Originally published July 2009

Incidence on an arbitration of a bankruptcy law provision that provides for a termination of any arbitration agreement in case of bankruptcy.

Facts

The dispute referred to arbitration pertained to a settlement agreement executed on March 29, 2006, between Vivendi SA and other telecom entities in Switzerland and Poland on the one hand, and Deutsche Telekom AG, T-Mobile and other telecom entities in Switzerland, Poland and Germany, including Elektrim SA, on the other hand. The settlement agreement provided for arbitration pursuant to the ICC Rules of arbitration, with the seat of arbitration in Geneva. It is not specified in the Swiss Supreme Court's summary report which law governed the merits of the case.

At an early stage of the arbitration, bankruptcy proceedings were initiated in Poland against one the co-defendants in the arbitral proceeding, namely Poland-incorporated Elektrim SA. The bankruptcy proceedings, resulting in a bankruptcy ruling issued in Poland on August 21, 2007. Elektrim SA notified the arbitration tribunal of the bankruptcy ruling on September 5, 2007 and requested the termination of the proceeding against Elektrim SA. It relied on Polish bankruptcy law (PKSG), which provides in its article 142 that "any arbitration clause concluded by a bankrupt shall loose its legal effect as at the date bankruptcy is declared and any pending arbitration proceedings shall be discontinued."

The arbitration tribunal upheld Elektrim SA's jurisdictional objection and terminated the arbitration proceeding against it with an interim award of July 21, 2008. In a nutshell, relying on various local authorities on the issue, the arbitration tribunal found that Article 142 PKSG applies to all pending arbitration proceedings whether conducted in Poland or abroad, involving a company incorporated in Poland. Whilst denying that Polish law could terminate or even suspend an arbitration proceeding conducted in Switzerland in application of Swiss arbitration law, the arbitration tribunal, relying on the general conflict of law provisions applicable in Swiss law (i.e. Private International Law Act ("PILA") Art. 154 et seq.), held that the incidence of polish bankruptcy proceeding on a polish company should be governed by Polish law. In particular, it would be for Polish law to determine the incidence of such proceeding on the existence and continued capacity of a Polish company to be party to an arbitration proceeding.

Decision

The Swiss Supreme Court dismissed an annulment proceeding filed against the interim award and considered that the arbitral finding's was not based on an erroneous interpretation of Polish law.

Except for an express provision regarding State entities, Swiss arbitration law is silent on the parties' subjective capacity to arbitrate. On the one hand, the Swiss Supreme Court acknowledged that such capacity pertained to the preliminary substantive question of the legal capacity (Rechtsfähigkeit) of the parties which, in its finding, ought to be governed in an international arbitration proceeding by the law designated by the general conflict of law provisions pertaining to these matters, in the instant case PIL Act Articles 154 and 155 lit. c (law governing the legal capacity of corporate entities). Numerous scholarly writings are cited in support for such a finding (see ground 3.2 last para.). On the other hand, the Swiss Supreme Court considered that the conflict of law provision contained in Swiss arbitration law to address the issue of the validity of an arbitration agreement (Swiss law, lex causae or lex contractus whatever is more favorable to arbitration, PILA Art. 178 par. 2) does not deal with the capacity of the parties to enter and/or remain in an arbitration agreement. The Court then confirmed that the legal capacity –hence the continued capacity to be party to an arbitration proceeding– should be determined in application of the law of the place of incorporation of a legal entity as per PILA Articles 154 and 155 lit. c, in casu Polish law to the exclusion of any other law. The Court further upheld the arbitration tribunal's reasoning and finding based on Polish law, and in particular on PKSG Article 142.

Commentary

The decision of the Swiss Supreme Court (and that of the arbitration tribunal) is sound and not surprising in its outcome, i.e. its reliance on the law of incorporation to determine the legal capacity of the parties to either initiate, or take part in an arbitration proceeding. This is a matter of commonsense not least because in most instance the final award will be enforced (hence will need to be recognized) in the state of incorporation of the loosing party and that the lack of capacity to arbitrate of that party under the law of that State would be a diriment obstacle to such a recognition and enforcement. Admittedly not the prime and direct responsibility of international arbitrators, recognition and enforcement issues remain a fundamental concern of all the actors in the arbitration process, and constitute key factor to the efficiency of the arbitral process in an international context.

