Data

Date:
25-11-1994
Country:
Arbitral Award
Number:
Unknown
Court:
Z├╝rich Chamber of Commerce
Parties:
Unknown

Keywords

CONTRACT GOVERNED BY A SPECIFIC DOMESTIC LAW (SWISS LAW) - REFERENCE BY ARBITRAL TRIBUNAL TO THE UNIDROIT PRINCIPLES TO CONFIRM THAT THE RELEVANT RULES OF THE SWISS LAW OF OBLIGATIONS ENJOY WORLWIDE CONSENSUS

INTERPRETATION OF A CONTRACTUAL PROVISION - REAL INTENTION OF THE PARTIES - INTERPRETATION IN GOOD FAITH - INTERPRETATION OF THE CONTRACTUAL PROVISION ACCORDING TO THE UNDERSTANDING OF THE AVERAGE HONEST AND DILIGENT BUSINESS PERSON (ARTS. 4.1 - 4.2 UNIDROIT PRINCIPLES)

VALIDITY OF THE ARBITRATION AGREEMENT - MATERIAL MISTAKE AS ONE RELATING TO FACTS THAT THE MISTAKEN PARTY CONSIDERED A NECESSARY BASIS OF THE CONTRACT (ART. 3.5 UNIDROIT PRINCIPLES)

Abstract

The award concerned the validity of an arbitration clause in which the parties agreed to submit their disputes to "international and trade arbitration organization in Zürich, Switzerland". The respondent contested the jurisdiction of the Zürich Chamber of Commerce as this institution was not specifically named in the arbitration clause. The claimant argued that it could rightfully assume that the arbitration clause, which had been drafted by the respondent, referred to the only existing international trade arbitration organization in Zürich, namely the Zürich Chamber of Commerce.

In deciding in favour of the claimant the Arbitral Tribunal applied Article 18(1) of the Swiss Code of Obligations according to which incorrect statements made in a contractual provision have to be interpreted by having regard to the real intention of the parties, and to Article 2 of the Swiss Civil Code laying down the principle of good faith. According to the Arbitral Tribunal the combination of the two components of the principle of good faith, i.e. the subjective and the objective one, leads to the conclusion that parties to a contract are bound by the meaning of the contractual provision as it must be understood by the average honest and diligent business person. In order to prove that this interpretation rule reflects a worldwide consensus, the Arbitral Tribunal referred to Articles 4.1 and 4.2 of the UNIDROIT Principles "which have been established by a large international working party consisting of specialists in contract law selected from all different parts of the world […]".

Having established that a proper interpretation of the arbitration clause leads to the conclusion that the parties designation of the arbitral institution in fact meant the designation of the Zürich Chamber of Commerce, the Arbitral Tribunal addressed the question whether the respondent could invoke a material mistake and thereby invalidate the agreement to arbitrate. By denying such a possibility the Arbitral Tribunal referred again not only to Article 24(1) of the Swiss Code of Obligations defining a material mistake as one relating to facts which the mistaken party in accordance with the rules of goods faith in the course of business considered to be a necessary basis of the contract, but also to the similar rule contained in Article 3.5 of the UNIDROIT Principles.

Fulltext

[...]

[9] Moreover, it is clear from the arbitration clause that the parties agreed that arbitration should take place in Zurich/Switzerland. [...]

[10] As a third element, the parties made reference to a certain institution, i.e. to the 'international trade arbitration organization in Zurich'. Such a reference must clearly be understood as a reference to an institution which administers arbitration cases, i.e., an institution which typically offers certain services in the framework of the administering and hosting of international arbitral tribunals.

[...]

[11] By virtue of such a reference, the parties therefore clearly opted for institutional arbitration, as opposed to mere ad hoc arbitration (i.e. an arbitration not hosted or administered by any arbitral institution). As regards the particular arbitral institution, the parties have made reference to that certain 'international trade arbitration organization in Zurich'.
[12] The fact is, as recognized by claimant, that an organization bearing exactly this name does not exist in Zurich. As indeed correctly indicated by claimant, the only international arbitration institution administering international disputes between foreign/foreign or foreign/Swiss parties is the Zurich Chamber of Commerce.

[14] Based on the foregoing, and
because the parties clearly agreed to arbitration (as opposed to litigation in ordinary state courts)
because the parties clearly agreed to a determination of their dispute in Zurich/Switzerland (as opposed to a determination in any other country, or in the country of the defendant party)
because the parties clearly referred to an institutional arbitration (as opposed to a mere ad hoc arbitration, not administered by any arbitral institution)
- because the reference to the 'international trade arbitration organization' can only have meant the Zurich Chamber of Commerce which is widely known and accepted as a major international arbitral institution.

