26. February 2024

Arbitration Agreement transferred to Non-Signatory Successor State: ICC Award confirmed

On 7 August 2023, the Swiss Federal Supreme Court (the “Supreme Court“) published an interesting decision (4A_575/2022 dated 7 August 2023, the “Decision“) in the field of international arbitration wherein it dismissed an action by the Republic of South Sudan (“South Sudan“) for annulment of a partial award in which the sole arbitrator had affirmed jurisdiction based on an arbitration agreement between a non-state party and the Republic of Sudan (“Sudan“) that was transferred to South Sudan as its successor state.

The Decision was rendered by all five members of the First Civil Chamber and has in the meantime been included in the Supreme Court’s publication of leading cases as BGE 149 III 431.

1. Facts

On 15 October 2003, C. Corporation as licensor and B. Ltd., a company organized under the laws of South Sudan, as licensee signed a licence agreement regarding the operation of a telecommunication network in the southern parts of Sudan (today: South Sudan) for a duration of 15 years. On 6 October 2007 the Ministry of Technology and Postal Services for the Government of Southern Sudan (“Ministry of Technology“) and B. Ltd. signed an amendment no. 2 to the licence agreement (initial licence agreement and amendments hereinafter together “Licence Agreements“) with an arbitration clause that stipulated arbitration under the ICC Rules before a sole arbitrator with the arbitral tribunal seated in Geneva as means of dispute resolution, as follows:

“All disputes arising out of, or in connection with the present License shall be amicably settled. Failing such an amicable settlement within a period of 3 (Three) months as from the date of notification by one Party to the other that a dispute has arisen, such dispute shall be finally settled under the Rules of Arbitration of the International Chamber of Commerce by one arbitrator appointed in accordance with the said Rules. The language of the arbitration shall be the English language and the place of arbitration shall be Geneva, Switzerland. The arbitral award shall be final and binding and both Parties hereby waive any right they may have to appeal by any mean or nature or request the cancellation of any such award.”

According to the Licence Agreements, B. Ltd. and A. Ltd., a company whose sole purpose is investing in B. Ltd., (together “Claimants“) were supposed to build and operate a telecommunication network in the southern parts of Sudan (today: South Sudan). However, disagreement regarding the execution of the project arose between the parties.

On 9 July 2011, South Sudan gained independence from Sudan.

In July 2018, the Claimants initiated arbitration proceedings against South Sudan requesting damages of almost USD 2.7 billion. They claimed that breaches of the Licence Agreements had led to delays and had affected the operation and development of the telecommunication network. They further claimed to have been forced to cease operation of the telecommunication network and that the Licence Agreements had been unlawfully terminated.

South Sudan contested the jurisdiction of the sole arbitrator, the validity of the contract as well as its liability.

On 10 November 2022, the sole arbitrator issued a partial award wherein he affirmed his jurisdiction for the dispute between the Claimants and South Sudan and held the latter liable for several breaches of contract.

Subsequently, South Sudan filed an action for annulment with the Supreme Court requesting the annulment of the partial award due to the lack of jurisdiction of the sole arbitrator.

The Supreme Court affirmed the sole arbitrator’s jurisdiction for the claims raised by the Claimants against South Sudan and dismissed the action for annulment.

2. Considerations

At the outset, the Supreme Court addressed and rejected the Claimants’ argument that the action for annulment should be dismissed because, in the arbitration clause, the parties had waived their rights to appeal.

The Supreme Court first recalled that a waiver of the right of appeal, as stipulated in the arbitration clause between the parties, is also admissible for questions of jurisdiction.

However, such clause does not preclude a party from questioning the arbitral tribunal’s jurisdiction in an action for annulment with the argument that the arbitration agreement and the waiver of appeal therein does not apply with respect to the party seeking the annulment of the award (subjective scope of arbitration agreement). If the examination of the subjective scope of an arbitration clause and thus the jurisdiction of the arbitral tribunal coincides with the examination of whether a waiver of appeal agreed in the arbitration clause can be subjectively invoked against the party concerned, the arbitral tribunal’s award affirming jurisdiction can be challenged before the Supreme Court.

