SVEA COURT OF APPEAL INTERLOCUTORY JUDGMENT Case No. 24 January 2011 T 2418-07 Division 020103 Stockholm Page 1 (10) CLAIMANT Tiscali International B.V. Papendorpseweg 83 3503 RB Utrecht The Netherlands Counsel: Advokaterna Jonas Benedictsson and Stefan Brandt Baker & McKenzie Advokatbyrå KB P.O. Box 5719 114 87 Stockholm RESPONDENT Yarps Network AB, Reg. No. 556541-5360 c/o Ranby Björklund AB P.O. Box 414 111 73 Stockholm Counsel: Advokaterna Jakob Falkman and Gustaf Swedlund Advokatfirman Hammarskiöld & Co AB P.O. Box 2278 103 17 Stockholm MATTER Challenged arbitral award CHALLENGED ARBITRAL AWARD Arbitral award rendered in Stockholm on 28 December 2006, before the Arbitration Institute of the Stockholm Chamber of Commerce case No. V (006/2006) JUDGMENT OF THE COURT OF APPEAL The Court of Appeal declares that the arbitrators have not exceeded their mandate and rendered an arbitral award over more/or something other than for what the parties have in due order motioned and referenced; and that during the proceedings no procedural error was committed, which was not caused by the parties, that likely affected that outcome of the case. Document ID 919397 Postal Address Address Telephone Telefax Opening Hours Box 2290 Birger Jarls Torg 2 08-561 670 00 08-561 675 09 Monday Friday 103 17 Stockholm 08-561 675 00 9:00 am 3:00 pm e-mail: svea.hovratt@dom.se www.svea.se
Page 2 BACKGROUND Tiscali International B.V. (Tiscali), with its seat in the Netherlands, supplies voice and other transit services to businesses in, amongst other places, Europe. Yarps Network AB (previously Spray Network AB, hereinafter Spray), with its seat in Stockholm, is a media company that provides interactive consumer services. On 27 August 2004, Tiscali and Spray entered into a share purchase agreement (the Agreement) pursuant to which Spray acquired all Tiscali s shares in the Swedish subsidiary Tiscali AB. The transaction was completed on 30 September 2004. The Agreement contains an arbitration clause. On 24 January 2006, Spray requested arbitration at the Arbitration Institute of the Stockholm Chamber of Commerce against Tiscali. Spray claimed that Tiscali should pay to Spray SEK 4,932,000 plus interest and compensation for litigation costs. The claim was based on compensation for double entries of revenue in Tiscali AB s accounting during April-September of 2004. The double entries amounted to a breach of the warranties set out in the Agreement and entailed a loss for Spray, since Tiscali AB s revenues had to be decreased by the corresponding amount. Spray relied on Section 9.1 of the Agreement, which provides that the purchaser in cases of the seller s breaches of warranty as sole compensation has the right to claim monetary compensation in an amount equal to all costs or losses, deficiencies or expenses as well as reasonable litigation costs that have been incurred. The arbitral tribunal (advokaterna C.S, chairman, B.T. and L.B., dissenting) rendered its arbitral award on 28 December 2006. Through the arbitral award Tiscali was ordered to pay the claimed amount to Spray. Tiscali has challenged the arbitral award, claiming that the arbitral award rendered between the parties shall be annulled because the arbitrators exceeded their mandate, or in the alternative, that they committed a procedural error that affected the outcome of the case. Initially, Spray objected to Tiscali s case, and moved that Tiscali s case should be dismissed because Tiscali s right to challenge the arbitral award had lapsed, or, in the
Page 3 alternative, that it had no rightful interest in challenging the arbitral award because it had paid the amounts without reservations. As a second motion, Spray moved that the claims should be rejected on the same grounds. Spray further objected that no excess of mandate or other procedural errors had occurred during the arbitration proceedings. On 7 April 2008, the Court of Appeal decided that the implications of Tiscali s payment in accordance with the arbitral award should not be tried as a procedural impediment, but as part of the main case. Spray reverted to a previously presented motion that the issue of whether Tiscali s right to challenge the arbitral award had lapsed should be tried in an interlocutory judgment. Tiscali objected to this. On 10 October 2008, the Court of Appeal rejected the motion for an interlocutory judgment. A date for a main hearing was set, but the hearing had to be cancelled on short notice. Hereafter, Spray presented another motion for an interlocutory judgment, now with respect to Tiscali s grounds for the challenge proceedings. Tiscali has not objected to this. The Court of Appeal finds that it is beneficial to review Tiscali s grounds for the challenge proceedings through an interlocutory judgment. MOTIONS Tiscali has moved that the Court of Appeal shall determine that the arbitrators have exceeded their mandate and rendered an arbitral award in excess of/or on other facts than what the parties have in due order motioned and referenced; and that during the arbitration proceedings, without being caused by the parties, procedural errors were committed that likely affected the outcome of the case. Spray has objected to Tiscali s claim.