The Arbitral Tribunal has to conclude that the arbitration clause agreed upon between the parties must correctly be construed as making reference to the international arbitration services as offered by the Zurich Chamber of Commerce on the basis of its International Arbitration Rules.

[...]

[20] Under Swiss law [...] where a contractual provision contains an incorrect statement or expression, such statement or expression will have to be interpreted by the Court (respectively here: the Arbitral Tribunal) in the sense of and by having regard to, the real intention of the parties. This notion is reflected in Art. 18 of the Swiss Code [...].

[22] In making such a 'correct' interpretation, the notions and rules on contract interpretation have to be used. [...] Rather, it suffices to indicate that a contract interpretation, under Swiss perspectives, has to be made on the basis of the good faith principle (bona fides principle) reflected in An. 2 of the Swiss Civil Code. This good faith principle has two components, i.e. the subjective component and the objective component. In other words:

- it is not sufficient to ask (and determine) the question how claimant itself (subjectively) understood (or interpreted) a particular contractual clause (here: the reference to a certain 'international trade arbitration organization in Zurich')
- nor is it sufficient to explore or determine how respondent understood or interpreted that same reference (i.e. the reference to an 'international trade arbitration organization in Zurich')
- but the decisive test and question is to know how the present parties, by applying the test of the so-called 'average honest and diligent businessman', had to understand or interpret the particular contractual provision (i.e. the reference to an 'international trade arbitration organization in Zurich').

[23] In essence, the above combination of the subjective and objective test leads to the conclusion that parties to a contract are bound by the meaning of the contractual provision as it must be understood by the average honest and diligent businessman. From a different perspective, one may also say that a party must be protected in its confidence that a contractual provision will have the meaning as will be conferred to it by the 'average/diligent businessman' (disregarding thus the purely subjective meaning one particular party for itself may confer to a particular contractual provision).
[24] It may be added here that, basically, the above interpretation rule reflects a general and indeed world-wide consensus. This is, for instance, apparent by comparing the Swiss interpretation rules with the most recent elaboration in respect of the legal rules applicable to international contracts, namely the 1994 UNIDROIT Principles which have been established by a large international working party consisting of specialists in contract law selected from all different pans of the world, including for instance Mainland China, Korea and Japan. Chapter 4 deals with the interpretation of contracts and contains the following provisions:

Article 4.1 - Intention of the parties
(1) A contract shall be interpreted according to the common intention of the parties.
(2) if such an intention cannot be established, the contract shall be interpreted according to the meaning that reasonable persons of the same kind as the parties would give to it in the same circumstances.

Article 4.2 - interpretation of statements and other conduct
(1) The statements and other conduct of a party shall be interpreted
according to that party's intention if the other party knew or could not have been unaware of this intention.
(2) If the preceding paragraph is not applicable, such statements and other conduct shall be interpreted according to the meaning that a reasonable person of the same kind as the other party would give to it in the same circumstances.

[...]

[26] While, in the sense of the above reasons, the contract interpretation (i.e. the interpretation of the arbitration clause) leads to a clear answer in the sense that the parties' designation of the arbitral institution in fact meant the designation of the Zurich Chamber of Commerce, the rather academic question may remain whether respondent could invoke a material or relevant mistake and thereby invalidate the agreement to arbitrate.

[27] In this respect, An. 24(1) of the Swiss Code of Obligations contains a narrow definition of what may constitute a material mistake:

Article 24 CO
'An error is, in particular, deemed to be material in the following cases:

4. 11 The error related to certain facts which the party in error, in accordance with the rules of good faith in the course of business, considered to be a necessary basis of the contract.

[28] Art. 24(2) CO specifically excludes the invalidation of a contract if the error only refers to motives for entering into the particular contract, or if the error cannot be considered as being material in the sense of Art. 24(1)CO. [29] Quite in the same sense, the 1994 UNIDROIT Principles contain by way of comparison, a similar concept:

Article 3.5 - Relevant mistake
(1) A party may only avoid the contract for mistake if, when the contract was concluded, the mistake was of such importance that a reasonable person in the same situation as the party in error would only have concluded the contract on materially different terms or would not have concluded it at all if the true state of affairs had been known, and (a) the other party made the same mistake, or caused the mistake, or knew or ought to have known of the mistake and it was contrary to reasonable commercial standards of fair dealing to leave the mistaken party in error; or
(b) the other party had not at the time of avoidance acted in reliance on the contract.
(2) However, a party may not avoid the contract if
(a) it was grossly negligent in committing the mistake; or
(b) the mistake relates to a matter in regard to which the risk of mistake was assumed, or, having regard to the circumstances, should be borne by the mistaken party.'

[...]}}

Source

Bulletin de l'Association Suisse de l'Arbitrage (ASA), 1996, 303-318
Yearbook Commercial Arbitration, Vol. 22-1997, 211-221}}