11. Oktober 2018

Arbitration Newsletter Switzerland: Precedence of Foreign State Immunity over the New York Convention?

On 27 September 2018 the Swiss Federal Supreme Court (the „Supreme Court“) published on its website a new decision (the “Decision”)¹ wherein it addressed the question of immunity of foreign states in enforcement actions in Switzerland as well as the relationship between Swiss procedural law and the New York Convention in this context.

The Decision was rendered by five members² of the Second Civil Chamber on 7 September 2018 and will be included in the Supreme Court’s publication of leading cases.

1 Facts

Based on an arbitral award rendered under the UNCITRAL arbitration rules by an arbitral tribunal seated in Paris, a company domiciled in Guernsey (the „Applicant“) requested the attachment³ of a real estate property of the Republic of Uzbekistan (the „State“) situated in Switzerland.

The district court hearing the case first granted the Applicant’s request and issued an attachment order. The Republic of Uzbekistan then filed an objection against the attachment order with the same district court, which then sustained the State’s objection and annulled the attachment.

Subsequently, the Applicant unsuccessfully appealed the decision with the Court of Appeals of the Canton of Schwyz. In consequence, the Applicant filed an appeal with the Supreme Court.

2 Considerations

The Supreme Court first pointed out that, as the decision on an objection against an attachment order deals with an interim measure, only violations of constitutional rights can be challenged in such proceedings before the Supreme Court. Accordingly, the application of federal law is examined under the aspects of arbitrariness (“Willkür”) only, and this had far reaching consequences in the present case.

The two main questions for decision by the Supreme Court were (a) whether or not, respectively under which conditions, property of a foreign state in Switzerland can be „attached“ at all and (b), given that the attachment was requested based on a foreign arbitral award, whether or not the Convention on the Recognition and Enforcement of Foreign Arbitral Awards (the „New York Convention“) prevents the Swiss courts from considering state immunity or similar concepts in such decisions.

According to Supreme Court case law, enforcement measures against a foreign state in Switzerland presuppose, on the one hand, that the legal relationship out of which the alleged claim resulted finds its basis in an act of the foreign state as holder of private rights (“iure gestionis”) and not as a sovereign (“iure imperii”), and, on the other hand, that such legal relationship has a sufficient domestic connection with the Swiss territory (“Binnenbeziehung zum schweizerischen Staatsgebiet”; hereinafter also referred to as “Minimum Contact Doctrine”). There must be circumstances that tie the legal relationship to Switzerland to an extent which justifies holding the foreign state responsible before Swiss authorities.

The condition of sufficient domestic connection is met in particular if the debt relationship from which the claims are derived was established in Switzerland or if it is to be fulfilled here, or if the foreign state has at least taken actions in Switzerland to establish a place of performance in Switzerland. However, it is not sufficient that assets of the foreign state are located in Switzerland or that the claim has been awarded by an arbitral tribunal seated in Switzerland.

The Supreme Court consistently qualifies the requirement of a domestic connection as an aspect of the immunity of foreign states from Swiss jurisdiction. According to its case law, in the absence of a sufficient domestic connection, Swiss courts have no authority to decide the dispute in question. The requirement of a sufficient domestic connection qualifies as a „restriction of jurisdiction“ („Einschränkung der Gerichtsbarkeit“). Jurisdiction – including the question of immunity – is a question of admissibility („Prozessvoraussetzung“), which must be examined ex officio by the courts. If the requirement is not met, then there is no jurisdiction of the Swiss courts in this matter and the respective court must close the proceedings without deciding the merits of the case.

The Supreme Court then addressed the argument raised by the Applicant that the requirement of the domestic connection cannot apply in the present case for the following reason: The attachment was requested based on an foreign arbitral award, for which the New York Convention stipulates the grounds under which a contracting state may refuse to recognize and enforce the decision in Article V in an exhaustive manner. An insufficient domestic connection is no ground provided for by the New York Convention that would allow the refusal of recognition and enforcement. Therefore, if Swiss courts would nevertheless apply the prerequisite of the domestic connection, the Swiss Confederation would fail to fulfil its obligations under the New York Convention.

