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Binding Non-Signatory States in International Arbitration: the Swiss Federal Tribunal Maintains a Strict Standard in Libyan State Entity Challenge

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The application of arbitration clauses to non-signatory parties is a complex and evolving topic in international arbitration. The issue can arise in both commercial arbitrations between private commercial parties and in investment disputes between investors and states or state entities (or even international organizations). The recent judgment of the Swiss Federal Tribunal (the supreme court in Switzerland) in A, B & C v D and State of Libya provides a timely example of the theoretical complexity and practical significance of this issue.[1]

The core issue in binding non-signatories to an arbitration agreement is that arbitration is a consensual process. In the absence of an express written agreement to arbitrate between parties, the question of what constitutes sufficient extrinsic evidence of “consent” can be controversial and the answer may not always be predictable. The question of when a non-signatory may be bound by an arbitration agreement also implicates other difficult issues of national and international law, including the status of third parties under applicable contract law, the jurisdictional foundations of international arbitration and the application of private choice-of-law principles in determining the validity of an arbitration agreement (whether, for instance, the law governing the interpretation of the arbitration clause is the governing law of the contract (the lex causae), the law of the arbitral seat (the lex fori) or whether “transnational principles” may even apply: see our October 2020 Insight).[2]

In its recent decision in A, B & C v D and State of Libya, arising out of an international commercial arbitration between private investors and a Libyan state development authority, the Swiss Federal Tribunal rejected an attempt by the claimants to bind the Libyan State to the arbitration agreement.[3]

The Federal Tribunal held, in essence, that state-owned entities’ arbitration agreements do not presumptively bind the state. In doing so, the Federal Tribunal declined to depart from its existing restrictive jurisprudence, including its landmark 1988 decision in Westland Helicopters v Arab Organization for Industrialization.[4] The Federal Tribunal’s judgment emphasizes the principles of formal corporate separateness and privity of contract as significant hurdles for any claimant seeking to bind a state non-signatory to an arbitration agreement. The decision is instructive not only with respect to the prevailing approach under Swiss law, but in its connections with the wider international debate over non-signatory involvement in international arbitration. 

The facts

The underlying facts of the case concern an agreement by a Turkish joint-venture vehicle and its two shareholder companies (the Claimants”) to construct a 383 km-long water pipeline in Libya. The project was part of Phase III of the construction of the so-called Great Man-Made River, a project to supply fresh water from the Nubian Sandstone Aquifer System in the south of Libya to the populous north. The project, which has now been ongoing for several decades, is the world’s largest irrigation project.

The Claimants’ agreement was concluded in 2006 with the Great Man-Made River Authority (the “Authority”), a Libyan state entity established in 1983 by the Libyan government to manage the project. The agreement contained an arbitration clause providing that any dispute arising under the agreement would be resolved by arbitration before a tribunal of three arbitrators seated in Geneva, under the ICC Rules of Arbitration. The Libyan State was not a signatory to the agreement.

The Claimants’ works were about 70% complete when they were interrupted by the Libyan Revolution/First Civil War in 2011. Despite discussions, the works were never recommenced. In 2015, the Claimants filed a request for arbitration against the Authority and the Libyan State. Libya objected to the arbitral tribunal’s jurisdiction over it as a non-signatory to the arbitration agreement.

The arbitral tribunal’s decision

The Claimants succeeded in the merits of their claim against the Authority, obtaining an award of more than USD 40 million in 2018. However, they failed to convince the majority of the arbitral tribunal that the Libyan State was bound by the arbitration agreement. Accordingly, the enforcement value of the award to the Claimants was significantly limited (the Libyan State having much deeper pockets than the Authority). The Claimants subsequently applied to the Swiss Federal Tribunal to set aside that portion of the arbitral tribunal’s award that found it lacked jurisdiction over the Libyan State (as discussed further below).

The Swiss validation standard

Given that the arbitration was seated in Geneva, the scope of the parties’ arbitration agreement, including its ability to bind non-signatories, had been assessed by the arbitral tribunal under Article 178 of the Swiss Private International Law Act (“PILA”). Article 178(2) applies a form of “validation principle” that seeks to uphold arbitration agreements if valid under any one of three possible laws: (i) the law of the main contract, (ii) the law of the arbitration clause (if specified) or (iii) Swiss law. The Swiss Federal Tribunal’s decision does not identify if either the agreement or the arbitration clause contained an express choice of law clause, but it appears the law of the agreement was Libyan law.

