Article 190(2)(b) of the Swiss Private International Law Act (PILA) provides that an award shall be set aside if the parties' right to be heard has been violated.

Pursuant to Article 190(2)(e) PILA, an arbitral award may be set aside if it is incompatible with public policy.

X and Y entered into a series of agreements relating to the installation of a paper mill. A dispute arose between the parties concerning the quality of the equipment supplied by Y. X, which had not yet paid the last instalment of the contract price, contended that tests that had been carried out showed that the equipment supplied was not performing as promised. In accordance with the dispute resolution clause in the agreements, Y initiated arbitration proceedings against X, requesting the payment of the outstanding amounts due under the agreements. X conceded that these amounts were due but filed a set-off claim for liquidated damages. In its final award, an ICC arbitral tribunal seated in Geneva ordered X to pay to Y €10,086,702.50.

X challenged this award before the Swiss Supreme Court. It argued that the tribunal had violated its right to be heard under Article 190(2)(d) PILA by:

X also argued that the award was contrary to public policy (Article 190(2)(e) PILA).

The Supreme Court dismissed X's challenge.

The Supreme Court rejected X’s argument that the arbitral tribunal had not taken into account issues raised by X, not only because it was insufficiently substantiated but also because the arbitral tribunal had indeed examined the issues raised by X. Moreover, the arbitral tribunal had come to the conclusion that X was responsible for the absence of additional tests and had thus implicitly rejected X's argument.

The Supreme Court also denied that the arbitral tribunal had violated X's right to be heard by rejecting X's request for a site inspection. It noted that X requested a site inspection 16 months after the arbitration had started, that X had only mentioned the "possibility" of a site inspection by the arbitral tribunal, and that X had not shown that it had reiterated its "request". According to established case law, an arbitral tribunal may abstain from considering additional evidence if, by an anticipated assessment of the evidence, it concludes that the evidence will not alter its findings (Case 4A_682/2011) (see Legal update, Arbitral tribunal must only take suitable and relevant evidence).

The Supreme Court further emphasised that the arbitral tribunal had, in any event, not ignored X's request but had considered that a site inspection was not necessary. Given that the dispute was essentially about the interpretation of certain contractual provisions, the Supreme Court failed to see how a site inspection nearly two and a half years after the plant was put into operation could have helped the arbitrators resolve the dispute. In any case, X should have reiterated its request and objected, at the latest, when the proceedings were closed. The Supreme Court once more confirmed that it was not admissible for a party to wait until the outcome of the proceedings to raise such an objection.

Finally, the Supreme Court held that the award was not contrary to public policy as contended by X (Article 190(2)(e) PILA). It recalled that a decision only violates substantive public policy if it is rendered in disregard of fundamental principles of law and cannot be reconciled with the essential and widely recognised system of values which serves as the bedrock for any legal order. The principles of pacta sunt servanda and of good faith are among these fundamental principles. The mere breach of a rule of law is not sufficient for an incompatibility with substantive public policy. The principle of pacta sunt servanda is violated if the arbitral tribunal:

However, the interpretation process itself and its result are not part of the principle of pacta sunt servanda and do not fall under the concept of public policy.

With regard to the violation of the good faith principle, X referred to a "double standard in the application of the principle of good faith". However, according the Supreme Court, X was merely trying to obtain a review by the Supreme Court of the interpretation made by the arbitral tribunal of the contractual provisions. Therefore the Supreme Court dismissed the argument, adding that contradictions in an award did not render the award contrary to public policy.

Finally, X had argued that the arbitral tribunal had ordered it to pay additional engineering costs to Y even though such a claim required a written agreement by the parties pursuant to the relevant contractual provision. The Supreme Court held that the arbitral tribunal had explained why, in the specific circumstances, X could not take advantage of the fact that there was no written agreement. Thus again, the principle of pacta sunt servanda was not violated.

This decision highlights once more the importance for a party to immediately raise a procedural objection during the arbitral proceedings, failing which that party will be barred from relying on such an objection in the context of the setting aside proceedings before the Supreme Court. As an additional "safety measure", the decision suggests that it is advisable to formally object to the closure of the arbitration procedure if a party is of the view that its right to be heard has been violated by the arbitral tribunal in the course of the taking of evidence.

This decision shows that it is still very difficult to obtain an annulment of an award for substantive violation of public policy. The fact that the interpretation process escapes the Supreme Court's review leaves little room for the success of a ground based on pacta sunt servanda.

4A_150/2012.