Page 4 THE PARTIES RESPECTIVE GROUNDS Tiscali The arbitrators have exceeded their mandate by rendering an arbitral award in excess of/or over other facts than what the parties in due order had claimed or referenced (item 2 of the first paragraph of Section 34 of the Swedish Arbitration Act (SFS 1999:116) (the LSF)). The arbitral tribunal has reinterpreted Spray s case from being a claim for damages incurred as a result of a cost to some sort of a contractual adjustment mechanism. Hereby the arbitral tribunal added a circumstance which had not been referenced, which entails that the arbitral tribunal exceeded its mandate. During the arbitration proceedings, without it being caused by the parties, a procedural error was committed that likely affected the outcome of the case (item 6 of the first paragraph of Section 34 of the LSF). The procedural error comprises the above and also the following. In any event, the arbitral tribunal based its decision on a legal framing entirely different from the legal framing of the parties. Because of this, the arbitral tribunal ought to have communicated its differing legal framing to the parties and granted them the opportunity to present their arguments on the issue. This did not happen, and as a result, the arbitral tribunal has failed to lead and guide the proceedings, which affected the outcome of the case. Spray The arbitral tribunal has not exceeded its mandate. Spray also disputes that any procedural errors have been committed. Without doubt, no procedural errors that likely have affected the outcome of the case were committed. FURTHER DETAILS ON THE GROUNDS The parties have provided further details in support of their respective claims as follows.
Page 5 Tiscali Exceeding mandate Spray s claim in the arbitration proceedings was for compensation/damages based on incorrect double entries of revenues. According to Spray, the incorrect double entries resulted in a cost, which entailed a loss for Spray in the claimed amount. There are several instances of clear wordings in Spray s submissions in the arbitration proceedings establishing that Spray s case was a case of claiming damages, against which Tiscali defended itself. During the proceedings Tiscali objected to Spray s claim that the incorrectly booked revenues had caused any damage or loss for Spray. It is particularly evident in Tiscali s statement of defense, based on Spray s submissions, that Tiscali focused on the allegations on causality and damage. These issues were of pivotal importance to the case, and were the main focal point of the submitted evidence. In the introduction to the arbitral award it was noted that the question of whether Spray had suffered any damage or loss was not a deciding factor, and that the presented claim was not for non-contractual damages, but rather a contractual adjustment mechanism devised to adjust errors in, amongst other things, the accounting. From the reasoning of the arbitral tribunal it is clear that this was what it intended to review. Thus, the arbitrators have opted to reconstruct Spray s claim for damages into a claim for breach of contract in which Tiscali s liability is strict and for which damage or loss is not required. However, a precondition to granting Spray s claims is causality between the alleged breach of contract and the incurred damage. Section 9.1 of the Agreement provides that causality is required, and the parties based their cases on this fact. If Spray had based its case on breach of contract in order to be awarded compensation covering a breach of warranty, then Tiscali would have constructed its defense thereon. In such a case, the interpretation of the Agreement would have been pivotal. Spray has not maintained that Spray has a contractual right to compensation, irrespective of whether any breach of a
Page 6 particular provision had been committed or any negligence had occurred and/or irrespective of whether any cost, loss or damage had arisen. The requirement that it cannot be excluded that the excess of mandate has affected the outcome of the case is met. Already the fact that a dissenting opinion was held indicates the difficulties in interpreting the Agreement. The outcome of a review based on entirely different factual circumstances cannot be held for certain. Procedural error The arbitrators had the opportunity to avoid the arisen situation. The arbitrators, however, neglected to try the claim presented by Spray as well as to review the case on the basis of the grounds referenced by Spray and to sufficiently guide the proceedings. Jurisprudence provides that the arbitrators are obliged to lead and guide the proceedings in the same manner as public courts in contractual disputes. This was neglected and this procedural error has likely affected the outcome of the case. The dissenting opinion indicates the difficulties in interpreting Section 9 of the Agreement. Spray Spray maintained in the arbitration proceedings that there was causality between the exaggerated revenue (the breach of