The Supreme Court then addressed the question whether the sole arbitrator lacked jurisdiction as alleged by South Sudan in the arbitral proceedings.

In the arbitral proceedings, the sole arbitrator had concluded that the Licence Agreements as well as the amendment no. 2 containing the arbitration clause had been validly agreed by the parties. Subsequently, the sole arbitrator had concluded that the Licence Agreements and the arbitration clause had been transferred to the newly-created state of South Sudan as successor state of Sudan.

The sole arbitrator relied for its decision, on the one hand, on the principle of state succession. In Sudan (including the territory of today’s South Sudan), the D. Corporation had the authority to issue telecommunications licences, and this authority had been transferred to South Sudan for the territory of the southern part of Sudan. Consequently, it had been up to South Sudan to have confirmed or denied the validity of the licences at issue. According to the sole arbitrator, South Sudan had done the former in its ministerial order of 1 November 2020 (“Ministerial Order“), by recognizing B. Ltd. as a validly licenced telecommunications provider pursuant to the “original” licences issued by Sudan and describing itself therein as the legal successor of D. Corporation. The sole arbitrator further referred to an agreement between Sudan and South Sudan on economic issues and the distribution of assets and liabilities between the two states dated 27 September 2012 (“Economic Agreement“). Overall, it was clear that the Licence Agreements had been transferred to South Sudan.

On the other hand, the sole arbitrator considered that under the “Swiss Appearance Test”, the Claimants could rely in good faith on the fact that the conduct of South Sudan which gave the appearance of South Sudan wanting to be bound to these contracts (including the arbitration clause).

When assessing whether the sole arbitrator lacked jurisdiction as alleged by South Sudan, the Supreme Court recalled that the question of jurisdiction also covered the question of the subjective scope of the arbitration agreement, i.e. who is bound by it.

The Supreme Court then first rejected South Sudan’s argument according to which the Licence Agreements and the arbitration clause were invalid (and therefore could also not be transferred to South Suden), inter alia, for the fact that the Ministry of Technology allegedly lacked authority to assign licenses for telecommunication. While the Supreme Court does not address this argument in detail due to Claimant’s arguments being limited to general criticism, it makes the following observation:

Article 177(2) of the Swiss Private International Law Act (“PILA“) prohibits a state from invoking its own law to challenge its capacity to be a party to arbitration proceedings or the arbitrability of a dispute. According to the prevailing doctrine this also precludes a state from invoking, on the basis of domestic law, the lack of competence of the person or institution that signed the arbitration agreement on behalf of the state concerned, at least if the non-state counterparty could not have recognized by exercising due diligence the lack of competence of the person signing on behalf of the state. Hence, insofar as South Sudan wanted an assessment under Sudanese law of the power of representation of the actors involved, its arguments are not to be followed.

The Supreme Court further rejected South Sudan’s argument that the Licence Agreement and the arbitration clause had never been transferred to it. The Supreme Court first recalled that it had long held that, under certain conditions, an arbitration clause may also bind persons who have not signed the contract and are not mentioned therein. As has been held previously, states that have gained independence through the process of state succession may, under certain conditions, be bound by an arbitration agreement concluded by its predecessor state.

The Supreme Court then considered that, notwithstanding the principles of public international law brought forward by South Sudan (“Clean-slate-Doctrine”, “Nyerere-Doctrine” and “Acquired-Rights-Doctrine”) and their respective approach to the question, the sole arbitrator’s decision that South Sudan was bound to the arbitration clause in amendment no. 2 was correct. Based on the Economic Agreement, the Ministerial Order and the conduct of South Sudan, it was established that the arbitration agreement had been transferred to South Sudan within the framework of the state succession regulation. Therefore, the question whether the arbitration clause would also be binding on South Sudan under the “Swiss Appearance Test” was left open.

