Bifurcation – More risk than reward?

Gernandt & Danielsson look at the recent trend of bifurcation in Swedish litigation and arbitration

Like most other legal practices, arbitration and litigation are sensitive to trends. Arbitration even more so, due to its flexibility and dispositive nature compared to the many times rigid and robust procedural codes that – for better or for worse – tend to bar more creative approaches from the courts or counsel.

In recent years, bifurcation of disputes has become trendy in Swedish litigation as well as Swedish domestic and international arbitration. Many times, it is presented as a cost-efficient way to resolve the dispute or as a means to refine and streamline the case in order to put focus on the relevant issues. Although it is easy to be caught in the flow, old apprehensions as well as recent experiences, justify that the matter of bifurcation be addressed with due caution and diligence.

One dispute, two cases – declaratory reliefs and orders

A claimant can achieve a form of bifurcation by first bringing an action with a request that the court declare that there is a legal relationship, eg, an obligation to deliver or pay, and then, if the first request is successful, request that the court order the respondent to perform. In this manner, issues relating to the existence of an obligation as such will generally be addressed in the first case and issues relating to the quantification of the obligation will be addressed in the second case. Through this approach, the dispute will be divided into two separate proceedings before two differently composed courts or arbitral tribunals (assuming that the same arbitrators are not engaged).

Under the Code on Judicial Procedure, a request for declaratory relief is only allowed if it concerns uncertainty about a legal relationship, eg, an obligation to pay a debt, that is to the claimant’s detriment. Fulfilling these criteria is essentially a matter of designing an appropriate request for relief, which can be quite challenging at times.

‘A claimant can achieve bifurcation by bringing an action with a request that the court declare that there is a legal relationship, and if successful, request that the court order the respondent to perform.’

In addition, a request for declaratory relief requires that the court find that the action is suitable. This assessment involves a balancing of the respondent’s interest in not having to endure two proceedings and the claimant’s interest in receiving a declaration before spending resources on the matter of quantification. In general, the probability that a decision in the declaratory case is followed by additional proceedings, the respondent’s interest in being able to produce an adequate defence and the extent to which the action is intended to mitigate the claimant’s detriment, are decisive for the assessment. If, for example, in a damages dispute, the claimant requests a declaration about liability, but not causality, the action may very well be dismissed. The judgment would only cover a small portion of the entire dispute, not cure the uncertainty about the legal relationship to any greater extent and most likely be followed by a second set of proceedings. With that said, the Swedish courts’ threshold for allowing declaratory reliefs is lower than what the law implies.

The Code on Judicial Procedure is not applicable in arbitration and the Swedish Arbitration Act is silent on the criteria of declaratory reliefs. Hence, an arbitral tribunal will have a wide discretion also to decide questions about the appropriateness of allowing declaratory reliefs. Another important difference is that an arbitral tribunal can make declarations about the existence or non-existence of facts, not only legal relationships. However, the starting point is that an arbitral tribunal shall not, upon the respondent’s objection, allow a request for declaratory relief unless it is suitable, which largely depends on a similar test as to the balancing of the parties’ respective interests.

It may seem tempting to a claimant to divide a dispute into two separate sets of proceedings. The usual rationale is that the claimant is quite sure about the subject of liability, eg, a breach of contract, but uncertain if and to what extent it has actually suffered a loss and how such loss will be quantified. Therefore, the claimant seeks a declaration hoping to reach a settlement once a judgment or award has been rendered in its favour. Through this method, the claimant may hope to save time and resources by not having to fully assess and prove the quantification.

It is important to note that in a damages case, a declaratory judgment or award that does not address the matter of causality is of very low value to the claimant. Such a judgment or award will not only allow the respondent to object against the amount of the loss, but also to the issue of whether the ground for the damages, eg, the breach of contract, has actually led to a compensable loss. Conversely, if the requested declaration is very wide and encompasses every aspect of the dispute except the quantification of loss, the claimant may be faced with an objection that the relief is not suitable. The grounds would be that it is not proportional to burden the respondent with two sets of proceedings when the claimant can request an order without significant additional costs. Accordingly, a claimant who contemplates bringing an action for declaratory relief needs to consider thoroughly the scope of the proceedings.

‘In a damages case, a declaratory judgment or award that does not address the matter of causality is of very low value to the claimant.’

Furthermore, if the respondent is a sophisticated counterparty, it will seldom accept a settlement following a declaratory judgment or award unless the respondent itself has thoroughly analysed the extent of the liability. Thus, the argument that the claimant can save time and resources by not having to fully assess and prove quantification is, many times, moot.

Another risk with dividing a dispute into two separate proceedings is that the duration of the first dispute and the time between the first and the second dispute can be very long. This risk is oftentimes overlooked. At least in court litigation, an appeal could add several years to the proceedings. Persons and counsel who were involved in the first case may no longer be available when the second case begins. This will, of course, increase the time and resources required in relation to the second dispute, but can also cause that the quality of evidence of importance for both disputes may be lower in the second dispute. For new persons working with the case, the judgment or award from the first dispute will be the first and main source of information. If the judgment or award is very brief, ambiguous or sweeping, it may cause the second dispute to take another form than foreseen during the first dispute. This may add unwelcome surprises, usually to the claimant’s detriment.

