Data

Date:: 00-08-2000
Country:: Arbitral Award
Number:: 9651
Court:: ICC International Court of Arbitration 9651
Parties:: Unknown

Keywords

SUPPLY AND INSTALLATION CONTRACT - BETWEEN A GERMAN COMPANY AND AN INDIAN COMPANY - CHOICE OF LAW CLAUSE REFERRING TO SWISS LAW – SCOPE – INTERPRETATION ACCORDING TO UNDERSTANDING OF REASONABLE BUSINESS PEOPLE

FRAUD AND MISREPRESENTATION IN CONTRACT NEGOTIATION – APPLICABLE DOMESTIC LAW (SWISS LAW) IN ACCORDANCE WITH “COMMON UNDERSTANDING OF ALL CIVILIZED JURISPRUDENCE” – REFERENCE TO ARTICLES 2.15(2)[ART. 2.1.15(2) OF THE 2004 EDITION], 3.8 AND 3.9 OF THE UNIDROIT PRINCIPLES.

Abstract

Claimant, a German company, concluded two contracts with Defendant, an Indian company, for the delivery and installation of industrial equipment. Claimant delivered equipment which according to Defendant was defective. When Defendant declared its intention to return the equipment, Claimant filed a request for arbitration.

Defendant argued first of all that the contract was null and void due to Claimant’s fraudulent misrepresentation during negotiations and secondly that Claimant had delayed delivery and delivered defective equipment.

The first issue addressed by the Arbitral Tribunal concerned the applicable law. The contract contained a provision entitled “Law and arbitration” stating that “the law of Switzerland shall be applicable to this contract” and that “all disputes arising in connection with this contract” shall be submitted to arbitration. According to Claimant the law applicable to the merits of the dispute was Swiss law, whereas according to Defendant reference to Swiss law in the arbitration agreement was limited to “the contract” while the issue of fraudulent misrepresentation during negotiations should be settled according to Indian law as the law of the place of negotiations and/or in accordance with the principles of justice, equity and good conscience. The Arbitral Tribunal decided that Swiss law was the only applicable law.

In interpreting the choice of law clause contained in the contract it expressly referred to Articles 4.1 and 4.2 of the UNIDROIT Principles stating that, in the absence of a common intention between the parties, contract terms should be interpreted according to the meaning that reasonable persons as the same kind as the parties would give to them in the same circumstances. According to the Arbitral Tribunal reasonable businesspersons would understand the choice of law clause as covering all kinds of disputes which might arise in connection with the contract without distinguishing between issues relating to the contract after its conclusion and issues relating to the formation process.

With respect to the merits of the case the Arbitral Tribunal pointed out that the issue of fraud and misrepresentation would not be adjudicated otherwise were Indian law to be found to apply. Indeed according to the Arbitral Tribunal the avoidance of a contract for wilful deception is “a common understanding of all civilized jurisprudence” and in this context the Arbitral Tribunal expressly referred to Articles 2.15(2)[Art. 2.1.15(2) of the 2004 edition], 3.8 and 3.9 of the UNIDROIT Principles.

Fulltext

What is the law applicable?

[1] The Parties have filed, for Claimant, a “Submission on the Question of Applicable Law” dated 15 October 1998, with annexure [sic] and for Defendant a “Submission” of 14 August 1998 supplemented by a file containing seven English cases, as well as the following texts:
- The Principles of European Contract Law, 1997
- EC Convention on the Law Applicable to Contractual Obligations, Rome, 1980
- Principles of International Commercial Contracts, 1994, Unidroit
- UNCITRAL Notes on Organizing Arbitral Proceedings
- Convention on the Law Applicable to International Sales of Goods, The Hague, 1955
- Convention on the Law Applicable to Contracts for the International Sale of Goods, The Hague, 1986
- United Nations Convention on the Recognition and Enforcement of Foreign Arbitral Awards, NewYork, 1958.

Hearings were held in Zurich on.. . to hear Parties on this issue. Both Counsel requested only an “indication” on this point, not necessarily an award . . . After extensive deliberation, the Arbitral Tribunal instructed the Parties . . . that they would have to structure their case on the tentative assumption that Swiss law would be held applicable, and they so did.

[2] When preparing this Award, the Arbitral Tribunal reconsidered the question of applicable law and we found as follows.

Position of the Parties

Claimant’s case

[3] Claimant contends that the seat of the arbitration being in Zurich entails that the 12th chapter of the Swiss Private International Law of 18 December 1987 [hereafter PIL] is applicable, and notably article 176, para. 1 PIL, which provides that “The provisions of this chapter shall apply to all arbitrations if the seat of the arbitral tribunal is situated in Switzerland and if, at the time when the arbitration agreement was concluded, at least one of the Parties had neither its domicile nor its habitual residence in Switzerland”. The two requirements of article 176 PIL are met in this case, namely
a) Parties have chosen Zurich for seat of the Arbitral Tribunal...
b) Partìes have neither their domicile nor their habitual residence in Switzerland.

