Dutch Supreme Court upholds CHF 402 million arbitral award in proceedings between Tiffany & Co. and Swatch

The Dutch Supreme Court delivered judgment in the annulment proceedings initiated by Tiffany & Co. against an arbitral award in which it was ordered to pay CHF 402 million (EUR 356 million) to Swatch. That judgment made the arbitral award final. In this blog, Dutch litigation lawyer Onno Hennis discusses the case in more detail.

Joint venture under Dutch law

In 2006, the American jewellery producer Tiffany & Co. and the Swiss watchmaker Swatch entered into negotiations about cooperation in the area of luxury watches. The idea was to develop and market watches together. To this end, the parties entered into several agreements, including the Watch Trademark and Supply Agreement (WTSA). The WTSA was subject to Dutch law, and the parties agreed on NAI arbitration for any disputes.

Arbitration proceedings in the Netherlands

It soon became clear that the cooperation was not successful. For this reason, Swatch initiated arbitration proceedings in 2011. It claimed that Tiffany & Co. had made insufficient efforts to promote the sale of the watches and claimed compensation for the damage it had suffered as a result. The arbitrators ruled that Tiffany & Co. had indeed breached its contractual obligations and awarded damages of EUR 356 million.

Annulment of the arbitral award by the District Court of Amsterdam

Tiffany & Co. did not leave it at that. They instituted annulment proceedings before the District Court of Amsterdam. Such proceedings usually have little chance of success. In the Netherlands, arbitral awards are in principle respected. The threshold for the court to annul an arbitral award is high. The District Court may only annul awards under certain circumstances defined explicitly by law. Tiffany & Co. still decided to try it.

Ground for annulment: the arbitrators exceeded their authority

One of the grounds for annulment put forward was the claim that the arbitrators had exceeded their authority. The WTSA stated the following: “The arbitral tribunal may not change, modify or alter any express condition, term or provision of this Agreement, and to that extent the scope of its authority is expressly limited.” Tiffany & Co. argued that, contrary to this provision, the arbitrators had ruled that Tiffany & Co. was subject to certain concrete obligations that were not (explicitly) included in the WTSA.

Best-efforts obligation based on the Business Plan

The arbitrators had based their decision on another article in the WTSA which read as follows: “Watch Company will use reasonable, good faith efforts to develop and promote the Collection in order to accomplish the Business Plan […]’”. The arbitrators considered that this best-efforts obligation in combination with the sales targets as formulated in the Business Plan resulted in some specific obligations, such as stocking watches and instructing personnel. In the opinion of the arbitrators, Tiffany & Co. had done too little.

Obligations on Tiffany & Co?

Tiffany & Co. also argued that it was not subject to the best-efforts obligation because according to the text of the provision only the JV company was obliged to do so. However, the same provision also gave the meaning of the best-efforts obligation as follows: “The term ‘reasonable, good faith efforts’ will be interpreted with reference to the agreed goals of the parties”. The arbitral tribunal ruled on the basis of this reference to ‘the parties’ that the best-efforts obligation also rested on Tiffany & Co. as a contracting party to the WTSA.

Addition or explanation?

Tiffany & Co. argued in the annulment proceedings that the tribunal had construed a noncontractual obligation and was not authorised to do so. Tiffany & Co. stated that the parties had explicitly restricted the arbitral tribunal in its authority. According to Tiffany & Co., they were not allowed to add further stipulations to the agreement if the legal consequences were sufficiently apparent from explicit provisions. The District Court agreed and annulled the arbitration award.

Appeal in the Netherlands

Swatch then appealed. In the appeal, Swatch stated that there had been no unauthorised addition to the agreement, but that the Arbitral Tribunal had merely interpreted the agreement between the parties. This did not mean that the authority that the parties had awarded to the arbitrators would have been exceeded. Applying the Haviltex formula and after an extensive analysis of the conclusion of the agreement, the Court of Appeal concluded that the provision in question could indeed be interpreted to the detriment of Tiffany & Co.

Restraint of the Dutch court

The Court of Appeal also considered that the court should exercise restraint in assessing whether an arbitral award should be upheld. Annulment proceedings should not be used as an appeal in disguise. Arbitration is precisely a procedure in a single instance. Therefore, the court should only intervene in extraordinary cases by annulling the arbitral award. The court of appeal ruled that this was not such an extraordinary case.

Supreme Court dismissed the appeal in cassation

Tiffany & Co. then went to the Supreme Court. This was to be expected given the considerable financial interests. However, it was an open-and-shut case for the Supreme Court. It dismissed the appeal in cassation under section 81 of the Judiciary (Organisation) Act. The advocate-general again made it clear in his conclusion that the regular courts should in principle not intervene in arbitral awards in order to implement a well-functioning arbitration procedure. This is understandable and significant. This award again underlines the respect for arbitral awards under Dutch law.