One case, two judgments or awards – Separate judgments and awards

Another form of bifurcation is the splitting of one case into two or several judgments or awards. In Sweden, a separate judgment or award can either concern a separate claim, or the existence or non-existence of one or more facts which are of immediate importance to the outcome of the case, eg, that a contractual provision shall be interpreted in a specific manner, that an obligation exists, or that a claim has been subjected to a statute of limitation. The latter type of separate judgment or award can also concern how a specific issue, mainly relating to the application of law, shall be decided in connection with the adjudication of the case. By nature, a separate judgment or award does not conclude the case. Even if the court or tribunal finds that a fact of immediate importance to the requested relief is not at hand, the court or tribunal would still need to render a final judgment or award. The basic objective of separate judgments and awards is improving the procedural economy. The reasoning is that by addressing a preliminary issue that will affect the case, costs can be avoided if the result of the assessment is that the action cannot be granted.

Particularly in arbitration, separate awards concerning matters that primarily relate to the application of law have gained popularity in recent years. The theme for such awards is usually that a contractual provision relevant to the dispute should be interpreted in a specific manner or that a specific valuation method should be used when assessing a loss or a claim. Such awards differ quite significantly from the separate awards that concern the existence of non-existence of dispositive facts. The objective is not procedural economy in the sense that the award may lead to a situation where the remainder of the case can be easily adjudicated, but rather to streamline the case and direct the parties to address issues in a specific manner. A separate motive is that parties may be more inclined to settle a case on quantum if they have been provided with the right tools – in the form of the tribunal’s assessment – to do so. Although this can bring benefits from a procedural economy perspective, it is also a form of substantive procedural guidance.

‘Separate awards concerning matters that primarily relate to the application of law have gained popularity in recent years.’

Just as with dividing a dispute into two cases using declaratory relief, there are certain risks with separate awards, some of which are oftentimes overlooked. A separate judgment can be appealed under certain circumstances and a separate award can be challenged. Depending on the circumstances, an appeal or challenge can add further time to the proceedings. Through such actions, the potential procedural economic benefits of the separate judgment or award are usually lost.

If a separate award concerns the interpretation of an agreement or the application of law, there is a risk that the parties adjust their positions due to the award. If such adjustments have the effect that the separate award is no longer relevant, the intended procedural economic benefits are lost. In such situations, the proceedings have arguably become more expensive through the rendering of the separate award. Adjusted positions after a separate award can also put an arbitral tribunal in a difficult position. What should the tribunal do if the adjustments seem caused by a misinterpretation of the award? This may give rise to complicated issues relating to the permitted scope of the tribunal’s substantive procedural guidance. In addition, if the parties adopt new positions based on a misinterpretation of a separate award, there is risk that the parties perceive that the dispositive part of the final award deviates from the dispositive part of the separate award, which typically constitute grounds for a successful challenge of the final award.

Similar issues are subject to resolved and pending challenge proceedings before the Swedish courts. Without going into details of those particular cases, it is noteworthy that separate awards concerning the application of law or contract tend to have a profound impact on the course of the proceedings in larger arbitrations. The awards simply tend to adjust the direction of the parties’ argumentation, with no real effect as to the number of arguments that are made or the amount of evidence that is adduced. From this perspective, the argument that a separate award would be beneficial from a procedural economic perspective is more or less a fiction.

Is it at all worth it?

Bifurcation can have benefits. A claimant may have an interest in establishing that its counterparty is liable for a breach of contract at a stage when it has not yet suffered loss, eg, if the claim would otherwise be subjected to limitation. In such cases, it can be necessary to allow a bifurcation of a damages dispute through the use of a declaratory award. However, in light of the procedural economic risks, the approach should rightly be regarded as a resort rather than an opportunity. Similarly, a separate judgment or award can be a good tool if the case hinges on a threshold issue that is clearly separated from the other issues, for example a jurisdictional objection based on arguments and evidence separate from the case on the merits. However, many times the issues to be determined separately are entangled, eg, liability and quantum, and depend on the same arguments and evidence. The risk for entanglement will not only mean that the benefits from a procedural economy perspective will be lost, but also that the precise scope or theme for the separate award will have to be very carefully determined. If the scope and theme are not thoroughly considered and determined, the separate award may have devastating effects on the procedural economy and, even worse, affect the parties’ ability to plead their cases effectively. An unclear theme may lead to issues of interpretation and uncertainties that can affect how the cases are pleaded both before and after the separate judgment or award.

‘Bifurcation can have benefits. A claimant may have an interest in establishing that its counterparty is liable for a breach of contract at a stage when it has not yet suffered loss’

Accordingly, even though the promises of efficient and economic procedures may seem tempting, there is every reason to be cautious when the subject of bifurcation is brought up. If the matter is brought up by the court or the tribunal, the parties should remember that they most likely know more about the issue in dispute – depending on the stage of the proceedings – and assist the court or tribunal in its assessment by pointing out risks. If the matter is brought up by a party, the court or tribunal should be very mindful and make sure that the theme of the contemplated separate judgment or award does not risk leading to further disputes.