[4] Claimant further cites article 187, para. 1 PIL, providing that “The Arbitral Tribunal shall decide the case according to the rules of law chosen by the Parties”.

[5] Claimant also points to article 13, para. 3 of the ICC Rules of Conciliation and Arbitration of 1 January 1988 (applicable under. . . the Terms of Reference agreed upon by the Parties. This provision reads as follows:
The Parties shall be free to determine the law to be applied by the arbitrator to the merits of the dispute. In the absence of any indication by the Parties as to the applicable law, the arbitrator shall apply the law designated as the proper law by the rule of conflict which he deems appropriate.

[6] It is Claimant’s case that the principle of party autonomy, allowing the Parties to choose the law applicable to the merits, is both a tradition of Swiss law and a general principle of conflicts of laws. Claimant cites the ICC Interim Award of 16 November 1984 to show that this principle has already been applied in the case of litigation between a US supplier and an Indian buyer.

[7] Claimant further contends that the choice of law by the Parties has to be regarded as determinative as to all aspects of their dispute, and namely also as concerns the possible nullity of the Contract for misrepresentation (as has been pleaded on behalf of the Defendant).

Defendant’s case

[8] Defendant states its case on the merits to be on the basis that Claimant obtained the Contract by fraud and material misrepresentation, further that the performance certificates were also obtained by fraud, and that Claimant is guilty of a fundamental breach of contract. These issues would require to be resolved in accordance with Indian law and/or in accordance with the principles of justice, equity and good conscience.

[9] Defendant also accepts that a contract can indicate a choice of law by the parties. However, it states that there may be exceptions on the grounds of public policies. Further, there are accepted limitations on the choice of law by the parties. Now in the present case, according to the Defendant, the Contract has the closest with India.
1.there are accepted limitations on the choice of law by the parties. Now in the present case, according to the Defendant, the Contract has

[10] As concerns the reissue of promissory notes, such a claim is based on general principles of law, and on principles of justice, equity and good conscience, but not, according to Defendant, on any clause of the Contract. However the Arbitral Tribunal shall not discuss that issue further, as Claimant no longer claims for reissue of the promissory notes.
Claimant now requests an order for payment of the Contract price. This claim is undoubtedly based on the Contract...

[11] As concerns its own claims, Defendant and Counter-Claimant insists that they are based essentially on allegations of misrepresentation and fraud in obtaining the Contract. The negotiations, pre-contractual and post contractual, were conducted mostly in India. If misrepresentation and/or fraud are alleged to have been made in India, Indian law would apply rather than Swiss law, all the more so because an Indian company needs various permissions to enter into such contracts as the one under consideration at present, and a number of representations made by the foreign party are carried by the Indian party to the Indian Government.

[12] Moreover, where one of the Parties claims that the Contract itself is tainted by fraud, it would be incongruous to decide this issue by reference to the contractual choice-of-law clause.

[13] Finally, Defendant submits that the principles of justice, equity and good conscience should apply. Fraud is accepted in all civilized jurisprudences. The principles of Un8droit on International Commercial Contracts are a useful guide in relation to such principles of justice and equity as are internationally acceptable.

Findings of the Arbitral Tribunal

[14] The rule under Swiss Law is that the interpretation of a choice-of-law clause is subject to the law chosen by the parties (article 116, para. 2 infine PIL). The true intent of the legislature may be apparent from article 118, para. 1, second sentence of the 1978 draft to the PIL: (translation: “The [choice-of-law] is subject to the law of which the choice is in issue”).
Law applicable to the choice-of-law clause

[15] Now, Article 116, para. 2, second sentence is innovative, in the sense that the case law anterior to the 1987 PIL seems to have entertained tile notion that the lexfori would be applicable to the choice of law. Therefore, it is no longer possible indiscriminately to rely on the cases published before 1 January 1989 (entry into force of PIL of 18 December 1987) and notably on ATF 7911295. As a consequence, modern commentary is to the effect that the principle of party autonomy, its extent and its limitations, are governed by the law chosen by the parties.

[16] Therefore, the applicable law to the interpretation of the Section 5 of the Contract is the Swiss law as the law chosen by the Parties.

[17] Abroad, tile more traditional approach to this question seems to have been, at least in the past, that the lexfori would be applicable to the construction of the choice-of-law clause.’