warranty) and the loss that the decrease of the exaggerated revenue entailed. In the arbitration proceedings, Tiscali attested to the amount of SEK 4,882,000 and that it had been incorrectly booked as revenue in the accounting of Tiscali AB. However, Tiscali disputed that the exaggerated revenue had caused Spray any damage or cost. The objection was based on a report from the auditing firm Deloitte, which established that there were other inaccuracies in Tiscali s accounting that compensated for the exaggerated revenue. Tiscali maintained that these positive deviations should be taken into consideration, which would exclude Spray having incurred any damage. It would have been difficult to come up with any other objections to the causality since the exaggerated revenue in the accounting was not disputed. Thus, Tiscali did not maintain
Page 7 that the negative adjustment in Tiscali s accounting was not in and of itself caused by the exaggerated revenue. Spray disputes that the arbitral tribunal added a circumstance which had not been referenced in the grounds for the arbitral award. The arbitral tribunal found that Tiscali s objection that positive deviations should be taken into account was not supported by the Agreement. The arbitral tribunal has provided its reasoning for its rejection of the objection and has sufficiently reviewed the issue of causality. Tiscali has misinterpreted a line of reasoning in the grounds for the arbitral award regarding the contractual nature of the claim based on the breach of warranty. Spray maintains that the first sentence of the arbitrators statement shall be read with a focus not on the word caused but rather on the words damage or cost. This finding by the arbitrators states that it is not entirely deciding whether Spray has incurred damage or a cost. If the sentence is read with this focus, then there is no statement in the grounds of the arbitral award that would imply that the arbitral tribunal has neglected to review whether causality could be established. The statement can also be seen as reasoning on whether any importance can be attached to the fact that the word damage, which in the opinion of the arbitral tribunal strictly means non-contractual damages, had been used within the scope of a claim that was solely based on contractual relations. The arbitral tribunal held, in the relevant paragraph, that it was limited to a review based on the provisions of the Agreement on warranties, breaches of warranties and the applicable sanction upon breaches of warranties. If the Court of Appeal would find that Tiscali has sufficiently established that the arbitral tribunal granted Spray s claim without basing it on one of the circumstances referenced by Spray (here causality), then this does not entail anything but the fact that the arbitral tribunal nevertheless rendered its award within the framing set up by Spray s claims and references.
Page 8 With respect to the question of deficient guidance of the proceedings, Tiscali s only objection to Spray having suffered any loss was that positive deviations balanced out the exaggerated revenue. Since Tiscali limited itself to this objection and that Spray during the arbitration proceedings noted Spray s opinion on the objection, any further guidance by the arbitral tribunal would have been inappropriate. There is nothing to indicate that the negative adjustment to the accounting was not caused by the exaggerated revenue. With the exception of the positive deviations, the causality was not disputed and the outcome of the case would likely have been the same irrespective of any particular guidance by the arbitral tribunal. GROUNDS OF THE COURT OF APPEAL The investigation The interlocutory judgment has based on item 5 of the first paragraph of Section 18 of Chapter 42 compared to Section 1 of Chapter 53 of the Swedish Code of Judicial Procedure been rendered without a main hearing. Documentary evidence has been referenced. Tiscali has also referenced a legal opinion issued by Professor Bengt Lindell. The finding of the Court of Appeal Tiscali has maintained that the arbitral tribunal has exceeded its mandate by adding a circumstance, which was not referenced by Spray. As understood by the Court of Appeal, Tiscali has based its opinion mainly on the following wording of the grounds of the arbitral award set out in Section 5.2 (according to the certified translation submitted to the court): The arbitral tribunal finds that the issue of whether the Claimant has been caused damage or a cost is not a deciding factor, the claim presented in these arbitration proceedings are not strictly speaking for damages of a noncontractual nature, but rather a contractual adjustment mechanism to deal with inaccuracies in, amongst other things, the accounting. Therefore, the arbitral tribunal will review the requirements of this mechanism with respect to inaccurate accounting and the resulting rights and obligations of the Parties, having regard to the applicable provisions of the agreement.
