In a recent decision, the Swiss Federal Supreme Court held that an arbitral tribunal was correct to consult the Vienna Convention on the Sale of Goods ("VCSG") and the Unidroit Principles of International Commercial Contracts ("Unidroit Principles"), to establish the meaning of the term "material breach" in the parties' contract. The tribunal applied the VCSG and the Unidroit Principles, both part of international trade law (lex mercatoria) notwithstanding the parties' agreement that the contract should be governed by Swiss law.

The subject matter of the dispute was a contract for the delivery of calcium fluoride between a company owning a South African calcium fluoride mine and an international conglomerate, seated in the US, producing fluorhydric acid. The contract provided that the agreement could be terminated by either party if either party was in material breach of the Agreement and the breach remained uncured following 30 days' written notice from the non-breaching party. In addition to an arbitration clause providing for ICC arbitration in Zurich, the contract contained the following choice of law clause:

"This Agreement shall be construed and interpreted in accordance with the laws of Switzerland as applied between domestic parties provided, however, that the express agreements, understandings and provisions contained herein shall always prevail."

The mining company terminated the contract for material breach, arguing that the US company had refused to pay two of its invoices and failed to disclose some of the information necessary to determine the price for the calcium fluoride. The tribunal held that, even though the US company had failed to provide the pricing information as requested by the contract, there had been no material breach of the contract. In order to determine what constituted a "material breach", the tribunal relied on the concept of "fundamental breach" in Article 25 of the VCSG and Article 7.3.1 of the Unidroit Principles. It followed that the mining company had wrongfully terminated the contract and the tribunal awarded the US company damages. The mining company appealed to the Supreme Court, arguing that the parties had agreed that Swiss law should govern their contract and that the tribunal had violated that choice of law by relying on the VCSG and the Unidroit Principles to determine the meaning of "material breach".

Under the relevant provisions of the Swiss Private International Law Act, an appeal against an arbitral award is only possible on limited grounds. The mining company argued that, in deciding the question of "material breach" by reference to the VCSG and the Unidroit Principles, the tribunal had acted in excess of its jurisdiction and decided a question which the parties had not submitted to it. The Supreme Court rejected this argument. In addition to questioning whether the mining company had relied on the correct grounds for its appeal (according to the Supreme Court, the more appropriate ground would have been violation of public policy), it held that the tribunal had properly followed the principles of contractual construction under Swiss law. Given that the term "material breach" does not exist in Swiss law, the tribunal correctly relied upon the VCSG and the Unidroit Principles to establish what the parties, as two companies engaging in international commerce, meant by this term.

The problem of a particular legal concept or term being referred to in an agreement which does not form part of the relevant applicable law is not uncommon in international arbitration. The Supreme Court's approach shows that arbitral tribunals faced with such a legal concept or term are not necessarily constrained by the parties' choice of a particular national law, but are entitled, in appropriate circumstances, to draw from international rules and principles directly aimed at the needs of international commerce.

(Swiss Federal Supreme Court, First Civil Chamber, 4A_240/2009 of 16 December 2009)