[18] Finally, international arbitral awards sometimes refer to a “transnational rules on conflicts of laws”. Presumably, if found to exist on that particular point, such a “transnational rule” might indicate as applicable to construe a choice-of-law clause either tile law chosen by the parties or the lexfori.

[19] Whatever the method that would be followed, Swiss law is applicable in the present case to the interpretation of section S of the Contract, since Parties opted for the Swiss law to govern their Contract and the lexfori is that of Switzerland as seat of the arbitral tribunal under a clause on the resolution of disputes that is not the object of any controversy between tile Parties, save for the present question of the applicable law.

Principle of interpretation under Swiss law

[20] It is a tenet of Swiss law that no interpretation is necessary when the true and common intent of the party is clearly expressed in the Contract. Article 4.1 of the Unidroit Principles also refers to the common intent of tile parties. However, the governing principle for the interpretation of any declaration of intent is the so-called “principle of confidence” (‘Vertrauensgrundsatz”, “principe de la confiance”) ‘ under which a seemingly clear wording may be shown not to convey the true intent of the parties.” According to that principle, the declaration is neither understood in tile sense of what the declaring party may have had in mind nor in accordance with the literal sense of tile wording, but in the meaning which the addressee could in good faith attribute to it. As good faith requires the addressee to consider all aspects allowing the understanding of the declared intent, tile wording is not the only test.’ Article 4.2(2) of the Unidroit Principles provides for tile same test, article 1.7 of the same Principles imposing further the overriding duty of good faith.

Proper interpretation

[21] In the present case, there is a clear wording: under para. 1 title “Contract” is the subject matter of the agreement and is subject to Swiss law, whereas para. 2 concerns “all disputes arising in connection with the agreement". That seems at first sight to leave no doubt as to the interpretation of section S. Nonetheless, as the Parties may or may not have thought that a dispute might involve something else than a contractual issue, the wording alone is not decisive.

[22] As Counsel for Claimant was questioned on that very wording during the hearing held . . . in Zurich, her answer was that the wording of that clause was standard. Under “Contract” should be understood everything which is connected with the Contract, also including tile conclusion of the Contract and precontractual negotiations. Counsel for Defendant, on the other hand, declared that there is a marked difference between the two paragraphs of Section 5.

[23] Now, under the principle of confidence, would not a reasonable businessman reading section S in its entirety think that all disputes arising in connection with the said agreement should be governed by the law chosen by the Parties in the preceding paragraph? All those disputes should certainly be referred to arbitration. In fact, it is not obvious that reasonable businessmen would be alert to the difference between a “contractual issue” and “an issue arising in connection with a contract”. Furthermore, it would appear somewhat strange if businessmen would, as a matter of common intent, choose two different laws to rule on their relationship, to wit the law of the Contract and some other law for the negotiation of the agreement.
Finally, it might be well assumed that a reasonable businessman would consider that a wrongful act which would allegedly have been committed during the negotiation of the Contract would be related more closely to tile contractual side of the case.

In this regard, it will be noted that under Swiss law, the most authoritative commentary is to the effect that precontractual liability is not a case of tortious liability, but a case of contractual liability subject to article 97 CO rather than article 41 CO, or a case of sui generis liability. The Arbitral Tribunal does not have to decide on this particular controversy at that point in time. The controversy itself is, however, sufficient to show why reasonable businessmen would understand section S of the agreement as not dividing the disputes arising “in connection with” the Contract into two categories, to wit the “contractual ones” and the “precontractual ones”, even if they were to be alert to the difference between “contractual issues” and “issues arising in connection with the contract”, which is uncertain.
[24] Therefore, the Arbitral Tribunal finds that section S contains a choice-of-law clause that is also intended to bear on any issue relating to the conclusion of the Contract.

Severability of the choice-of-law clause

[25] Is tile choice of law clause severable in the sense that it is not tainted by any possible misrepresentation or fraud as to the main contract?
(a) The doctrine of severability of the arbitration clause is generally admitted nowadays, in the sense that tile validity of the arbitration clause is independent from the main contract.
(b) The issue before us is whether the choice-of-law clause is also to be applied where the whole contract is alleged to be vitiated by fraud or misrepresentation.

