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01 June 2017
In an April 25 2017 judgment, the Amsterdam Court of Appeals annulled a 2013 Amsterdam District Court decision to set aside a $450 million arbitral award in proceedings between watchmaker Swatch and jeweller Tiffany.(1) The main question for the court of appeals was whether the district court had been correct in holding that the tribunal had exceeded its authority.
The joint venture set up by Swatch and Tiffany aimed to produce Swatch watches under the Tiffany brand. After terminating the cooperation, Swatch brought proceedings under the Netherlands Arbitration Institution (NAI) Rules in Amsterdam. It claimed $5 billion in damages in what has been described as the largest NAI arbitration to date. Swatch argued that Tiffany had failed to meet its sales targets as set out in the jointly developed business plan. Tiffany argued that this business plan was not part of the contractual framework for the joint venture and that, as such, a failure to meet these targets did not constitute a breach of the joint venture agreements.
In 2013 the arbitral tribunal issued a $450 million award in Swatch's favour, rejecting Tiffany's $500 million counterclaim. The majority of the tribunal, comprising Filip de Ly and Georg van Segesser, found that Tiffany had breached its contractual obligations under the joint venture agreements by not meeting its sales targets stemming from the business plan. Bernard Hanotiau issued a dissenting opinion.
The tribunal (with one dissenting opinion) used wording which suggested that the joint venture agreements contained no express contractual terms requiring Tiffany to meet the business plan's targets. It further held that the business plan "clearly provided for implied obligations to target certain sales" and that it should be understood as a "contractual benchmark", under which both Tiffany and Swatch were to develop reasonable efforts to meet these targets. Dutch law, including the Dutch contract law provisions on reasonableness and fairness, applied to the joint venture agreements. The tribunal further supported its finding by citing Article 1.14 of the watch trademark and supply agreement (WTSA) between Swatch and Tiffany, which stated that:
"all obligations of the parties to each other under this Agreement shall be undertaken in good faith with a view of preserving a long term relationship and all obligations stated herein are to be read with this precept, whether or not expressly stated in the language defining the obligation."
Tiffany brought setting-aside proceedings in the Amsterdam District Court, claiming, among other things, that the tribunal had exceeded its authority as the arbitration agreement in Article 30.3.8 of the WTSA expressly provided that "the Arbitral Tribunal may not change, modify or alter any express condition, term or provision of this agreement and to that extent the scope of its authority is expressly limited".
The district court agreed with this submission.(2) It found that the arbitral tribunal had derived implied obligations for Tiffany from the business plan and that these implied obligations supplemented the express contractual obligations contrary to the tribunal's authority as provided in Article 30.3.8 of the WTSA. The district court also found that the tribunal, by supplementing the express obligations, had altered the terms of the agreements. In doing so, the district court relied on a strict distinction between 'interpreting' contractual wording on the one hand and 'supplementing' it on the other. By such supplementing, the tribunal had exceeded the boundaries of its authority. Consequently, its award was set aside.
The Amsterdam Court of Appeals first acknowledged that the arbitration agreement (Article 30.3.8 of the WTSA) limited the tribunal's power. However, under Dutch law, the exact scope of the arbitration agreement could not be determined exclusively on the basis of the literal wording thereof. This wording left open the question of whether the tribunal had been allowed to assume implied terms in the joint venture agreements that derived from the express contractual terms.
Dutch law stipulates that implied terms can be assumed both through an interpretation of express contractual provisions and by supplementing such provisions on the basis of the legal principle of reasonableness and fairness (ie, good faith). The court considered that these concepts were applicable due to the parties' choice to make their agreement subject to Dutch law. An unambiguous carve out would have been required to safeguard that the tribunal could assume express contractual obligations only in line with their literal wording, but such carve out was not included in the arbitration agreement.
Consequently, and unlike the lower court, the Amsterdam Court of Appeals found that the arbitration agreement did not exclude the possibility for the tribunal to assume implied terms. The tribunal had been allowed to do so by means of interpretation of the contract and by supplementing the contract on the basis of the principle of good faith. The court rejected a strict distinction between 'supplementing' and 'interpreting', as made by the district court. Rather, it found both concepts to be effectively hybrid concepts with "insufficient distinctiveness". This distinction was considered to be insufficient to justify the far-reaching consequence of setting aside.
Subsequently, and in light of the express good-faith obligation in Article 1.14 of the WTSA, the Amsterdam Court of Appeals found that the tribunal had been allowed to assume the good-faith obligations provided for in the express terms of the agreements. In other words, the tribunal had been allowed to consider good-faith obligations, but only those which followed from the express terms of the agreement and were aimed at preserving a long-term relationship and the success of the sale of the watches, as had been expressly included by the parties in their joint venture agreements.
The Amsterdam Court of Appeals then had to analyse whether the arbitral tribunal had based its findings on such obligations. In this regard, it noted that an arbitral tribunal should be allowed a large margin of discretion, "in order for arbitral awards not to be easily subjected to the possibility of annulment". It emphasised that the Dutch courts exercise restraint in reviewing an arbitral tribunal's exercise of its power, irrespective of whether they are confronted with the question of whether it has overstepped its procedural power or complied with a more substantive requirement, such as in the case at hand.
In reviewing the tribunal's findings, the court subsequently found that the tribunal had not exceeded its powers. Exercising the same level of restraint, the court further found that the tribunal had not violated due process principles and had properly substantiated its findings. The reference to Hanotiau's dissenting opinion in the award – which constituted a violation of Article 48(4) of the NAI Rules, also did not justify the setting-aside of the award.
The restraint applied in reviewing arbitral awards in setting-aside proceedings seems to make it hard for parties to rely on their own concepts of contractual interpretation with regard to arbitral agreements, in case they choose to apply a particular law. Careful analysis is therefore required before choosing such law.
Arbitrators must be as clear as possible when explaining the legal reasoning behind their answers to the key questions under debate – notably, when required to work in the language of arbitration chosen by the parties, which may not be their native language. This clarity is not only essential to the parties, but also to the setting-aside judge.
Finally, and more generally, this judgment, which may be subjected to Supreme Court review, confirms the Amsterdam Court of Appeals' pro-arbitration and enforcement approach. Due to a recent change in procedural law, setting-aside decisions will now be decided by the appeal courts in the first instance, rather than the district courts.
For further information on this topic please contact Ulrike Verboom or Jorian Hamster at Freshfields Bruckhaus Deringer LLP by telephone (+31 20 485 7000) or email (firstname.lastname@example.org or email@example.com). The Freshfields Bruckhaus Deringer LLP website can be accessed at www.freshfields.com.
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