Problematic is the scope of PKSG Article 142, whose first part seems to deal with the termination of the arbitration agreement. From a Swiss law perspective, one could argue that such termination should be ruled exclusively by the arbitration law governing the proceeding. However, this first part of PKSG Article 142 seems not to have been argued by the parties; thus, the Swiss Supreme Court focused only on the capacity to pursue arbitration with no need to differentiate the latter from the termination of the arbitration agreement.

Surprising also is the clear-cut reasoning of the Court –traditionally rather cautious in its approach– to two controversial issues. To start with, the Court –and before it the Tribunal– determined the law governing the capacity to arbitrate of the parties based exclusively on the Swiss conflict of law provisions (i.e. PILA Art. 154 and 155 lit. c). The automatic and unreserved application of Swiss conflict of law rules is disputable. It is yet generally agreed that the Swiss Arbitration Act (Chapter 12 of the PILA) ought to be dissociated from the other chapters of the PILA, to the (disputed) exception of a few milestone provisions (e.g. PILA Art. 19 on the public policy). In particular, it is generally considered that the parties' choice of arbitration in Switzerland, hence the application of Swiss arbitration law, does not per se imply the reference to the other provisions of the PILA. Thus, an international arbitration tribunal seated in Switzerland ought to determine the relevant applicable law on the merits on the basis of the relevant provisions contained in the Swiss Arbitration Act only (in part. PILA Art. 187: law chosen by the parties, subsidiarily the law the most closely connected to the dispute) and not on the basis of the general Swiss conflict of law provisions. The Swiss Supreme Court did not suggest any convincing justification for its referring to provisions outside the Swiss Arbitration Act. In fact the scholarly writings cited by the Court in support for its reliance on PILA Art. 154 and 155 lit. c are not all as explicit as the unreserved reference of the Court might imply. Thus, for the sake of coherence, the Swiss Supreme Court should probably either have based its decision only on the Swiss Arbitration Act (i.e. PILA, Chapter XII) or it should have explained more in details why it found that reliance on other provisions was necessary in this case.

A second point that may have deserved further explanations is the unreserved endorsement of the effects of foreign bankruptcy proceedings (and bankruptcy laws) on international arbitration proceedings conducted in Switzerland. Admittedly, the arbitration tribunal and the Court made it clear that Polish law could not by any means directly put an end to an international arbitration proceeding conducted abroad. Nevertheless, considering the importance of the issue at stake (definitive loss of the capacity to arbitrate), and considering the lack of either unanimous or converging arbitral practice and scholarly writing on the issue, a more thoroughly motivated decision, examining the various trends and solutions, would have been highly appreciated in such critical economic time.

In any event, one should not overestimate the effect of this decision considering the peculiarities of the case and, more particularly, the unusual radical content of PKSG Article 142 on arbitration clause and arbitration proceedings. In fact, the Swiss Supreme Court did not consider the decision worthy enough publication in its official reports. But there is no question about it: this decision will revive –more than resolve– the longstanding debate on the uneasy relationship between arbitration and bankruptcy.

Decision 4A_428/2008 of the Swiss Supreme Court in Vivendi S.A., Vivendi Telecom International S.A., Elektrim Telekomunikacja Sp. z o.o., Carcom Warszawa Sp. z o.o., Elektrim Autoinvest SA v Deutsche Telekom AG, T-Mobile International AG & Co. KG, T-Mobile Deutschland GmbH, T-Mobile Poland Holding No. 1 BV, Polpager S.p. z o.o., Elektrim SA, Mega Investments Sp. z o.o., Elektrim Finance B.V., and Polska Telefonia Cyfrowa Sp. z o.o. The full text of the decision, which will not be published in the official reports of the Swiss Supreme Court's decisions, is available in its original (German) language at www.bger.ch/fr/index/juridiction/jurisdiction-inherit-template/jurisdiction- recht/jurisdiction-recht-urteile2000.htm

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