Commercial Litigation in State Courts – Why Arbitration is Not Always the Better Choice in Swiss Domestic Disputes
Manifold are the criticisms raised against the current state of commercial litigation, and the readers of this publication are well aware of them: cost, time, discovery, expensive lawyers, sluggish courts, negative publicity, burdensome depositions – there is no need to repeat the complaints here. Often alternative dispute resolution (ADR) methods are praised as the saving alternative – or, at the very least, arbitration; and arbitration practitioners (including the authors of this article) can easily list 10 decisive advantages of arbitration over court litigation.
This article tries to sing a somewhat different song, and point out that, from a Swiss perspective, there are advantages to litigating domestic disputes in national courts which should not be overlooked.
Arbitration has a longstanding tradition in Switzerland. Swiss courts are known to respect and enforce arbitration agreements and awards. As a general rule, any pecuniary dispute may be submitted to arbitration; domestic arbitration is available for all claims that parties may freely dispose of.
However, in spite of this traditionally very arbitration-friendly environment, Swiss parties in domestic relationships only rarely include arbitration clauses in their contracts. Rather, they submit potential disputes to the jurisdiction of the competent local courts – in commercial matters this is most frequently one of the existing commercial courts, such as that in Zurich, which has an excellent reputation. The only exception to this phenomenon is large M&A transactions, where often the documentation is in English and highly influenced by the Anglo-Saxon legal culture, and arbitration is chosen even in domestic cases.
How can this be explained? Why do the well-known advantages of arbitration not play out in domestic contracts in Switzerland? The reason is relatively simple: court litigation is, unlike in other countries (and definitely unlike in international matters) often the better alternative available to parties to domestic disputes.
Civil procedure in Switzerland is governed by the Swiss Code of Civil Procedure (CPC) enacted in 2011. This statutory basis in itself is a first advantage of court litigation: contrary to the often-praised flexibility of arbitration, a statute such as the CPC provides for a stable framework, and the case law developed by the courts of different levels further increases the transparency of the applicable rules. This eliminates (negative) surprises, and increases foreseeability for all parties and their lawyers. While the court or judge has the same power as an arbitrator to adjudicate the substance of the dispute, there is less discretion and freedom to structure the proceedings.
Of course, the courts have the power to direct and efficiently manage the proceedings pending before them, and they do so. Swiss courts, for example, have the power to consolidate separately filed claims, to separate jointly filed actions, or to bifurcate proceedings. If factually connected claims are pending before different courts, the subsequently seized court may transfer the case to the court seized first, given the latter court’s agreement. Moreover, at any time during the proceedings, the courts have the power to facilitate an attempt at amicable settlement. All of this cannot or not easily be done in arbitration.
Already at the early stages of the enforcement of a claim, the clear structure of litigation plays out. Proceedings are commenced by the plaintiff submitting the statement of claim with the court. In Switzerland, the courts take care of the service of submissions of the opposing party, summons, rulings and other decisions. No lengthy proceedings to choose arbitrators and to agree on procedural rules; the case simply starts.
The statement of claim to be filed by the plaintiff must contain the following content: the prayers for relief, a statement of the value in dispute, a detailed account of all factual allegations and of the evidence offered for each allegation, and usually the main legal arguments on which a party relies. Contrary to arbitration, where a typical request for arbitration only contains the bare minimum in terms of factual and legal argumentation, this initial submission must be so complete as to give a full picture of the claiming party’s position. This not only facilitates the defendant’s task in terms of focusing on the dispute, but it also assists the court to pinpoint the issues of the case.
A plaintiff who fails to do his or her homework in that regard is in trouble, although parties cannot move for a summary judgment and the courts do not have the possibility to issue a summary judgment, as seen in the US for example. However, after reviewing the parties’ submissions and documentary evidence, a court can issue its judgment on the merits of the case without hearing witnesses or taking other evidence for lack of proper substantiation or if it can anticipate that the evidence offered will not be sufficient to support the plaintiff’s claims. An arbitral tribunal would not dare to do so, even in the clearest of cases.
The CPC does not provide for a pretrial discovery phase, as this is customary in common law countries. Only in specific and narrowly described circumstances is the taking of evidence as a form of preliminary measure, prior to the filing of the main claim, possible. Moreover, during the proceedings, the parties may request the production of a specific document which is in the possession of the opposing party or a third party.
Generally, proceedings before a court of first instance can be divided into the following stages:
- Presentation of the facts and legal arguments (usually in the form of two rounds of written submissions). Together with their pleadings, the parties must also file all documentary evidence and offer any other evidence (eg, witness testimony) on which they rely.