Page 9 The parties have had differing opinions on the interpretation of the above statement. The Court of Appeal s view is that the grounds must be read against the background of the Parties respective cases in the arbitration proceedings. From the arbitral award, and the sections of the submissions referenced by the parties before the Court of Appeal, it is clear that the issue of insufficient causality was for obvious reasons not discussed at length in the arbitration proceedings. From the arbitral award it is further clear that the parties agreed that an amount of SEK 4,882,000 had been incorrectly booked as revenue. Tiscali has not disputed that the ensuing negative adjustment of the revenue, which Spray maintained caused damage, was caused by the exaggerated revenue. The statements in Tiscali s statement of defense (Chapter B, Sections 1.1-1.2), which Tiscali has particularly referenced as targeting the issue of causality and damage, are blank objections to the fact that Spray had suffered any damage or incurred any cost. With the exception of positive deviations, Tiscali does not appear to have further fleshed out its objections. Accordingly, the grounds, with the exception of the aforementioned objection, do not contain any more detailed reasoning on the causality between cause and damage. In the opinion of the Court of Appeal, the wording of Section 5.2 does not in any clear way indicate that the arbitral tribunal has understood Spray s claims in a manner not referenced in the proceedings. However, the statement does clarify that the arbitral tribunal s review would be based on the applicable provisions of the Agreement. Following the statement in Section 5.2, the arbitral tribunal proceeds to review the disputed issues of the case based on the arguments of the parties, e.g. the objection based on positive deviations. Against this background, it would be difficult to infer that the above statement shows that the arbitral tribunal reinterpreted Spray s claim and considered something other than the grounds that were referenced in the proceedings. It is substantially more reasonable to understand the statement as a reflection on that the claim was not for non-contractual damages, which it undisputedly was not, and that the review of the arbitral tribunal as a result would be based solely on the provisions of the Agreement. Thus, the Court of
Page 10 Appeal finds that neither the statement nor the grounds in other parts can be interpreted to support the claim that the arbitral tribunal has added circumstances that had not been referenced. As a result, no excess of mandate or procedural error has been established in this regard. Tiscali has further maintained that the arbitral tribunal has committed a procedural error by not sufficiently guiding the proceedings. As noted above, the arbitral tribunal cannot be deemed to have added any circumstance that had not been referenced. For the same reasons, the Court of Appeal finds that it has not been established that the arbitral tribunal has based its reasoning on another legal framing than that of the parties. Already from this conclusion, it cannot be held that the arbitral tribunal has insufficiently guided the proceedings. In sum, the Court of Appeal finds that the questions whether the arbitral tribunal has exceeded its mandate and rendered its award over more/and or something other than what the parties in due order have motioned and referenced, and whether during the proceedings, without being caused by the parties, any procedural errors were committed that likely affected the outcome of the case shall be answered in the negative. APPEAL The second paragraph of Section 43 of the Swedish Arbitration Act (SFS 1999:116) provides that the Court of Appeal may only be appealed if it is deemed important for the correct application of the law that an appeal is reviewed by the Supreme Court. The Court of Appeal finds that no such grounds are at hand and does not permit appeals of this judgment. [ILLEGIBLE SIGNATURES] The decision has been made by: Senior Judge of Appeal K.B., and Judges of Appeal M.E. (reporting Judge of Appeal) and A-K.W. Unanimous.