, consistent in its content and coherent over time. High priority is given to documentary evidence, in particular when it comes to the assessment of damages.

Proving damages can be a challenging task, in particular when complex, multi-causal factual set- tings (“concurrency”) result in delay and disruption damages6. However, the Swiss Federal Tribunal has repeatedly hold that hypothetical losses do not need to be proven with certitude: The party who was prevented from realizing a profit because of the other party’s unlawful action or omission should not bear the adverse consequences of the fact that hypothetical developments which lie in the future necessarily remain – hypothetical7. In a recent arbitration under the Swiss Rules of In- ternational Arbitration, the sole arbitrator supported this approach by awarding damages to the party who, by breach of contract of a nickel producer, was prevented from starting its business in the UK. The sole arbitrator based the calculation of the damages on the business case, which both parties, and experts, had accepted to be reasonable. In other cases, hypothetical losses of profit in frustrated investments were awarded, too8. Hypothetical developments of frustrated investments may be proven by showing the development of similar investments during the same time period, involving corresponding risks9. The hypothetical scenario, however, must be claimed and substantiated to a degree that makes it reasonably probable10. In contrast, concrete damages, e.g. resulting from too low delivered quantities of fertilizer, or from steel qualities not complying with the contractual obligations, need to be substantiated and proven in a stricter manner11.

Claims which are not sufficiently substantiated (e.g., by only referring to enclosures and documents without showing how exactly the damages claim is deducted from the facts on the file, are to bedismissed12. Furthermore, contractual limitations on liability may, or may not, apply13.

6 See, e.g., VIVIAN RAMSEY, Problems of delay and disruption in international construction arbitration, in: Evaluation of Damages in International Arbitration, ICC Publication 2006, p. 193 et seq.; see also Azzurri Communications Ltd v. International Telecommunications Ltd, [2013 EWPCC 17], where the UK Patent County Court affirmed compensation for frustrated workers’ time in case of breach of contract. 7 See, e.g., BGE 4A_91/2014 of 11 July 2014. 8 See, e.g., MICHAEL PRYLES, Lost Profit and Capital Investments, ICCA paper, p. 5 et seq., available at http://www.arbitration- icca.org/media/4/43096502954185/media012223892171920damages_in_the_international_arbitration_paper.pdf. 9 See, e.g., judgment of the Supreme Court of the Canton of Zurich dated 27 May 2015 [HG110135], sect. 2.7.2.3. 10 BGE 4A.539/2014 of 7 May 2015, E. 3.5-3.7. 11 See, e.g., BGE 4A_614/2015 of 2 April 2015, E. 11 for a detailed calculation of damages under the CISG; regarding the requirements for the substantiation of damages, the Swiss Supreme Court, see BGE 4A_539/2014, E. 3.4: The degree of substantiation follows from the substantive law. The facts need to be substantiated to the extent that the other party is in a position to contest them in detail. Also, the conduct of the other party is to be taken into consideration. 12 See, e.g., BGE 4A_61/2010. 13 See, e.g., article 100(1) of the Swiss Code of Obligations, which mandates that such limitations do not apply in case of gross negligence or willful misconduct, i.e. intent. – For the standard of proof, see also PETER F. SCHLOSSER, The “Search for Truth” in Arbitration. The

Arbitration Newsletter September 2016 Page 7 | 14 7. Expertise in arbitrators

Experts play a prominent role in the assessment and proving of damages. Although in arbitrations the amount of damages is largely determined by experts, it is finally awarded by the arbitral tribunal. Thus, it is of utmost importance to ensure that the necessary expertise is available among the arbitrators. If party appointed experts mostly come to opposing conclusions, the arbitral tribunal must be in a position to separate the wheat from the chaff, so to speak, which requires from the arbitrators a fairly high degree of expertise not only in the subject-matter at issue, but also particularly in damages calculation. In some instances, arbitral tribunals might need assistance from tribunal-appointed experts, as provided among others by art. 25(3) ICC Rules on International Arbi- tration. Nevertheless, even in such case, the arbitral tribunal must be in a position to ask the right questions and to assess as well weigh the facts established during the taking of evidence.

Because arbitral tribunals on an average award only 37% of the amount claimed, and in view of the large difference of the damages estimation by claimants’ and respondents’ experts, we may also assume that over-charging (to tactically “set an anchor”) is not a very successful strategy when it comes to a decision by the arbitral tribunal, but above all results in extra costs, especially in terms of court fees, which are calculated based on the value in dispute. It may be taken into consideration, though, for out of court settlement negotiations.