The Supreme Court then assessed the final ground of appeal raised by South Sudan, an alleged violation of the right to be heard due to the fact that the sole arbitrator’s decision had been based on “unspecified principles” of state succession, which would not have been raised in the proceedings and without giving South Sudan the opportunity to present argument thereon.

The Supreme Court held that the Economic Agreement between Sudan and South Sudan and the Ministerial Order of South Sudan, on which the sole arbitrator had based its decision, concerned the Licence Agreement as well as the transfer of rights and obligations between Sudan and South Sudan under the Licence Agreements. Therefore, in the light of the subject matter of the two documents, it was not beyond what could be expected by the parties that the sole arbitrator would rely on this legal argument. The Supreme Court added that in cases of international arbitration it is particularly reluctant to admit a violation of the right to be heard due to unexpected legal arguments.

Consequently, the Supreme Court dismissed South Sudan’s action for annulment of the partial award.

3. Conclusions

The Decision of the Supreme Court has, in our view, four key takeaways.

First, the Decision is to be welcomed as it adds further clarification to the Supreme Court’s practice regarding the admissibility of a waiver of the right to appeal pursuant to Article 192 PILA. In the current case, the arbitration clause contained a waiver of the right to appeal as follows:

“The arbitral award shall be final and binding and both Parties hereby waive any right they may have to appeal by any mean or nature or request the cancellation of any such award.”

When assessing the legal effect of the above clause, the Supreme Court held that, in principle, a waiver of the right to appeal is also admissible for questions of jurisdiction. In the light of the Supreme Court’s practice however, this general statement needs further clarification.

In leading case BGE 134 III 260 the Supreme Court had concluded that a waiver of the right to appeal also excluded parties from invoking a lack of subject-matter jurisdiction (ratione materiae) on appeal. However, the Supreme Court also admitted in an obiter dictum that in case of an alleged lack of personal jurisdiction (ratione personae) the answer to the question would be more delicate, because of the fact that art. 192 para. 1 PILA required an explicit exclusion of the right to appeal.

The present case provided the Supreme Court the possibility of examining such a question in a more detailed manner. The Supreme Court considered that the assessment of the personal scope of the arbitration clause and the personal jurisdiction coincided with the question as to whether Respondent was bound by the waiver of appeal. Therefore, the Supreme Court concluded with reference to BGE 134 III 260 that in the present constellation, an appeal against an affirmative award on jurisdiction must still be admissible, as otherwise Respondent would be entirely excluded from contesting the applicability of the arbitration clause and the waiver of appeal therein.

In the light of the above, it must be concluded that a waiver of the right to appeal excludes the parties from invoking a lack of subject-matter jurisdiction (ratione materiae) on appeal but does not prevent them from invoking a lack of personal jurisdiction (ratione personae).

Second, the Supreme Court confirmed the view of the prevailing Swiss legal doctrine according to which a state is precluded under Article 177(2) PILA from invoking the lack of authority of the person or institution that signed the arbitration agreement on behalf of the state concerned based on domestic law, at least if the non-state counterparty could not have recognized the lack of authority of the person signing on behalf of the state by exercising due diligence.

This confirmation is to be welcomed for the purpose of foreseeability and protection of legitimate expectations of the non-state counterparty. In fact, it can be difficult for non-state counterparties to assess the authority of the signing individual of a foreign state according to that state’s domestic law.

The question, however, remains what the Supreme Court expects from a party in order to be exercising due diligence in that context.

Third, the Decision also confirms that an arbitration agreement may, under certain circumstances, be transferred from a predecessor state to its successor state based on a more general treaty between the two states, which regulates the distribution of rights and obligations between the parties.

Fourth, the Supreme Court confirmed its reluctance to admit a violation of the right to be heard due to a surprising application of law in cases of international arbitration. This is in line with its earlier case law where the Supreme Court showed a quite restrictive approach in this regard and it has only rarely accepted arguments contending a surprising application of law.

 

 

2024-02-26-Arbitration-Newsletter-4A_575_2022.pdf (pdf 306 KB)