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10 September 2015
Following its decisions of May 27 2014 (published in ATF 140 III 278) and February 26 2015 (4A_374/2014),(1) the Supreme Court recently issued an additional decision dealing with the principle of res judicata.(2)
The dispute arose out of an agreement between a US law firm and a German lawyer on the combination of the US firm and a German law firm founded by that lawyer. The agreement contained a dispute resolution clause in favour of International Chamber of Commerce arbitration in Zurich and was governed by German law.
The lawyer commenced arbitration against the US law firm seeking payment of the difference between the so-called 'floor amount' to be paid to the partners of the German firm under the agreement and the amounts actually paid to him for 2009 and 2010. An arbitral tribunal seated in Frankfurt denied the claim on the grounds that payment of the floor amount was subject to the lawyer fulfilling certain prerequisites, which he had failed to do.
Subsequently, the lawyer commenced a second arbitration against the US law firm seeking payment of the difference between the floor amount and the amounts actually paid to him for 2011 and 2012. The US law firm raised a res judicata objection, which the arbitral tribunal (this time seated in Zurich) rejected by way of Procedural Orders 3 and 5. This tribunal did not find itself bound by the decision of the first tribunal and made its own interpretation of the relevant provision in the combination agreement. Based on this interpretation, it found that the lawyer had fulfilled the majority of the prerequisites for payment of the floor amount, and that the first tribunal's decision was not consistent with the holistic approach required by this provision. Therefore, in its final award the tribunal granted the lawyer's claim, but reduced the amount awarded.
The law firm challenged the award before the Supreme Court.
The Supreme Court first recalled the well-settled principle that the reference in an arbitration agreement to specific rules of arbitration that contain a provision on the exclusion of challenge, such as Article 34(6) of the International Chamber of Commerce Rules, does not qualify as a waiver of challenge within the meaning of Article 192(1) of the Private International Law Act.(3)
Further to the position of the lawyer and of the tribunal that the law firm should have challenged one of the decisions dealing with the res judicata objection issued before the final award, under penalty of foreclosure, the Supreme Court held that Procedural Orders 3 and 5 were not partial decisions and thus did not have to be challenged directly.(4) Therefore, the Supreme Court found that the challenge was admissible.(5)
On the merits, the law firm did not argue that the awards of the first and second tribunal were identical, recognising that the first award pertained to the floor amounts for 2009 and 2010, while the second pertained to the floor amounts for 2011 and 2012. However, the law firm argued that the first award was binding in respect of preliminary issues arising in the proceeding before the second tribunal. Referring to an international definition of the res judicata principle, the law firm argued that the binding effect should extend not only to the dispositive part, but also to the reasons that were decisive for the first tribunal – including its finding that the floor amounts were due only insofar as the prerequisites "billable hours" and "turnover from billable hours" under the combination agreement were fulfilled, which the second tribunal had disregarded. According to the law firm, application of the national definition of res judicata should have led to the same result.(6)
After reiterating the well-established principles in relation to res judicata,(7) the Supreme Court addressed the law firm's arguments. First, referring to its previous decisions on the issue, the Supreme Court denied that it had not rendered any decision as to whether the binding force of a foreign award corresponds to that of a national state court.(8) It also made clear that there is no legal basis for applying the broad Anglo-American concept of binding effect, as advocated by the law firm.(9) Second, the Supreme Court held that this binding effect applies only if the claim raised has been decided by the arbitral tribunal, and that to determine whether this is the case, the entire award must be considered. The Supreme Court found that the second tribunal had looked into the reasons of the first award and that it had rightly rejected the plaintiff's res judicata objection with full reasoning in Procedural Order 5 because the claims in the two proceedings were not identical.
Therefore, the Supreme Court found that the second tribunal had not violated procedural public policy by giving its own interpretation of the combination agreement and had to do so in order to avoid such a violation.(10)
This decision confirms the Supreme Court's line of decisions in relation to res judicata. In addition, it makes clear that the liberal approach advocated when assessing the identity of the parties in its decision of May 27 2014 (ATF 140 III 278) should not apply when assessing the identity of the claims. It further seems to exclude application of an international concept of res judicata in Switzerland instead of the principle as defined by Swiss law.
For further information on this topic please contact Frank Spoorenberg or Daniela Franchini at Tavernier Tschanz by telephone (+41 22 704 3700) or email (firstname.lastname@example.org or email@example.com). The Tavernier Tschanz website can be accessed at www.taverniertschanz.com.
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