In 2017 the Svea Court of Appeal(1) rejected City Säkerhet i Stockholm AB's motion to set aside the arbitral award in City Säkerhet i Stockholm AB v SafeTeam i Sverige AB.(2) The judgment clarifies whether an arbitrator's application of a legal rule to which neither party referred in the arbitration may constitute grounds to challenge the arbitration award.
City Säkerhet and SafeTeam had entered into a franchise agreement, under which City Säkerhet could enter into agreements with end customers regarding security systems pursuant to SafeTeam's concept. City Säkerhet provided the delivery to the end customers, but the agreement was entered into in the name of SafeTeam. When an agreement with an end customer had been initiated by City Säkerhet, the company was, as a rule, entitled to compensation from SafeTeam of an amount corresponding to the sum paid by the end customer to SafeTeam following the deduction of any commission that SafeTeam was entitled to.
In 2015 City Säkerhet initiated arbitration against SafeTeam under the Arbitration Rules of the Arbitration Institute of the Stockholm Chamber of Commerce. A sole arbitrator was appointed. City Säkerhet claimed compensation for certain deliveries and repayment of amounts paid by City Säkerhet to Safe Team regarding litigation costs incurred by SafeTeam in relation to a dispute with a customer. The parties agreed that SafeTeam was entitled to compensation for the deliveries.
The sole arbitrator rendered the award on December 11 2015, finding that SafeTeam was entitled to compensation for its litigation costs incurred in the dispute with the customer. Since SafeTeam had a counterclaim eligible for set-off against City Säkerhet, which exceeded the amount claimed by City Säkerhet, the arbitrator dismissed City Säkerhet's claim.
In 2016 City Säkerhet challenged the award before the Svea Court of Appeal in Stockholm, claiming that the award should be set aside pursuant to Section 34(1)(2) or (6) of the Arbitration Act.
City Säkerhet claimed that by basing his conclusions on circumstances not referred to by SafeTeam, the arbitrator exceeded his mandate. The arbitrator's failure to inform the parties before rendering his decision that he contemplated taking the provisions of the Commission Act into consideration and applying them by analogy constitutes a procedural error which likely affected the outcome of the arbitration.
The arbitration concerned the franchise agreement regarding liability for litigation costs incurred by SafeTeam in a dispute relating to a contract entered into in SafeTeam's name, but which had been initiated and carried out by City Säkerhet. The agreement did not explicitly regulate that issue. When reviewing the matter regarding whether the agreement should be supplemented with an obligation for City Säkerhet to compensate SafeTeam for the relevant costs, the arbitrator applied certain provisions of the Commission Act by analogy. Neither SafeTeam nor City Säkerhet had referred to the provisions of the act during the arbitration.
City Säkerhet argued in the challenge that the prerequisites of the provisions constituted facts on which the arbitrator was not entitled to base his decisions. City Säkerhet further argued that before rendering his decision the arbitrator failed to inform the parties that he contemplated taking the provisions into consideration and applying them by analogy. According to City Säkerhet, the arbitrator was required to give the parties an opportunity to present their arguments concerning the applicability of a certain legal rule that the arbitral tribunal should consider and the parties had not referred to.
The Svea Court of Appeal found that City Säkerhet did not allege that the arbitrator had based his assessment that the agreement should be supplemented on any other facts than those referred to by SafeTeam. The fact that the arbitrator applied certain provisions of the Commission Act by analogy did not mean that he exceeded his mandate. It was irrelevant whether the parties had referred to or presented arguments concerning the relevant legal rules. Further, the court found that the arbitrator had not failed in his management of the proceedings. City Säkerhet had the opportunity to argue its position on the supplementation of the agreement and should not have been surprised by the arbitrator's analogous application of the Commission Act. The court concluded that no procedural error had occurred and the motion to set aside the arbitral award was denied.
The predominant view is that the principle of jura novit curia (ie, the court knows the law), which is applicable in court proceedings, should also apply in Swedish arbitration unless otherwise agreed by the parties. Pursuant to this principle, the arbitral tribunal is bound not by the parties' references to legal rules, but only by the facts invoked by the parties. On this basis, an arbitral tribunal is free to apply a legal rule not referred to by the parties.(3)
However, legal literature has also presented arguments against the applicability of jura novit curia in arbitral proceedings. In view of the requirement of impartiality, the arbitration tribunal should normally not assist a party that does not make the appropriate legal references. The parties may also assume that the outcome of the dispute will be settled on the basis of the legal rules referred to by the parties. It may therefore be desirable for the arbitral tribunal to ask the parties how it should proceed in this regard.(4) It has been argued that the arguments presented in favour of jura novit curia (eg, that parties need protection from their own ignorance, mistakes and indifference) do not carry the same weight in arbitral proceedings.(5)
The decision confirms that an arbitrator's application of a legal rule not referred to by the parties does not constitute grounds for challenge in accordance with Section 34(1)(2) of the Arbitration Act.
The second question put to the court was whether, despite the fact that the principle of jura novit curia applied, the arbitrator had an obligation to inform the parties that he contemplated taking some legal rules not referred to by the parties into consideration and whether failing to do so constituted a procedural error which likely affected the outcome of the arbitration and which, in accordance with Section 34(1)(6) of the Arbitration Act, constituted grounds for challenge.
An arbitral tribunal should attempt to manage the proceedings to prevent the parties being surprised by the application of a legal rule. Consequently, if the arbitral tribunal considers applying legal rules not referred to by the parties, it should bring it to the parties' attention.(6) However, the arbitral tribunal should not inform parties about legal rules if their applicability is dependent on further facts not yet invoked.(7)
Failure by the arbitral tribunal to manage the proceedings properly may constitute a ground for challenge, at least when the failure is of a material nature. This may include failure to inform the parties that a legal rule not referred to by the parties will be considered by the arbitral tribunal.(8)
City Säkerhet concerned Swedish parties and the applicable law was Swedish. It does not follow from the court's reasoning that the outcome would have been the same if it had been an arbitration with foreign parties or applicable foreign law. In the preparatory works to the Arbitration Act it is stated that when determining the mandate of the arbitrators in international arbitration it should be taken into consideration that the parties may come from jurisdictions where the principle of jura novit curia does not apply.(9)
It has been stated in legal literature that it is doubtful if jura novit curia is applicable in international commercial arbitration conducted in Sweden and that an application by the arbitrators of legal rules not referred to by the parties may constitute a ground for challenge of the award in accordance with Section 34(2) of the Arbitration Act, on the basis that the arbitrators exceeded their mandate.(10)
However, it has also been stated that the principle of jura novit cura – in the meaning that arbitrators are not confined to the legal qualifications and arguments that the parties have made in the proceedings as applied to the invoked facts – is applicable in international arbitrations seated in Sweden, unless the parties and the arbitrators have agreed otherwise. This means that the tribunal would not exceed its mandate if it bases the award on a legal rule not referred to by any of the parties. However, the arbitrators must not violate the adversarial nature of the proceedings, meaning that the arbitral tribunal should normally give the parties an opportunity to present their view on the legal issue. In case it fails to do so, the award could potentially be challenged due to a procedural error.(11)
Consequently, it is not yet settled whether the reasoning in City Säkerhet also applies in international arbitration in Sweden.
This article was first published by the International Law Office, a premium online legal update service for major companies and law firms worldwide. Register for a free subscription.
For further information on this topic please contact Fredrik Norburg or Ulrika Anderson at Norburg & Scherp by telephone (+46 8 420 035 00) or by email (email@example.com or firstname.lastname@example.org). The Norburg & Scherp website can be accessed at www.norburgscherp.se.