One authority has been cited by Claimant. Another authority states that “Parties do not expect that on issues of formation and validity of the choice-of-law agreement, a law other than the chosen law could apply (...) Both the lex fori and the objectively determined lex causae should be excluded in that regard (...) the objective lex causae because the parties did not want to have it applied to their contract.” In fact, such independence of the choice-of-law clause had been recognized a long time ago by the Federal Tribunal. It explains the solution that the legislature adopted in article 116, para. 2 PIL: “because the contract choosing the applicable law is independent from the main contract”, it is well possible that the form requirement governing the choice-of-law clause might be different from the form requirement governing the main agreement. Very well-known authors also state that “the law which (if the choice-of-law as made by the parties is not vitiated) is to govern the contract determines if tile choice-of-law clause is valid or invalid, for example because of mistake, misrepresentation or fraud”, or that “claims for culpa in contrahendo and other claims relating to the formation of the choice-of-law clause fall under the law selected by the parties". Therefore, the severability and independence of the choice-of-law clause is a well-settled principle of Swiss international private law. Thus, Swiss commentary is to be followed when it states that the law chosen by the Parties is applicable even to the question whether the will of the parties was vitiated.

(c) Assuredly, the question was put to the Arbitral Tribunal by Counsel for Defendant whether Swiss law should apply to the question whether Swiss law governs the choice of law. Counsel for Defendant termed this to be a circulus vitiosus. However, this logical difficulty is only apparent. The principle of party autonomy is recognized by all the legal orders that are connected with the present contract, be it the German, the Indian or the Swiss legal order. The decision in Vita Food Products Inc. v. Unus Shipping Co. Ltd, 21 on which Defendant relied, allows party autonomy, as does article 116 PIL and article 27 of the German law on international private law of 25 July 1986 (following art. 3 of the Rome Convention). The principle of party autonomy is also recognized in international arbitration . Further, there seems to have been no decided case in England striking down a choice of law because it would not be “bonafide and legal”. Therefore, the party autonomy seems to be really unrestricted in spite of the limitations that were mentioned by Lord Wright in the Vita Food case.

Now, party autonomy must be respected even where there was allegedly misrepresentation or fraud in the conclusion of the agreement. The first law to apply to the existence and validity of the choice-of-law contract is therefore the law “which would govern it . . . if the contract or term were valid” (art. 8, para. 1 of tile Rome Convention on the Law Applicable to Contractual Obligations of 1980; see to the same effect article 116, para. 2, 2d sentence PIL; the same solution was already adopted in article 2 III of The Hague Convention on tile law applicable to tile international sale of movable property of 1955). It is only if “it appears from the circumstances that it would not be reasonable to determine the effect of [a party’s] conduct in accordance with” that law that the law of this party’s residence might apply (art. 8, para. 2 of the Rome Convention). Therefore, Swiss law is properly to apply to the question of the validity of the choice-of-law clause.
(d) Besides, it will be noted byway of superabundance that the English approach, if it were to be followed, would not entail a different solution.
According to a “decision of the Court of Appeal which is not without its difficulties”, Mackender v. Feldia A. G., a choice of foreign law might not be effective in England if by English law there had been no consensus ad idem (“e.g because of the plea of non est factum, or, perhaps, of fraud”). But even if the English rule referring to the lex fori would appear to be different from the Swiss one, the result would be the same, because Switzerland is the forum in the present case. It has been explicitly stated . . . by Counsel for Defendant that Defendant did not contest the validity of the arbitration proceedings; the seat of the arbitral tribunal being in Switzerland, Swiss law shall apply to the question of fraud whether the Swiss law of conflict (art. 116, para. 2 PIL) or the English rule of the lex fori applies.

(e) Finally, it deserves mention that article V(i)(a) of the New York Convention on the Recognition and Enforcement of Arbitral Awards allows for a rejection of the arbitral award, among other grounds, when the agreement to arbitrate is not valid under the law which the parties have chosen. This shows that a concept common to all civilized jurisprudence is that the choice of law shall be respected even if the contract is alleged to be null and void for fraud or misrepresentation.

(1) While finding that Swiss law applies, the Arbitral Tribunal is however aware that the issue of fraud and misrepresentation would not be adjudicated otherwise were Indian law to be found to apply on these issues. Indeed, as has been said already, the avoidance of a contract for willful deception is a common understanding of all civilized jurisprudence. For example, article 2.15(2) of the Unidroit Principles provides that “a party who negotiates or breaks off negotiations in bad faith is liable for the losses caused to the other party”. Article 3.8 provides for avoidance of a contract by a party in case of fraudulent misrepresentation or fraudulent non-disclosure of circumstances which, according to reasonable commercial standards of fair dealing, the other party should have disclosed. Article 3.9 provides for the avoidance by reason of a threat leading a party to conclude the contract. Further, principles of justice, equity and good conscience will be legitimately applied by the Arbitral Tribunal for the purpose of determining the scope and manner of applying the law, and what should be the nature and extent of the relief to be granted, as those principles are referred to in Swiss law (see e.g. art. 4 Civil Code and art. 42, para. 2 CO).’}}

Source

Excerpts of the award published in
ICC International Court of Arbitration Bulletin, Vol. 12, No. 2 (Fall 2001), 76-81.}}