The consequence of skipping a mandatory pre-arbitral step
- Matthias Scherer & Samuel Moss
In mid-2014 the Federal Supreme Court ruled that the requirement in the International Federation of Consulting Engineers (FIDIC) Conditions to submit a dispute to a dispute adjudication board (DAB) was a mandatory precondition for arbitration (for further details please see "Supreme Court – DAB proceedings precondition for arbitration under FIDIC Conditions"). However, the court was able to avoid the longstanding question of what the consequence for failing to comply with a mandatory pre-arbitral condition should be – should the arbitral tribunal: ● dismiss the case outright for lack of jurisdiction or inadmissibility; ● suspend the proceedings; or ● award damages for the breach and proceed with the arbitration in spite of the failure? In a recent case (4A_628/2015) the Supreme Court finally addressed the question, ruling that an arbitral tribunal should suspend arbitration to allow the parties to comply with the pre-arbitral condition. The decision is particularly important for international construction contracts, which often contain multi-tier dispute resolution clauses requiring parties to resort to mediation, conciliation, dispute boards or DABs before initiating arbitration.
Decision The case arose from a contract that required the parties to attempt conciliation under the International Chamber of Commerce (ICC) alternative dispute resolution (ADR) Rules before initiating arbitration. The rules provide that conciliation can be terminated by either party, but only after an initial procedural meeting is held. Although the claimant first initiated conciliation proceedings, it filed for arbitration before an initial procedural meeting was held. The conciliator therefore interpreted the claimant's action as a withdrawal of the conciliation request. In the arbitration, the respondent objected to jurisdiction on the basis that the pre-arbitral conciliation requirement had not been complied with. The arbitral tribunal disagreed and rejected the objection in a partial interim award. The respondent then challenged the award before the Supreme Court. Options and solution Based on the wording of the ICC ADR Rules, the Supreme Court first concluded that the arbitral tribunal had erred in finding that the parties had complied with the conciliation requirement. It then turned to the question of what the consequence of the non-compliance should be – a question which it had until then managed to avoid addressing. The court considered several options. It first looked into whether it was enough for an arbitral tribunal to award damages for breach of contract, without any impact on the arbitral proceedings. According to the court, such a solution would, however, deprive the pre-arbitral condition of any meaning, and therefore considered that a procedural consequence was necessary. Indeed, the purpose of a mandatory pre-arbitral condition is usually to provide an opportunity to avoid the expense and disruption of an arbitration, which is especially relevant for construction projects, which often give rise to numerous