Vue sur la Cité, le lac, les Alpes

In its decision dated 24 September 2019, the Swiss Federal Supreme Court (“SFSC“) held that a State is only bound by an arbitration clause signed by its State-owned company if the State constantly and repeatedly interferes in the negotiations and/or performance of the relevant contract (Case No. 4A_636/2018 (in German)).

Factual background

The reported dispute stems from a contract between a Turkish joint venture, as contractor, and a Libyan State-owned, but legally independent, entity for the construction of a 383-km long water pipe for the Great Man-Made River project in Libya. The contract contained an ICC arbitration clause.

Following the riots in Libya in Spring 2011, the joint venture stopped its work. At that time, about 70% of the project had been completed. In 2015, the joint venture and its participating companies initiated an arbitration against Libya and the State-owned entity. Libya contested the arbitral tribunal’s jurisdiction with regard to the claims raised against the State.

The Tribunal’s partial award

In a partial award, the arbitral tribunal partially accepted the claims against the State-owned entity but refused to accept jurisdiction for the claims against the Libyan State. In particular, the tribunal rejected claimants’ position, both under Libyan and Swiss law, that (i) the State-owned entity was a public authority or a tool of the State and therefore identical to the State and (ii) that the Libyan State had intervened in the negotiation or performance of the contract in such a way that the claimants’ could in good faith consider the State a party to the contract and bound by the arbitration clause. The arbitral tribunal relied in particular upon the Swiss Westland ruling (decision P 1675/1987 of 19 July 1988) which denied the extension of an arbitration clause entered into by a legal person established by States to such establishing States.

The claimants subsequently lodged a partial challenge of the award with the SFSC requesting a declaration that the arbitral tribunal has jurisdiction to decide on the claims vis-à-vis the Libyan State. The claimants argued inter alia that the Westland ruling is outdated.

The SFSC’s ruling

The SFSC preliminarily held that it is not allowed to correct or supplement the factual findings of an arbitral tribunal, even if they are manifestly incorrect or entail an infringement of rights. Therefore, the SFSC accepted the arbitral tribunal’s conclusions concerning the alleged State interference. The arbitral tribunal rejected any such interference and held that neither the executive branch of the Libyan government nor the state financial supervisory authority or the Prime Minister actually intervened in the negotiation, the approval or the execution of the relevant contract. Moreover, the SFSC adopted the arbitral tribunal’s findings concerning the State-owned entity’s identity. In particular, it acknowledged that the entity was not exclusively financed by the State but generated revenue from water sales and that the entity could not exercise sovereign authority.

The SFSC then stated that the arbitral tribunal correctly concluded from the Westland ruling that legal independence is recognized under Swiss law to legal persons established under public law or by States. Arbitration agreements concluded by such legal persons are thus not attributed to the controlling States. Claimants’ view that this principle has changed in subsequent case law was not accepted by the SFSC.

The SFSC referred to its previous decisions holding that a third party who constantly and repeatedly interferes in the performance of a contract with an arbitration clause shall be treated as if they had acceded to the contract and had subjected themselves to the arbitration clause. Such behavior, according to the SFSC, indicates the third party’s intention to become a party also to the arbitration clause. According to the binding findings of the arbitral tribunal, there were however no factual circumstances that could indicate an interference by the Libyan State in the contractual relationship from which the claimants could have deduced in good faith the State’s accession to the arbitration clause contained in the contract. The SFSC also observed that the authoritarian government of Libya at the  time of the conclusion of the contract and the importance of Great Man-Made River project to the Libyan government are not sufficient to establish a legitimate expectation of the claimants on the State’s intention to directly enter into certain contractual commitments.

The SFSC has thus basically confirmed the established case law which had been recently applied also to the accession of a third party to an arbitration clause under the New York Convention (access the GAN summary here).