KMU Magazin No. 3, March 2024 How Arbitration actually works
"Arbitration before litigation" is firmly anchored in the Swiss culture of dispute resolution. In principleproceedings may only be initiated after the parties have attempted mediation. But what exactly does conciliation mean? What rules apply and what are the challenges?
Article 197 of the Code of Civil Procedure (ZPO) briefly and concisely regulates the conciliation obligation: "The decision-making procedure shall be preceded by an attempt at conciliation before a conciliation authority."
If a claimant initiates court proceedings without an attempt at conciliation, the court may not hear the claim.
Numerous exceptions
However, there are numerous exceptions to the arbitration obligation. On the one hand, these are intended to prevent procedural idle time. For example, the law assumes that disputes that have to be brought directly before a specialized court, such as antitrust proceedings or, in some cantons, commercial disputes, should not first take a detour via the general conciliation authority. The same applies to divorce proceedings. However, the exception to the arbitration obligation does not mean that no attempt at settlement is made in these cases. The Zurich Commercial Court, for example, is famous (notorious) for the high rate of settlements that are reached under the guidance of the competent judges.
On the other hand, there are proceedings in which mediation would actually frustrate the objective of the proceedings, especially if time is of the essence. These include matters in summary proceedings, such as the attachment of a defaulting debtor's assets or other precautionary measures. These proceedings are also exempt from mandatory arbitration.
In addition to generally applicable exceptions, there is the possibility for the parties to jointly waive the arbitration procedure for amounts in dispute of CHF 100,000 or more. In addition, a claimant can unilaterally waive arbitration if the defendant is domiciled or resident abroad or their whereabouts are completely unknown.
Initiation of the procedure
Arbitration proceedings are initiated by submitting a request for arbitration to the competent arbitration authority. The cantons can regulate these responsibilities themselves. In the cantons of Lucerne, Zurich and Zug (as in most other cantons), the justices of the peace in the relevant judicial district are responsible. The request for arbitration does not have to meet high standards. It is precisely the aim of arbitration that it can be initiated by laypersons.
There are specialized arbitration authorities for certain areas of law. These include disputes arising from the renting and leasing of residential and commercial premises or disputes under the Gender Equality Act. Most cantons also have separate arbitration authorities for disputes arising from the employment relationship.
For example, the "Rent and Lease" arbitration authority is made up of a chairman and a representative of the tenants' association and a representative of the homeowners' association. This ensures that all interest groups are equally represented.
Legal effects
The initiation of arbitration proceedings is associated with important legal consequences.
On the one hand, arbitration leads to the so-called “lis pendens” of the dispute, which means that the same matter cannot be brought before another court in Switzerland or abroad. In addition, a request for arbitration interrupts any current limitation periods. The aim of arbitration is to resolve the matter in dispute as quickly as possible. Article 203 ZPO therefore stipulates that the arbitration hearing should take place within two months of receipt of the request or after the conclusion of any exchange of documents. The actual arbitration hearing is relatively informal. Ideally, the justice of the peace can initiate a constructive discussion between the parties, which ultimately leads to a resolution of the dispute.
Obligation to appear
In order to fulfill the actual purpose of mediation, the out-of-court settlement of disputes, the parties must appear in person at the arbitration hearing.
If a party wishes to take legal counsel with them, this is permissible, but only in the capacity of accompaniment and not as representation. In the case of natural persons, it is clear what is meant by "personal appearance". In the case of legal persons, however, uncertainties repeatedly arise because, by definition, a legal entity can only act through its representatives. The revised ZPO, which will come into force on January 1, 2025, therefore specifies that a legal entity must either be represented by a body registered in the commercial register or by a person with commercial power of attorney (Art. 462 CO).
The authorized representative must also be authorized to conduct the proceedings and conclude a settlement and be familiar with the subject matter of the dispute. A purely civil authorization, for example of an employee, is therefore not sufficient. There are exceptions that release you from the obligation to appear in person. Those who do not have to appear in person and can be represented include those who are domiciled outside the canton or abroad or who are unable to attend due to illness, age or other important reasons. In the doctrine it is whether the criterion of domicile outside the canton or abroad also applies to legal entities, as they do not have a domicile. According to the prevailing doctrine, this is the case, as the legal entity's place of business can be assumed by analogy.
However, an explicit decision by the highest court is still pending. It is therefore advisable to attend the arbitration hearing in person to be on the safe side in the event of a forfeiture period. The circumstance of "illness, age or other important reasons" only applies to legal entities by analogy if no other body is available.
If a party does not appear in person or is not represented where representation would be possible, default is assumed. The further procedure depends on which party is in default. If the claimant is in default, withdrawal of the request for arbitration is assumed. If the defendant defaults, the proceedings continue as if no agreement had been reached, i.e. the authorization to sue is issued. In order to counteract unexcused absences as far as possible, the revised ZPO explicitly provides that a defaulting party can be fined up to CHF 1,000 beginning January 1, 2025.
Result of the hearing
If the parties reach an agreement, the arbitration authority will record a settlement, an acknowledgement of the claim or an unconditional withdrawal of the claim. These minutes are signed by the parties and have the effect of a legally binding decision. This means that the matter in dispute is deemed to have been adjudicated and may not be judged again in any court.
If no agreement is reached, the plaintiff will be issued with the authorization to sue. This entitles the claimant to bring an action before the competent court of first instance within (as a rule) three months. The arbitration authority can also submit a proposal for a judgment to the parties. The current limit of CHF 5,000 for the amount in dispute will be raised to CHF 10,000 with the revised ZPO. If the parties accept the proposed judgment, it will also have the effect of a legally binding decision. If they reject it within 20 days, the dispute is deemed to be unresolved and the action is granted.
Costs
Arbitration is generally subject to a fee. Depending on the amount in dispute and the canton, costs of around two hundred to a maximum of two thousand francs can be expected. Disputes arising from rent and lease of residential and business premises or employment law disputes are exempt from the obligation to pay costs, whereby the latter only up to a value in dispute of CHF 30,000. If no agreement is reached, the costs are temporarily imposed on the plaintiff, whereby a different allocation of costs is possible in subsequent court proceedings.
In contrast to court proceedings, no party compensation is awarded in arbitration proceedings, regardless of the area of law. Therefore, if a party wishes to be accompanied by legal counsel, they must bear the corresponding costs themselves.
Approaching arbitration with an open mind
The above explanations show that arbitration is not rocket science, even for non-experts. The challenge does not lie in procedural obstacles, but rather in the mindset of the parties.
People who are confronted with arbitration, whether as plaintiff or defendant, are often skeptical about the arbitration process. As the dispute usually drags on for several weeks, if not months or even years, by the time arbitration takes place, it is all too often perceived as an additional burden rather than an opportunity. This reduces the chances of an amicable settlement being reached.
If, on the other hand, the parties manage to approach the arbitration process with an open mind and a willingness to compromise, possibly together with their lawyers, they increase their chances of reaching an amicable agreement, which allows them to invest financial, time and emotional resources in new projects.
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