The Supreme Court has rejected an appeal concerning an arbitral award which was recently set aside by a court of appeal.(1) Significantly, the Supreme Court concluded that important principles of due process had been violated during the arbitration, which had probably influenced the case's outcome.
In 2004 CicloMulsion and NeuroVive entered into a licence agreement regarding a pharmaceutical product. According to the agreement, NeuroVive had the option to acquire the rights to the product. The consideration for exercising the option was a fixed amount, including royalties calculated in a certain way according to the agreement. In 2010 NeuroVive exercised the option. The agreement between the parties included an arbitration clause referring to the Stockholm Chamber of Commerce (SCC) Arbitration Rules.
In 2013 CicloMulsion initiated an SCC arbitration. A key issue at hand was the interpretation of the provision in the agreement which required NeuroVive to pay royalties to CicloMulsion.
In 2016 the arbitral tribunal rendered a partial award regarding (among other things) the interpretation of NeuroVive's obligation to pay royalties. The award was challenged by both parties. CicloMulsion claimed that an irregularity had occurred in the proceedings, without its fault, which had probably influenced the case's outcome.
In 2018 the Scania and Blekinge Court of Appeal found that the arbitral tribunal had diverged from its own statement in a procedural order and hence deprived CicloMulsion of a reasonable opportunity to present its case. According to the court, an irregularity had occurred in the proceedings, without fault of CicloMulsion, which had probably influenced the case's outcome. Therefore, the court decided to partly set aside the arbitral award. NeuroVive was granted leave to appeal to the Supreme Court.
The key issue considered by the Supreme Court was whether the award was to be set aside because of a procedural irregularity and, in particular, how to interpret the prerequisite that the irregularity had probably influenced the outcome of the proceedings.
The Supreme Court stated that an arbitral award must be wholly or partially set aside on the request of a party if an irregularity occurred in the proceedings which had not been the fault of the party and probably influenced the case's outcome (previously Section 34(6) of the Arbitration Act, currently Section 34(7)). However, the court highlighted that this provision should be applied restrictively.
According to the court, arbitral tribunals have a wide scope to adapt proceedings depending on the issue at hand and requests from the parties. However, proceedings must meet reasonable due process standards and provide parties with an adequate opportunity to present their case.
The prerequisite that an irregularity probably influenced a case's outcome implies that the scope of application is limited to more qualified irregularities. One condition is the existence of a significant correlation between the irregularity and the case's outcome. In addition, the Supreme Court referred to its recent judgment in Belgor, in which it had found that an irregularity also has to be of reasonable importance for the challenging party.(2)
In assessing the 'influenced the outcome' prerequisite, the Supreme Court noted that the starting point is a comparison between the incorrect proceedings and the hypothetical correct proceedings. The condition is met if it is probable that the case's outcome would alter between the two scenarios. However, such a comparison is not feasible in all cases.
Therefore, in cases of more severe irregularities, the assessment ought to be standardised or a correlation be presumed. According to the Supreme Court, a presumption that an irregularity influenced a case's outcome can be justified, as it is difficult to prove that some irregularities will have influenced the outcome of a case despite having caused serious doubts as to whether the proceedings were acceptable. The court provided examples of circumstances in which an influence on the outcome of the case may be presumed:
- where there is a complete absence of reasons for the award;
- where deliberation has been carried out by only two arbitrators; or
- where a party has not been given reasonable opportunity to present its case.
The Supreme Court also stated that since Section 34(7) of the Arbitration Act should be applied restrictively, the threshold for applying a presumption is higher in cases regarding challenges of arbitral awards compared with assessments of procedural errors in litigation under the Code of Judicial Procedure (where material breach of due process will be presumed to have influenced a case's outcome).
In the present case, the arbitral tribunal had rendered a procedural order in which it had taken a position regarding the interpretation of a certain provision in the licence agreement between the parties. According to the procedural order, the arbitral tribunal had committed to notify the parties if it intended to diverge from the adopted position.
The Supreme Court found that the arbitral tribunal's conclusions in the award implied that the tribunal had diverged from its own statement in the procedural order without notifying the parties in advance. Thus, an irregularity had occurred in the proceedings.
As a consequence, CicloMulsion had been deprived of the opportunity to fully present its case regarding the specific issue. In addition, after the arbitral tribunal had rendered the procedural order and as long as the tribunal had failed to communicate otherwise, CicloMulsion could rightfully assume that the issue would not be reconsidered by the tribunal. This irregularity implied that important principles of due process had been violated during the arbitral proceedings, which consequently provided grounds to presume that the irregularity had influenced the case's outcome and set aside the arbitral award.
The Supreme Court confirmed that Section 34(7) of the Arbitration Act – under which an arbitral award must be set aside if an irregularity occurred in the proceedings and probably influenced the case's outcome – should be applied restrictively.
However, the court also concluded that arbitral proceedings must meet certain standards of due process and provide parties with an adequate opportunity to present their case.
As regards the causal link between procedural irregularities and the outcome of the case, the court held that in certain situations where a link is difficult to prove and there are serious doubts as to whether the proceedings were acceptable, it can be presumed that an irregularity influenced a case's outcome.
In CicloMulsion the arbitral tribunal – in violation of an express provision in its procedural order – failed to give the challenging party a reasonable opportunity to present its case. As a result, an important principle of due process was violated. In addition, the case provided that CicloMulsion would have developed its position on the issue had the company been aware that the issue might be reconsidered. The Supreme Court concluded that this is a situation in which a presumption that an irregularity has influenced the case's outcome is applicable.
This decision is a rare example of a Swedish court setting aside an award based on procedural irregularities under Section 34(7) of the Arbitration Act.
(1) Supreme Court, 30 April 2019 (T 796-18). Available in Swedish here.
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