This article addresses the partial annulment of an award which granted damages where the prayer for relief sought only a declaration (ultra petita). The case confirms the well-established line of decisions on penalty and public order.(1)

Facts

A dispute arose in connection with the procurement of 4X4 armoured tactical vehicles by the Turkish General Directorate of Security, a division of the Turkish Ministry for Internal Affairs, from a Turkish company (C AS). C AS subsequently subdelegated its obligations to another Turkish company (B AS) which, in turn, subdelegated the design, production and delivery of the vehicles to an Israeli company (A Ltd). Disagreements arose among the parties which first gave rise to the amendment of their agreement and, ultimately, to A Ltd partially avoiding the agreement in December 2015 and starting an International Chamber of Commerce arbitration in Switzerland against B AS and C AS, which submitted counterclaims. None of the parties entirely prevailed in the arbitration; and the claimant and respondents challenged the final award.(2)

Decision

Among others, the final award included orders which, in substance:

  • granted A Ltd damages for the contractual breaches of B AS and C AS;
  • declared that B AS and C AS had infringed A Ltd's IP rights and know-how in relation to the armoured vehicles;
  • declared that B AS and C AS were not liable to compensate A Ltd for this infringement;
  • declared that A Ltd was liable to compensate the respondents for damages and losses (including interest thereon) suffered by the respondents as a consequence of A Ltd's breaches, but declared that such losses and damages had been paid in their entirety by virtue of the declaration of set-off by B AS and C AS and their draw-down of excess amounts under A Ltd's bank guarantee; and
  • declared that, in light of the determination in the abovementioned fourth order, B AS and C AS were liable to reimburse to A Ltd a certain amount of money.

In the abovementioned first order, the arbitral tribunal declared both the principle of liability and the amount of damages due to A Ltd. However, in its prayer underlying that order, A Ltd had only sought a declaration of liability. Hence, the Supreme Court found that the order went beyond A Ltd's prayer (ultra petita).(3) Notably, the court dismissed the argument of B AS and C AS that A Ltd had no legitimate interest to challenge an award which granted damages instead of merely declaring the principle of liability. The court found such interest in the fact that the damages granted were limited and, due to the res judicata effect of the award, A Ltd would have been barred to claim for the balance of damages in a new proceeding, whereas a mere declaration of liability would have enabled A Ltd to do so.(4)

In the abovementioned second and third orders, the final award declared that B AS and C AS had infringed A Ltd's IP rights and know-how, but also declared that they need not compensate the latter for that violation. A Ltd challenged this order, since its prayer only sought a declaration of liability and thus the award should not have entered into the issue of compensation at all. The Supreme Court dismissed the argument. It found that the second and third orders – especially the latter – did not exceed A Ltd's underlying prayer, which read "[t]he Tribunal shall declare Respondents severally and jointly liable, liable to compensate Claimant for any and all damages". Interestingly, the court mentioned that A Ltd's prayer did not seek a relief for a negative declaration, while the final award did in fact include such a declaration. Since A Ltd made no argument in this respect, the court refrained from analysing that point further.(5)

In the abovementioned fourth order, the final award granted damages but declared that those damages need not be paid to the extent of the set-off declared by B AS and C AS. The Supreme Court refused the argument that by taking into account the set-off, the final award would not have limited itself to the determination of the damages but entered into the payment of such damages, going thereby ultra petita. For the court, taking into account the declaration of set-off was part of the assessment of the damages and thus was not ultra petita.(6)

The Supreme Court thus partially admitted the challenge.

Comment

This decision is noteworthy because it is among the few annulments, albeit partial, of an international award by the Supreme Court.

Considering the raising trend in international arbitration seated in Switzerland to resort to declaratory reliefs, it is likely that more decisions are to come in this respect. One of the issues which might have to be settled is whether a claimant may freely cut its case in several parts, each of them to be submitted in a sequence of proceedings, timing and the contents of which depending on the result obtained by the declaratory relief, or whether the claimant is expected to submit all its claims in relation to the dispute at once as per the principle of concentration des moyens et des demandes. This might be a topic for the decade ahead.

This decision also confirms the line of decisions on penalty and substantive public order. As a reminder, penalty is allowed under Swiss substantive law. An excessive penalty must be reduced by the arbitrator as per Article 163(2) of the Code of Obligations. However, the arbitrator's failing to do so is not a violation of the substantive public order which qualifies as a ground of annulment under Article 190(2)(e) of the Federal Statute on Private International Law, unless the penalty amount is tantamount to a prohibited limitation to the personal freedom within the meaning of Article 27 of the Civil Code.

Endnotes

(1) Supreme Court, 4A_296/2019 and 4A_296/2019, 13 November 2020.

(2) Grounds A and B.

(3) Ground 4.2.

(4) Ground 3.

(5) Ground 4.3.

(6) Ground 6.2.1.