- Taking of evidence by the court to the extent that evidence other than documentary evidence has been named. Before evidence is taken, the court indicates the admissible evidence and designates the party bearing the burden of proof. Parties must name the witnesses on which they rely in their submissions. The court will then order the witnesses to appear and testify orally. Witnesses will be questioned by the court, but the parties have the right to ask additional questions. Witness statements or depositions are generally not admissible evidence. The taking of evidence takes place during an oral hearing. Thereafter, the parties may comment on the result of the taking of evidence. As a general rule, the burden of proving the existence of an alleged fact rests on the party that derives rights from that fact. The Swiss courts are free to assess the evidence.
- Third parties have a duty to cooperate in the taking of evidence, unless they can invoke a legal privilege. This includes, in particular, the duty to truthfully testify as a witness, to produce physical records where required, or to allow an examination of their person or property by an expert.
- Upon (sufficiently reasoned and specified) application by one of the parties, the court has the power to order the opposing party or a third party to produce a specific document. The court may also order witnesses to appear and testify. Moreover, as mentioned, the court will question the witnesses, which makes sure that the examinations are usually short and focused on the relevant questions. The court also appoints experts.
- Finally, the court issues the judgment.
Courts may also hold so-called instruction hearings at any time during the proceedings. Such hearings are mainly held to prepare for the main hearing or to facilitate a settlement. It is particularly the latter objective which is regularly pursued by courts such as the Zurich Commercial Court. After both parties have filed their initial, extensive submissions (statement of claim, answer), the instructing judge invites the parties to a hearing, where he or she, in an off-the-record discussion, elaborates on his or her current assessment of the case and the respective chances of success of the parties, and based thereon attempts to motivate the parties to conclude a settlement. The success rate of such hearings is remarkable; although no reliable statistics are available, it is safe to say that it is considerably above 50 per cent. The advantage of a settlement concluded after such an exercise is that the parties have had the opportunity to present their arguments, and that they see first-hand that their arguments have been taken into account and assessed by a judge who has invested considerable time to familiarise himself to the case. This process leads to a high degree of acceptance of the resulting settlement, because both parties will walk away with the impression that they have had “their day in court”, and that the result achieved in the settlement is thus one that is acceptable to them from a factual and legal perspective.
The average length of litigation before first instance courts is between one and two years in commercial cases, and approximately up to one year in simpler cases before specialist courts for labour law and for landlords and tenants matters. In complex cases, the duration of the proceedings may be longer. These averages compare rather favourably to arbitration, where even simple cases rarely take less than one year until a final award is rendered.
Court fees and attorneys’ fees are regulated by the Cantons individually. In Switzerland, litigation costs are generally reasonable. In pecuniary disputes the court and attorneys’ fees mainly depend on the amount in dispute. Other factors such as the type and course of the proceedings and the complexity of the case are also taken into consideration. Swiss courts may order a plaintiff to make an advance payment up to the amount of the expected court costs and cost and attorneys’ fees are to be compensated by the losing party. If no party fully prevails, the court will divide the costs proportionally between the parties. The applicability of a statutory fee structure applicable to both the fees of the court and the attorneys’ fees payable by the losing party (which are often lower than the actual cost incurred) adds an additional level of foreseeability. A party starting litigation (or being sued) will know in advance what its financial exposure is, and there should be no negative surprises in that regard. Moreover, the linkage of the cost allocations to the amount in dispute creates an incentive not to claim excessive amounts at the outset.
Reductions of the prayers of relief (with prejudice) are permissible at any time. Other amendments of the prayers of relief (including additional claims) are only allowed if:
(i) they are submitted with the party’s second round of pleadings;
(ii) they are subject to the same type of procedure and venue; or
(iii) the new claim is closely connected to the original action or the opposing party agrees with the amendment.
A party may notify a third party of the dispute, if in the event of losing the case the party might take recourse against or be subject to recourse by the third party. The notified third party may decide:
- not to react to the notification
- to intervene in favour of the notifying party; or
- with consent of the notifying party, proceed with the litigation in the latter’s place.
As a general rule, if the notifying party loses the case, the decision will also have effect on the notified party. The notified party’s liability will be the subject of a subsequent litigation. It is also possible for the notifying party to integrate the litigation between it and the notified party into the main proceedings. There is simply nothing in arbitration that has the same effect, and the lack of an arbitration clause basically excludes the joinder of third parties against their will.
A party violating the procedural rules risks procedural disadvantages such as the drawing of adverse inferences or a default judgment. If a third party refuses to cooperate without justification, the court may order disciplinary fines or adopt other measures. Furthermore, disciplinary fines and criminal sanctions may be imposed for wilfully lying during the examination of the parties, or for not telling the truth while testifying. It is the experience of the authors that counsel behave in a more disciplined manner in front of courts than in arbitration.
All of the foregoing leads to advantages of litigation that for most parties to domestic contracts outweigh those of arbitration – and Switzerland, as one of the frequently chosen venues for international arbitration, sees only few domestic arbitrations.