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Challenging interim awards on jurisdiction in Swiss seated arbitrations

Introduction

In the arbitration process, the state courts serve important roles. On the one hand, they fulfill important supervisory functions as they are called to ensure that arbitral awards have a legitimate basis in party consent and otherwise enjoy legitimacy. On the other hand, courts are expected to interfere as little as possible and do only what is reasonably necessary to support the arbitral process. These roles are not without certain tension. And that tension is perhaps most present when the arbitrators' jurisdiction is disputed.

Each legal system must decide at what stage in the arbitral process the parties will be able to request a court to review whether the arbitrators have jurisdiction to decide the case. The extreme solutions range from full court review at any time in the arbitral process to no court review at all until after the arbitration has ended. Most jurisdictions strike a balance between the two extremes.

The Swiss Federal Supreme Court recently decided under what circumstances interim arbitral awards on jurisdiction are subject to immediate challenge in court (Decision 4A_98/2017 of July 20, 2017 [French]; see http://www.servat.unibe.ch/dfr/bger/170720_4A_98-2017.html). This decision is the first to address the availability of a challenge against interim arbitral awards that address only some, but not all, of the jurisdictional issues raised by a responding party.

Background

Yukos Capital Sàrl, a limited liability company based in Luxembourg ("Claimant"), initiated arbitration proceedings against the Russian Federation ("Respondent") based on Article 26 of the Energy Charter Treaty ("ECT") requesting payment of damages in excess of $13 billion for unlawful expropriation of an investment. A three-member arbitral tribunal seated in Geneva was constituted in accordance with the UNCITRAL Arbitration Rules of 1976. The Permanent Court of Arbitration in The Hague is acting as administering institution.

Respondent objected to the Arbitral Tribunal's jurisdiction on five grounds, namely that (1) the Respondent has not ratified the ECT and applied it only provisionally in accordance with Art. 45(1) ECT until 18 October 2009 to the extent such a provisional application was consistent with local law; (2) Claimant has not made an investment; (3) the dispute was of a fiscal nature and therefore outside of the scope of the treaty; (4) Claimant has no substantial commercial activities at its place of domicile and is controlled by nationals of a third state, for which reason Respondent can refuse Claimant the benefits under part III of the ECT based on Article 17 ECT; and (5) the alleged investments were made illegally and are not protected by the ECT.

The Arbitral Tribunal decided to bifurcate the proceedings and to decide first on grounds (1), (2) and (4), leaving (3) and (5) for determination together with the merits.

In an Interim Award on Jurisdiction, the arbitral tribunal dismissed grounds (1), (2) and (4). Respondent filed a petition to set aside the Interim Award on Jurisdiction based on Article 190(2)(b) PILA and requested that the Supreme Court declare that the Arbitral Tribunal lacked jurisdiction. The arbitration was stayed pending the set-aside proceedings before the Supreme Court.

Decision

The Supreme Court held that the petition to set aside the Interim Award on Jurisdiction was premature. The Supreme Court first reiterated case law according to which the availability of court review depends, not on how the award is called by the Arbitral Tribunal (e.g. award, procedural order or something else), but on the nature of the award.

It then summarized what types of awards were subject to challenge. So-called final awards are subject to challenge based on all grounds set forth in Article 190(2) of the Swiss Private International Law Act ("PILA"). Decisions qualify as final awards if they end the arbitration, at least with respect to certain claims, be it that they decide a case on the merits or that they end the arbitration on a procedural ground. So-called interim (or preliminary) awards, among which awards dismissing objections to the jurisdiction of the arbitral tribunal, can be challenged only on two grounds, namely irregular constitution of the arbitral tribunal or incorrect decision on jurisdiction (Article 190(2)(b) PILA).