The Supreme Court agreed that, within the scope of application of the New York Convention, the question of whether or not the recognition and enforcement of a foreign arbitral award may be refused is to be determined exclusively under Article V of the New York Convention. However, the examination of these possible grounds for refusal of recognition and enforcement presupposes that the court proceedings in which this examination takes place are admissible in procedural terms. In this connection, the Supreme Court pointed to an older decision⁴ in which it had held that the regulation of the proceedings for recognition and enforcement under the New York Convention is in principle left to national law. In addition, the Supreme Court noted that the New York Convention itself stipulates in its Article III that the contracting states permit the enforcement of arbitral awards in accordance with the rules of procedure of the territory where the award is relied upon.⁵

The requirement of sufficient domestic connection qualifies as a question of admissibility, which has to be addressed prior to the merits of the case. In contrast, the grounds for refusal of enforcement in Article V New York Convention belong to the merits. Therefore, a Swiss court faced with a request for an attachment cannot address the question of whether or not the foreign award can be recognized and enforced in Switzerland if the procedural requirement of the domestic connection is not fulfilled. In this case, the Swiss court will close the proceedings by issuing a procedural decision without entering into the merits of the case.

Therefore, a domestic connection is also a prerequisite in cases where a party attempts to obtain an attachment of property belonging to a foreign state in Switzerland based on an arbitral award whose recognition and enforcement in Switzerland will be governed by the New York Convention.

As there was no sufficient domestic connection with Switzerland in the present case, the Supreme Court rejected the Applicant’s action for annulment of the decision of the Court of Appeals of the Canton of Schwyz.

3 Conclusions

The Decision has to be analyzed against the very limited area of authority available to the Supreme Court. It could overturn the decision of the Court of Appeals of the Canton of Schwyz only if the Applicant was successful in establishing that the decision rendered by such court was – to paraphrase the Supreme Court – “obviously untenable, in clear contradiction to the facts of such case, violating in a blatant way a legal provision or an undisputed legal principle or was in a striking way hurting the sense of justice”. To top this, the decision challenged must not only by its reasoning but also by the result appear to be arbitrary.⁶

This makes it obvious that the Applicant was confronted with a serious uphill fight. Had the Court of Appeals of the Canton of Schwyz rendered its decision in favour of the Applicant it would obviously have been an entirely different ballgame, imposing the same difficulties mentioned before upon the Republic of Uzbekistan.

The Minimum Contact Doctrine, as applied by the Supreme Court in the present case, does not only apply in enforcement proceedings based on an attachment against a state but is also a requirement for an attachment against a debtor without residence in Switzerland based on Article 271(1)(4) of the Swiss Debt Collection and Bankruptcy Act.⁷ And, even in this area, this doctrine has a long-standing tradition of application in enforcement matters against a state. Inter alia, the Supreme Court has applied such doctrine already back in 1930.⁸ Therefore, from a legal point of view, the Decision stands as is.

But then, from a practical standpoint, the Decision is regrettable: a creditor has – as a first hurdle – to obtain an enforceable award against a foreign state, then – as a second hurdle – he has to find iure gestionis assets of such state in Switzerland, which by experience, is rather burdensome undertaking – and – as a third, almost insurmountable hurdle – this creditor has to establish the required minimum contact of its claim with Switzerland.

At the very end of its Decision the Supreme Court left expressly open the question of what would be the result if it were not restricted in its authority to review the present case. This reads well, as a token of consolation, but does not really help in practice since a creditor typically tries to initiate the enforcement of an award against a iure gestionis asset of a state in Switzerland by requesting an attachment in summary proceedings – and then we are back to square one!

Arbitration-Newsletter-of-11-October-2018.pdf (pdf 332 kB)