8. Choice of expert, set of instructions and exam questions

Experts may be involved in many ways in arbitrations. They may do the “number crunching”, which includes the establishment of the data and the analysis of the underlying assumptions, or actually the calculation of the damages. Whereas in smaller cases, experts may rather have an assisting role, their expert reports and testimony are key in large-scale damages cases. Because there are different views of experts on the subject-matters at issue, the choice of the expert, and particularly his or her background, is often a key factor when it comes to selecting experts in arbitration proceedings. Furthermore, the set of instructions and the exam questions are often decisive to the outcome of the experts’ findings.

Preparing for expert opinions starts with defining the relevant issues and the expert’s profile. Beside his expertise in the matter at issue, the expert’s credibility is key, which means impartiality and experience. An expert should not be a “hired gun”, but base his report on a tested factual basis and take a defendable opinion. There are cases where technical issues may be examined by an expert in an objective way, e.g. the quality of steal, technical properties of machines etc. The more expert reports depend on a complex factual picture, including assumptions and the weighing of evidence, however, the less expert reports filed by the parties along with their first substantive briefs are conclusive. In such case, the establishment of an expert report by an expert jointly appointed by the parties, if needed with the assistance of the arbitral tribunal, may be an option for obtaining a conclusive result. The parties and the arbitral tribunal should then put much weight on

Civil Law View – the German Perspective, in: The Search for “Truth” in Arbitration: Is finding the Truth What Dispute Resolution is About?, ASA Special Series No. 35, p. 39 et seq.

Arbitration Newsletter September 2016 Page 8 | 14 a diligent instruction of the expert and the establishment of the questionnaire. Expert conferencing (so-called “hot tubbing”) may be a helpful means to understand different expert opinions and to put them into perspective. In any event, understanding the factors which tip the outcome of an expert report in one direction or the other is key. Furthermore, experienced and successful experts are excellent communicators: at the end of the day, they must be able to defend their position in a hearing in cross examination.

9. Final remarks

There is no such thing as “the truth” in international arbitration, not in general and not with regard to damages. What damages may be awarded is defined by the “lex causae” and the standard of proof applicable to the case. Proving damages means understanding the underlying legal concept, proving facts, carefully choosing the arbitrators and experts, diligently selecting and instructing experts and substantiating in detail the claimed damages. Well-chosen and instructed party-appointed experts are an important means for preparing a party’s case and to forcefully and convinc- ingly present it before the arbitral tribunal. Understanding the different background of experts, their different instruction and focus, or simply their different opinions on a subject-matter, helps the parties and the arbitral tribunal maybe not to close, but to lessen the gap between the parties’ positions by a fair and expertly conducted evidentiary procedure and allows the arbitral tribunal to deliver a well-reasoned decision. This is at the end of the day what the parties may reasonably expect from an arbitration, no more and no less.

Arbitration Newsletter September 2016 Page 9 | 14

Thierry P. Augsburger Penelope Nünlist Lic.iur., LL.M. (Cantab), Attorney-at-law MLaw, Attorney-at-law Partner Phone +41 58 258 16 00 Phone +41 58 258 10 00 [email protected] [email protected]

Arbitration clauses in bylaws – possibilities, risks and current developments

While arbitration clauses in corporate bylaws are becoming more and more popular in many jurisdictions, they endure a wallflower existence in the Swiss arbitration and corporate landscape. Thierry P. Augsburger and Penelope Nünlist explain the reasons for this situation, comment the most recent Swiss Supreme Court decision on the matter and outline how an upcoming legislative amendment to the Swiss Code of Obligations might catapult Switzer- land to the forefront of legislations friendly to the inclusion of arbitration clauses in corporate bylaws.

10. The increasing use of arbitration clauses in corporate bylaws

The advantages of having an arbitration clause in statutes or bylaws are plenty. Arbitration provides for a confidential, efficient and swift resolution of a dispute by a tribunal made up of arbitrators with specialist know-how.

An increasing number of arbitration or company laws all around the globe explicitly recognize the binding validity of arbitration clauses in bylaws for disputes between the corporation and its shareholders, board members and/or directors. Spain, Austria, France, the Netherlands, Finland, Swe- den, Brazil or Italy, are only a few examples. It is thus not surprising that arbitration clauses in bylaws are becoming more and more popular in practice and finding their way into the bylaws of large publicly-traded corporations such as, for example Nokia Oyj, Royal Dutch Shell plc or DNA Oy.

11. The situation in Switzerland

In Switzerland, the discussion on arbitration and jurisdiction clauses in bylaws of legal entities (companies, associations, co-ownerships, cooperatives, etc.) is as old as the Swiss Civil Code. In 1907 already, the Swiss Supreme Court mentioned that “[t]he admissibility of bylaw provisions submitting internal affairs of a stock corporation to a particular jurisdiction or a particular adjudica- tion process have constantly been upheld. It does not require any further explanation that a single shareholder subjects himself to such provisions by acceding to the stock corporation and that they, therefore, possess the effect of a contractual agreement” (Swiss Supreme Court Decision [„SCD“] 33 II 205 c. 5).

