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30 April 2015
In 2007 Tiffany and Swatch entered into a joint venture agreement on the basis of which the parties intended to cooperate on a long-term basis on the sale of luxury watches. In 2011 Swatch terminated the joint venture agreement and alleged that Tiffany had failed to meet its obligations with respect to the distribution and sales targets as set out in the joint venture's business plan. Following an arbitration procedure under the rules of the Netherlands Arbitration Institute initiated by Swatch, in the award Tiffany was declared to be in breach of its contractual obligations and ordered to pay $450 million in damages to Swatch.
The arbitration clause, which was Article 30.3.8 of the joint venture agreement, specifically provided that the "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".
In its award the arbitral tribunal – comprised of F de Ly, G von Segesser and B Hanotiau – recognised that its authority was limited in the arbitration clause, but that those limitations did not prevent it from interpreting the joint venture agreement and identifying that the joint ventures' business plan contained implied terms and conditions. Mr Hanotiau, who was appointed by Tiffany, delivered a minority dissenting opinion in this respect.
The arbitral tribunal considered that although the agreement between the parties did not contain an explicit obligation to reach the commercial targets as laid down in the business plan, it could not be considered as a "mere management instrument to check results with targets".
According to the arbitral tribunal the business plan had to be considered as "a contractual benchmark under which the Parties were to develop reasonable efforts to meet these targets which under Dutch law can be characterized as an obligation to use reasonable efforts". In this respect the arbitral tribunal referred to Article 3.1 of the joint venture agreement which obliged Tiffany to "use reasonable, good faith efforts to develop and promote the Collection in order to accomplish the Business Plan".
In a March 4 2015 decision the Amsterdam District Court(1) had a different view and considered that by referring to implied obligations (derived from the joint venture's business plan), the arbitral tribunal supplemented Tiffany's contractual obligations, and by doing so stepped outside the limits of its authority as defined in the arbitration clause. The court held that from the wording of Article 30.3.8 it could be concluded that also "supplementing the agreement with an obligation which constitutes an alteration of the express terms was not allowed".
According to the arbitral tribunal's analysis in the award, the tribunal had also expressly considered that it had to stay within the limits of interpreting the contractual provisions and that this was not the same as supplementing the provisions. It was within these limits that the award concluded that implied obligations existed in the agreement which would bind Tiffany to make reasonable efforts. However, the court ruled that the arbitral tribunal did not stay within those limits and that it proceeded with a prohibited supplementation of the legal consequences of the agreement.
In reaching its conclusion the Amsterdam District Court rejected Swatch's argument that legally the court was not allowed to examine the motivation behind the award. With reference to a Dutch Supreme Court decision of December 23 1943, the court held that Swatch's reasoning would make it impossible for the court to verify whether the arbitral tribunal effectively complied with the express limitation of its authority provided for in the arbitration clause.
Tiffany also argued that the fact that Hanotiau had delivered a dissenting opinion meant that the arbitral award was conditionally signed by the arbitrator and that this would also be grounds for setting aside the arbitral award. The former Netherlands Arbitration Act, which was still applicable to the case, did not prevent an arbitrator from delivering a dissenting opinion, although such opinion should be delivered separately. The Netherlands Arbitration Institute Rules also did not prohibit a dissenting opinion. The court held that reference to a dissenting opinion in the award itself did not mean that the rule – the signing of the award by all the arbitrators – had been violated. Alternatively, the dissenting arbitrator could have refused to sign the arbitral award. Instead, the arbitrator included the words "subject to dissenting opinion" below his signature. The court ruled that his signature stood first for his involvement as one of the arbitrators, and second for his acceptance of the result, although he was left with the short end of the stick during the deliberations.
Swatch has indicated that it will appeal to the Amsterdam District Court's decision. One question which will certainly be debated is whether the identification of an implicit obligation can be considered as supplementing an agreement rather than recognising an already existing obligation embedded in the parties' express commitments.
The court's decision clearly shows that limiting the authority of an arbitral tribunal in an arbitration clause dangerously increases the risk of court interference in the substance and merits of a dispute. Often the parties specifically wish to avoid or mitigate this risk when choosing arbitration as a dispute resolution mechanism.
For further information on this topic please contact Alfred Hoogveld or Carlijn van Rest at Hogan Lovells International by telephone (+31 20 55 33 600) or email (firstname.lastname@example.org or email@example.com). The Hogan Lovells International website can be accessed at www.hoganlovells.com.
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Carlijn van Rest