The Supreme Court recalled that it was in the Arbitral Tribunal's discretion whether to bifurcate the proceedings and determine its jurisdiction before the final award. Article 186(3) PILA provides that the arbitral tribunal shall, as a rule, decide on its jurisdiction by preliminary (or interim) award. But this rule, according to the Supreme Court's case law, is not absolute and its breach carries no sanction.

If the Arbitral Tribunal bifurcates the issue and determines that it lacks jurisdiction, it issues a final award ending the arbitration. That decision is subject to challenge on all grounds for challenge set forth in Article 190(2) PILA. If it bifurcates the issue and dismisses the objection to jurisdiction, it issues an interim or preliminary award, which is subject to immediate challenge based on Article 190(3) PILA.

The Supreme Court stated that the common denominator of both types of reviewable awards on jurisdiction (i.e. final awards and interim awards) is that the Arbitral Tribunal has made a final ruling on its jurisdiction. Conversely, merely provisional decisions on jurisdiction are not subject to court review. The Supreme Court held that this follows already from the wording of Article 190(2)(b) PILA, according to which awards can be challenged if the Arbitral Tribunal has "accepted or rejected jurisdiction". This implies that the Arbitral Tribunal's decision on jurisdiction is subject to challenge only if it is final.

As a matter of policy, the Supreme Court held that for reasons of procedural economy, it should only be bound to take a decision on jurisdictional challenges once. Making court review available also for preliminary decisions on jurisdiction that do not address all jurisdictional objections carries the risk of abuse as respondents could delay the arbitration with successive challenges before the Court.

Implications

This decision has been designated for publication in the official collection of leading decisions by the Swiss Federal Supreme Court. It is the first to hold that only final decisions on arbitral jurisdiction are subject to immediate court review. The decision is to be welcomed as it furthers both legal certainty and procedural economy. And such certainty was necessary given that, if a party fails to challenge an interim award on jurisdiction within 30 days from its notification, it is deemed to have irrevocably waived any jurisdictional objection. This decision thus makes clear, that it is neither necessary nor possible to challenge a merely preliminary determination of certain aspects of jurisdiction.

Will this decision influence how arbitral tribunals approach bifurcations of jurisdictional issues in the future? Hardly. The absence of court review for less-than-final decisions on jurisdiction will in our view have very little, if any, influence on the arbitrators' decision whether or not to bifurcate questions of jurisdiction.

It bears noting that this case was atypical in the sense that arbitrators do not often bifurcate some, but not all, jurisdictional issues. In principle, arbitrators either address all jurisdictional issues in an interim award or in a final award. What occurred here, namely the bifurcation only of some jurisdictional issues, is explained by the fact that in investor-state arbitrations the scope of possible jurisdictional issues is much broader. And some of those jurisdictional issues lend themselves more to early determination than others.

Even so, this decision will not influence how arbitral tribunals approach bifurcations in the future. Arbitral tribunals will apply the same criteria for bifurcations as before – including whether bifurcation could lead to a more efficient resolution of the dispute, and whether the jurisdictional issues are intertwined with the merits and require substantial factual evidence. In contrast, the decision may influence the conduct of the parties as they will have to take into account that the Federal Supreme Court will not entertain challenges of decisions on jurisdiction that do not finally determine the arbitral tribunal's jurisdiction.

The Supreme Court has not yet decided what the consequences would be if the arbitral tribunal accepts some grounds for lack of jurisdiction raised by respondent but not all and ends the arbitration with a final award denying its jurisdiction. Such a decision would be subject challenge on the basis that it is a "final award" ending the arbitration, regardless of the fact that the award does not address all jurisdictional issues that the responding party raised. If the Supreme Court sets aside the negative jurisdictional award and sends back the case to the arbitral tribunal, the arbitration will continue. In that case, the final word on jurisdiction would only be made once the arbitral tribunal has decided all jurisdictional issues. It should still be possible to challenge the final award on jurisdiction on the grounds not yet addressed by the Supreme Court, to the extent such grounds were timely raised by the respondent in the arbitration.