The Claimants’ case for jurisdiction over Libya before the arbitral tribunal

The Swiss Federal Tribunal’s decision records that the Claimants argued before the arbitral tribunal that it had jurisdiction over the Libyan State under Libyan and Swiss law on two, apparently alternative, bases:[5]

  • the Authority and the Libyan State were one and the same and, implicitly, state entities may (at least to some extent) be identified with states for the purposes of arbitral jurisdiction; or
  • the Libyan State had intervened in the negotiation or performance of the agreement in such a way that the Claimants could in good faith have considered that it had consented to be bound to arbitration.

The arbitral tribunal’s ruling and findings of fact

The arbitral tribunal rejected both of the Claimants’ arguments for jurisdiction over the Libyan State. With respect to the Claimants’ attempt to conflate the identity of the Authority and the Libyan State, the Swiss Federal Tribunal’s judgment records that the arbitral tribunal’s ruling was based on a number of relevant factual findings, including that:[6]

  • the Authority was an independent legal entity under Libyan law;
  • the Authority was not exclusively state-financed, as it also benefitted from the proceeds of selling water;
  • the Libyan State’s General People’s Committee, the executive branch of the Libyan government, was not involved in the tender or contracting process (rather, the Authority’s own People’s Committee – i.e., its own internal governing body – was responsible for this);
  • the Authority had no sovereign power (or at least no significant sovereign power) delegated to it; and
  • it had been necessary to involve the Minister for Water in settlement discussions because it was envisaged that Libya would provide compensation for the loss of the machines and facilities which had been destroyed in the Revolution.

The arbitral tribunal similarly rejected the Claimants’ argument that the Libyan State had intervened in the negotiation or performance of the agreement such that it was bound by the arbitration clause, finding that:[7]

  • the Libyan State’s administrative contract regulations had not been applied, and the asserted involvement of the State’s Audit Bureau in negotiations had not been proven;
  • any supervision of the tender by the State was limited to anti-corruption issues and the contract had not been reviewed or approved by the General People’s Committee or the Libyan Prime Minister;
  • the Authority was able to agree on contractual amendments following State review; and
  • while the Libyan Central Bank had organized a letter of credit for payment to the Claimants, it effectively acted as a commercial bank in playing this role.

The Swiss Federal Tribunal’s set-aside judgment

Despite the significant adverse findings of fact made by the arbitral tribunal, which were binding upon the Swiss Federal Tribunal, the Claimants applied to set aside the tribunal’s award with respect to jurisdiction under Art 190(2)(b) of the PILA, and asked the Federal Tribunal to substitute its own finding that the tribunal had jurisdiction over the Libyan State (as permitted under the PILA). The Claimants asserted that the tribunal had erred under both Libyan and Swiss law.

Libyan law challenge

The Claimants argued that decisions of the Libyan Supreme Court established that under Libyan law, the contractual liability of a public entity may be imputed to the State on the sole condition that there is state supervision of the public entity. The Swiss Federal Tribunal doubted that the cases cited by the Claimants stood for this proposition (only one of the cited cases related to contractual obligations).[8] In any event, the Federal Tribunal affirmed the reasoning of the arbitral tribunal that whether a state could be held substantively liable for a state entity’s conduct was a different question from whether a state had consented to arbitration.[9]

Swiss law challenge

The Swiss Federal Tribunal held that Swiss law also presented a significant obstacle to the Claimants’ case, as the arbitral tribunal had found. The Claimants’ argument that state entities’ arbitration agreements could be extended to states per se under Swiss law effectively required a significant attack on the existing Swiss jurisprudence on this subject.

