National Iranian Oil Co. v. State of Israel, Judgment No. 4A_146/2012 (2013)

Facts

  • The National Iranian Oil Company (NIOC) and the State of Israel entered into a contract for NIOC to use Israeli territory to deliver oil.
  • The contract contained an arbitration clause requiring each party to appoint one arbitrator; if the two arbitrators could not settle the dispute or agree on a third arbitrator, the President of the Paris Chamber of Commerce would appoint the third arbitrator.
  • After a dispute arose, NIOC initiated arbitration and appointed its arbitrator, then requested Israel to appoint its arbitrator.
  • Israel did not appoint an arbitrator and objected to proceeding to arbitration.
  • NIOC sought court assistance in France, and a French court ultimately appointed an arbitrator on Israel’s behalf.
  • In the arbitration (seated in Switzerland), Israel contested the tribunal’s jurisdiction and argued the tribunal was not validly constituted because Israel itself had not appointed its arbitrator.
  • The arbitral tribunal issued a partial award holding that the French court’s appointment was proper and that Israel could not defeat arbitration by refusing to appoint an arbitrator simply because the clause did not spell out a default procedure.
  • Israel filed an appeal to the Swiss Federal Supreme Court seeking annulment of the partial award and arguing the parties intended that, absent an express fallback mechanism, arbitration would not proceed if a party failed to appoint its arbitrator.

Issues

  1. Whether the arbitral tribunal was irregularly constituted (Swiss PILA art. 190(2)(a)) because Israel’s arbitrator was appointed by a French court after Israel refused to appoint one.
  2. Whether the arbitration clause’s silence on a default mechanism for non-appointment meant the parties intended that arbitration would not occur if a party refused to appoint its arbitrator.
  3. Whether recognizing the French court’s appointment was inconsistent with the parties’ agreed appointment method or with basic procedural fairness (including the right to be heard, Swiss PILA art. 190(2)(d)).

Decision

  • The Swiss Federal Supreme Court dismissed Israel’s appeal and refused to annul the partial award.
  • The court held that the tribunal was properly constituted despite the French court’s appointment of an arbitrator for Israel.
  • The court rejected Israel’s reading of the arbitration clause as permitting a party to stop arbitration by declining to appoint an arbitrator.
  • The court found no procedural defect warranting annulment under the limited grounds in Swiss PILA art. 190(2).

Legal Principles

  • Under Swiss international arbitration law, an award may be set aside for irregular constitution of the tribunal only within the narrow framework of Swiss PILA art. 190(2)(a).
  • An arbitration agreement providing for arbitration and party appointments is generally interpreted to give effect to the agreement to arbitrate; a drafting silence on default appointment does not normally create a right to block the process by non-cooperation.
  • A party that fails to perform its agreed role in constituting the tribunal (such as appointing an arbitrator) may prompt judicial assistance to prevent the arbitration agreement from being rendered ineffective.
  • Court intervention to complete tribunal formation—where a party’s refusal would otherwise prevent access to arbitration—can be compatible with the arbitration agreement and does not, by itself, make the tribunal improperly constituted.
  • The Swiss Federal Supreme Court’s review in annulment proceedings is confined to the statutory grounds in Swiss PILA art. 190(2) and does not permit a broad re-litigation of the tribunal’s contractual interpretation or case management.
  • A right-to-be-heard challenge (Swiss PILA art. 190(2)(d)) requires a showing of a material procedural denial; disagreement with the tribunal’s interpretation of the clause is not enough.

Conclusion

National Iranian Oil Co. v. State of Israel (Judgment No. 4A_146/2012) confirms that, under Swiss law, an arbitration clause is not defeated by one party’s refusal to appoint an arbitrator, and that judicial assistance—here, a French court appointment—may validly complete tribunal constitution without triggering annulment under Swiss PILA art. 190(2).