Arbitration Newsletter September 2016 Page 10 | 14 While one would assume that such a clear statement in favour of arbitration clauses in corporate bylaws should have paved the way for their frequent use in Swiss corporate practice, the reality of the past 100 years has been quite the opposite.

One reason might be that the Swiss Concordat on Arbitration of March 27, 1969 (“Concordat”), governing domestic arbitration in Switzerland, and in force until December 31, 2010, explicitly required a written declaration whereby the parties in question adhered to the bylaws’ arbitration clause. Since start of 2011, this condition is no longer part of the provisions dealing with domestic arbitration in the Swiss Code of Civil Procedure (“CCP”), having replaced the Concordat. In fact, neither the CPC nor the Swiss Private International Law Statute (“PILS”), governing international arbitration in Switzerland, explicitly deal with arbitration clauses in bylaws or statutes. The case law of the Swiss Supreme Court in connection with such clauses has remained piecemeal. Finally, legal doctrine is utterly divided as to the scope and extent of arbitration clauses in bylaws and statutes. As a result of this uncertainty, arbitration clauses in corporate bylaws and statutes are the wallflowers of the otherwise so arbitration-friendly Swiss legal landscape.

12. What is clear and what remains opaque in connection to arbitration clauses in Swiss corporate bylaws

As stated above, neither the CPC nor the PILS contains any provisions dealing explicitly with arbitration clauses in corporate bylaws. The Swiss Supreme Court has held, however, that both domestic and international cases are governed by the same rules when it comes to the validity and the extent of an arbitral clause in corporate bylaws. While the validity in principle of such clauses is accepted by both the Swiss Supreme Court and a large part of Swiss legal doctrine, there is no agreement as to when such a clause deploys its binding effect, which party it binds and which disputes are covered by it.

Art. 178 PILS and art. 358 CCP both require that the consent to the arbitration agreement has to be made in a form allowing it to be evidenced by text, even if it is only by reference. A signature is, however, not necessary.

Some authors uphold that no exchange of documents is required (as art. 178 PILS, unlike art. II NYC, does not contain the requirement that the arbitration agreement is exchanged between the parties), so that a written confirmation by one party only (i.e., in the form of the arbitration clause in the bylaws) suffices as long as the other party expresses its adherence by its conduct, i.e., implicitly consents to the arbitration clause.

Part of the legal doctrine and some cantonal courts even hold that the transfer of shares also transfers to the acquiring shareholder the binding effect of the statutory arbitration clause by means of either the principles of assignment or the “special” corporate nature of such an arbitration clause.

Contrary to the just mentioned view, some authors and cantonal courts require that the new shareholder explicitly accepts the arbitration clause. This view is in particular supported by corporate law academics holding that an arbitration clause in corporate bylaws not explicitly consented to by the

Arbitration Newsletter September 2016 Page 11 | 14 individual shareholder violates art. 680 CO, according to which “A shareholder may not be required, even under the articles of association, to contribute more than the amount fixed for sub- scription of a share on issue”. The confusion is increased by the fact that there is no agreement as to which degree of consent expressed by the joining shareholder is “enough” to bind him or her to the arbitration clause in bylaws.

In a recent but unpublished decision (SCD 4A_492/2015 of February 25, 2016 [unpublished]), the Swiss Supreme Court had the possibility to clarify if arbitration clauses in bylaws follow the same principle of consent as arbitration clauses in contracts or if they adhere to a “special” regime. The highest court decided not to do so. After dwelling on the above-mentioned different scholarly views in connection with the scope of arbitration clauses in bylaws and statutes, the Supreme Court held that it did not have to decide on the matter. It found that the party which had not signed the founding bylaws and only later on incorporated the legal entity had expressed its consent to the arbitration clause in the bylaws by initiating the arbitration. Hence, a party which has signed the bylaws con- taining the arbitration agreement is bound by such agreement even vis-à-vis other members of the legal entity which have not done so but only joined later.

The Supreme Court, however, abstained to deal with the question whether the arbitration could also haven been brought the other way around, i.e., by a shareholder which had explicitly accepted the corporate arbitration clause against a new shareholder that in turn had not done so when acquiring the shares.

Another pressing question not yet addressed by the Swiss Supreme Court and on which doctrine is deeply divided is if the (simple or qualified) majority of the shareholders of a corporation (or any other legal entity for that matter) can introduce an arbitration clause into its bylaws against the will of an opposing minority. Some authors vehemently oppose to this, inter alia referring to ECHR case law denunciating arbitration forced upon a minority shareholder against his will (ECHR 1643/06, Suda v. Czech Republic, October 28, 2010). On the other end of the spectrum, some legal scholars want to allow the introduction of an arbitration clause in the bylaws by means of such majority decision. They base their view, inter alia, on a Swiss Supreme Court decision from the year 1898 which had supported such an approach (SCD 24 II 552 c. 8). In addition, it is also argued that the minority shareholder may always bring the decision changing the bylaws before a judge if he is of the opinion that it violates the bylaws or the law (cf. art. 706 et seqq. CO), and is thus not helpless.