As noted above, the landmark 1988 decision of the Swiss Federal Tribunal in Westland Helicopters[10] establishes that Swiss law recognizes the legal independence of public law entities, and that a non-signatory state cannot be bound to an arbitration clause merely because it established or controls a legally-independent state entity.[11] Furthermore, the Federal Tribunal in Westland had opined that even strict control of a state entity by the state or a close link between the two entities may be insufficient to bind a non-signatory state to arbitration.[12]

The Federal Tribunal was unwilling to accept the Claimants’ argument that the position in Westland was “outdated” or that Swiss law ought to develop “various grounds of imputation” on which the Claimants might succeed. The Federal Tribunal observed that while, as general rule, the principles of separate legal personality and privity of contract mean that an arbitration clause will bind only signatory parties, Swiss law already recognizes certain limited exceptions, including assignment, assumption of debt and delegation, but the Claimants did not assert any of these grounds.[13] In relation to the Claimants’ allegation of interference by the Libyan State in the execution or performance of the agreement (essentially equivalent to the exception of “intervention” or “intention to intervene” recognized under Swiss law), the Federal Tribunal accepted that a non-signatory could in principle become bound by (a) “constant and repeated” interference in performance, and (b) demonstrating an intention to be a party to the arbitration clause, but held that this standard was not satisfied on the facts of the case.[14]

The Federal Tribunal accordingly dismissed the Claimants’ set-aside application with costs.

Commentary

The Swiss Federal Tribunal’s judgment and its affirmation of Westland confirms that the fact that a contractual counterparty is a state entity will not by itself support arbitral jurisdiction over the state under Swiss law. Rather, a state will be bound as a non-signatory only in exceptional circumstances. Accordingly, it is essential that parties contracting with a state entity under Swiss law consider joining the state as an express signatory to any relevant contracts if the state’s participation in dispute resolution is considered necessary or desirable. The state entity, in turn, may also wish to consider expressly including the investor/contractor’s parent company in the arbitration clause.[15]

The Swiss Federal Court’s judgment is also an important contribution to the ongoing international debate on the circumstances in which non-signatories may be bound by an arbitration agreement. Evaluating the extent to which different jurisdictions take truly different approaches to this issue is a difficult exercise, as the development of clear international law principles as to when a non-signatory party may be bound by an arbitration agreement remains an ongoing task in international arbitration. Theorization in many cases appears to have taken a back seat to the decision maker’s application of a “common sense” assessment of the facts. However, it has been suggested that the result will, at least in many cases, be determined by the presence or absence of three key factors: (i) the parties’ intent (as with all issues of consent in contractual matters, the essential issue is the parties’ actual or implied intent); (ii) accountability (even where an intent to be bound is not apparent, a non-signatory may be bound if it has created the impression that it is bound by an arbitration clause and a counterparty has relied on this to its detriment); or (iii) abuse of rights (a non-signatory may be bound to arbitration where it would otherwise succeed in conduct designed to leverage its non-party status for an abuse of process or fraud).[16]

A range of more specific grounds for binding non-signatories have also been put forward (and embraced to varying degrees) under different national laws. Swiss jurisprudence to date reflects a range of these bases, albeit perhaps less developed and more restrictive set of grounds than under some other national laws. The key concepts recognized to a greater or lesser degree under Swiss law as possible bases for binding non-signatory parties are: (i) implied guarantees; (ii) agency; (iii) “intervention” (as discussed above); (iv) a “group of companies” approach (to a more limited degree); (v) piercing the corporate veil; (vi) estoppel; and (vii) denial of justice / procedural efficiency.[17]

Consistent with the emphasis on separate legal personality in A, B & C v D and State of Libya, the Swiss courts seem generally less ready to accept some of these grounds, in particular the “group of companies” approach and other approaches which require looking behind the formal legal personality of an entity. This stands in contrast to both the Anglo-American approach[18] (which is more permissive) and the French approach (which emphasizes the determination of the parties’ “common intention” as the highest principle – i.e., a formalistic interpretation of a contract should not prevent the extension of the arbitration agreement to a third party if that is what the parties intended). Moreover, the Anglo-American/common law courts, given their historical development and application of the doctrine of estoppel, likely remain more confident in the use of estoppel as a basis to bind non-signatories than the civil law courts.[19]

In the case of attempts to bind states to international arbitrations with state entities, as in A, B & C v D and State of Libya, the same legal rules in principle ought to apply as in private disputes between commercial entities. However, a number of national court decisions have demonstrated a deep-seated (and arguably misconceived) reluctance to bind non-signatory states to international arbitration agreements. The Westland position, as affirmed in A, B & C v D and State of Libya, perhaps typifies this reluctance to join non-signatory states to international arbitrations involving their state entities.

A final but important (perhaps preeminent) issue in relation to binding non-signatories is the extent to which the applicable principles are, or should constitute, international law principles or a part of the lex mercatoria. At least some of the proposed grounds for binding non-signatory parties create a “chicken and egg problem”, in that applying a choice-of-law approach can result in assessing whether a non-signatory is party to an arbitration clause under a law that the non-signatory played no role in choosing. One might argue that this equally violates the paramount principle of consent in international arbitration. As a result, some authors advocate a mixed model by which national laws in the context of non-signatory issues should be subject to international limitations, forbidding discriminatory or idiosyncratic rules.[20] Another suggestion is that the problem of aligning international standards for binding non-signatory parties is best addressed at a more “macro” level by focusing efforts on the international harmonization of conflict of laws rules and, ultimately, contract law doctrine.[21]

In any event, unless and until international standards develop further, contracting parties should be aware of the possibility of different approaches to binding non-signatories being applied in different jurisdictions, and tailor their agreements (including choice of law and arbitral seat) accordingly. The judgment of the Swiss Federal Tribunal in A, B & C v D and State of Libya presents one relatively restrictive approach, imposing a high bar for binding non-signatories (and in particular non-signatory states) in the absence of clear evidence of consent. Whether the Swiss approach strikes the correct balance between the primacy of consent in international arbitration and the commercial intentions and expectations of the parties remains a subject for discussion and debate.


 
Footnotes:
  1. A.________, B._______, C._______, v. D.________ and State of Libya, 4A_636/2018 [the judgment] (decision in German). 
  2.  Dorine Farah and Iselin Juhl Johannessen “Enka v. Chubb: The Supreme Court Rules on the Proper Law of the Arbitration Agreement”:https://www.bakerbotts.com/thought-leadership/publications/2020/october/enka-v-chubb-the-supreme-court-rule-on-the-governing-law-of-the-arbitration-agreement.
  3. The judgment related to a private award but noted that a parallel investor-state claim was underway.
  4. Westland Helicopters Ltd v Arab Organization for Industrialization and Ors Federal Tribunal, Switzerland, 19 July 1988, reproduced in (1989) 80 ILR 652.
  5. Judgment at [4.2].
  6. Id. at [4.3.1].
  7. Id.at [4.3.2].
  8. Id. at [4.2 and 4.4.2].
  9. Id.
  10. Westland Helicopters, above n 4.
  11. See judgment at [4.5.1].
  12. Id. Westland was decided in the arguably somewhat different context of an attempt to bind several non-signatory states which had constituted an international organization with separate personality. However the Federal Tribunal drew on its previous decision in the state-entity context, also involving Libya, where it concluded that Libya was not bound by an arbitration clause between a foreign company and the Libyan National Oil Company and did not appear to observe a distinction between entity types: The Arab Republic of Libya v Wetco Ltd (published in part in SJ 1980).
  13. See judgment at [4.5.2].
  14. See judgment at [4.5.3] and see for example X.________ S.A.L., Y._______ S.A.L., A._______, v. Z.________ Sàrl 4P 115/2003 (not cited).
  15.  Cf 4A_128/2008 where the Swiss Federal Court found that the issuing of a guarantee did not bind a parent company to the subsidiary/debtor contractor’s arbitration agreement.
  16. Tobias Zuberbühler “Non-Signatories and Consensus to Arbitrate” ASA
    Bulletin (2008) (26) 18 at 32-33.
  17. See the summary and evaluation in Tobias Zuberbühler “Non-Signatories and Consensus to Arbitrate” ASA Bulletin (2008) (26) 18.
  18. “[P]iercing the corporate veil between a signatory and nonsignatory party may bind the nonsignatory party to an arbitration agreement of its alter ego.” American Fuel Corp v Utah Energy Dev Co 122 F 3d 773 130 at 133 (2d Cir 1995), citing Thompson-CSF SA v American Arbitration Assn 64 F 3d 773 at 776 (2d Cir 1995).
  19.  See the recent decision of the United States Supreme Court in GE Energy Power Conversion France SAS Corp v Outokumpu Stainless USA LLC.
  20. Gary B. Born “International Commercial Arbitration”, 2nd edition (2014) p. 1499.
  21. James M. Hosking “The Third Party Non-Signatory’s Ability to Compel International Commercial Arbitration: Doing Justice without Destroying Consent” (2004) 4 Pepperdine Dispute Resolution Law Journal 469.

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