In all this obscurity comes a new legislative endeavour is about to change the level playing field completely.

13. The planned addition of art. 697l to the CO

On November 28, 2014 the Swiss Federal Council presented both a preliminary draft of modifications to the part of the CO governing stock corporations and an explanatory report on the preliminary draft for consultation. On September 17, 2015 the report on the results of the consultation phase was published. On December 4, 2015 the Federal Council announced that it had issued its guidelines for the final draft and the Message to the same to be brought before parliament.

Arbitration Newsletter September 2016 Page 12 | 14 Art. 697l CO included in the preliminary draft reads as follows:

“Arbitration

Art. 697l

1 The bylaws may provide that corporate disputes shall be resolved by an arbitral tribunal. They might provide that the arbitration clause is binding for all shareholders, the corporation and its bodies.

2 The arbitration proceedings are governed by the provisions of the 3rd part of the Swiss Code of Civil Procedure. The bylaws may, within the scope of these provisions, regulate the details of the arbitral proceeding.

3 If an arbitral award is to effect the corporation and all shareholders, the board of directors shall notify the shareholders of the initiation of the respec- tive arbitration proceeding and points out to them their rights in such proceedings.”

According to the explanatory report, an arbitration clause in the bylaws shall not require any further formalities or any kind of explicit consent. It shall bind the parties mentioned in the bylaws’ arbitration clause (such as shareholders, the company and/or the bodies of the company) ipso jure when they acquired their status, e.g. by obtaining shares of the company, accepting to act as board member or auditor of the corporation. The preliminary draft and the explanatory report clarify that the introduction of an arbitration clause into a corporation’s bylaws shall require a qualified majority in the general assembly (meaning at least two-thirds of the voting rights represented and an abso- lute majority of the nominal value of shares represented, cf. the also new art. 704[1][13] CO). Such qualified majority is justified by the fact that by the introduction of such clause the shareholders renounce to their right to state courts.

According to the report on the results of the consultation phase, the introduction of art. 697l CO has been widely acclaimed and only minor suggestions for modifications have been made. It is to be expected that art. 697l CO will form part of the definitive proposal and the message submitted to the parliament in late 2016.

Hence, art. 697l CO breaks with the principle of consent in arbitration, considered one of the cor- nerstones of a valid arbitration agreement under the PILS and the CCP. The rupture is, however, not complete. As mentioned in the explanatory report, the existence of an arbitration clause in the corporate bylaws will have to be included in the public company register excerpt of the corporation. According to art. 933(1) CO, “Ignorance of an entry that has become effective in relation to third parties is no defence”. Thus, any new shareholder is deemed to have acknowledged the statutory arbitration clause before acquiring the shares of the corporation in question due to the positive publicity effect of the publication in the company register.

In any event, art. 697l CO will make it possible to introduce a statutory arbitration clause binding for all shareholders and the corporation’s organs, meaning the board of directors and the auditors,

Arbitration Newsletter September 2016 Page 13 | 14 irrelevant of whether they agreed to it or not. The bylaws will also be able to define which kind of corporate disputes shall be covered by the arbitration clause, including the possibility to cover disputes between shareholders. It might well be argued that due to the positive publicity effect of the publication in the company register, the arbitration clause also binds creditors of the company in the bankruptcy of the corporation, when they get assigned claims against the directors out of the latter’s liability – which is something the Swiss Supreme Court denies for the time being, as it considers that “such binding cannot be deducted from the corporate bylaws” (SCD 136 III 107 c. 2.5.2).

In summary, art. 697l CO would resolve most of the uncertainty surrounding the scope and application of arbitration clauses in bylaws of Swiss corporations. Switzerland would close the gap to jurisdictions which already have such an arbitration-friendly regime.

14. Conclusion

As long as art. 697l CO is, however, not enacted by the Swiss parliament, a corporation (and any other legal entity) with an arbitration clause in its bylaws is well advised to require every new shareholder, director or auditor to explicitly submit to the arbitration clause, for instance by requiring a written statement to that effect. How this is best done depends on the nature of the legal entity and should in any case be discussed with a legal advisor.

In addition, arbitration clauses in bylaws require careful drafting as to fit the needs of the founders of a company wishing to introduce such a clause in their bylaws. The introduction of such a clause at a later stage might be difficult, in particular if it is not unanimous – at least before the entry into force of art. 697l CO.

Finally, actual and future shareholders, board members and corporations should monitor the developments in connection with the finalized draft of the amendments to the CO and the message of the same, to be submitted to parliament in late 2016 – or ask us, because we will.

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