Year in review: international arbitration in Switzerland

An extract from The International Arbitration Review, 12th Edition

The year in review

i Developments affecting international arbitration

As mentioned above, the revised Chapter 12 of the PILA entered into force on 1 January 2021. It was a light revision rather than a comprehensive overhaul. Some case law of the Swiss Federal Supreme Court on procedural issues was codified. The moderate amendments are taken into account in Section I.iii. Last year, there were no changes to the Swiss Rules of 2012.

ii Arbitration developments in local courts

In the past year, the Swiss Federal Supreme Court rendered more than 50 decisions in set-aside proceedings.

Jurisdiction

As every year, the Swiss Federal Supreme Court had to deal with a number of cases with issues of jurisdiction, such as Kompetenz-Kompetenz, objective and subjective scope of the arbitration clause and the extension of the arbitration clause to third parties.

In a decision of 2 November 2020,⁴⁴ the Swiss Federal Supreme Court reconfirmed the principle of 'Kompetenz-Kompetenz' which provides that the arbitral tribunal itself decides on its own jurisdiction (cf. Article 186(1) of the PILA). This applies even when the state court was seized before the arbitral tribunal, subject to substantial grounds to the contrary (Article 186(1 bis) of the PILA). In this case, however, the arbitral tribunal did not even have to resort to these provisions of the PILA because of the chronological priority of the arbitral proceedings. A Turkish construction company had settled claims arising from a construction agreement with its contract partner, the state of Libya, in a settlement agreement. Libya failed to comply therewith. The Turkish company introduced ICC arbitration proceedings in Geneva based on the Turkish-Libyan Investment Protection Agreement. Only thereafter Libya initiated proceedings before the local court in Tripoli to contest the validity of the settlement agreement. The Tripoli Court having found that the settlement agreement is invalid and void, the State of Libya then filed an appeal against the award which the Supreme Court rejected.

In a decision of 18 May 2020,⁴⁵ the Swiss Federal Supreme Court confirmed again its long-standing practice as regards the parties' intent when concluding an arbitration agreement. Any determinations by an arbitral tribunal relating to the parties' actual and common intent are factual findings and therefore not subject to review by the Supreme Court on this basis ('subjective interpretatio'). However, if the arbitral tribunal had not relied on the parties' actual and common intent, but on the parties' presumed intent ('objective interpretation'), this is a question of law and thus can be fully reviewed by the Supreme Court. The dispute brought to the Supreme Court was based on a trilateral agreement for the construction of a housing project in Iran which contained an arbitration clause mirroring the dispute resolution clause in Article 11 of the 1996 BIT between Turkey and Iran which referred to UNCITRAL arbitration. Following various disagreements, a Turkish company and an Iranian company that had assumed the Turkish company's obligations under the trilateral agreement together introduced arbitration proceedings against the Iranian state company and the Iranian state bank, the two other parties to the trilateral agreement. The arbitral tribunal seated in Geneva had found the arbitration clause not to be pathological by itself but that it was not compatible with the trilateral agreement's wording. Nor did the arbitration clause have any connection with the trilateral agreement. It did not refer to the parties of or to disputes arising out of the trilateral agreement. Finally, during the contract negotiations of the trilateral agreement, the parties had not agreed to refer potential disputes to international arbitration outside Iran or Turkey. The respondents' objection on this issue had even been expressly recognised by the other side. Thus, the arbitral tribunal had correctly denied its jurisdiction. The Supreme Court was bound by such factual findings and had to reject the challenge.

In a decision of 6 January 2020,⁴⁶ the Supreme Court had to deal with the objective scope of an arbitration agreement. A South Korean company and a German company had negotiated three contracts: a corporate agreement, the terms of purchase and also a quality assurance agreement (QAA). They finally signed only the QAA that contained an arbitration clause for 'contract disputes' to be resolved by ICC arbitration in Zurich. Following a dispute, the German company introduced an arbitration for claims which did not arise from the QAA. In a partial award, the arbitral tribunal declared that it had jurisdiction based on the arbitration clause in the QAA. The Supreme Court rejected the South Korean company's challenge that the arbitral tribunal had incorrectly admitted its jurisdiction. The Supreme Court reiterated its established practice that an arbitration agreement has to be interpreted according to the general principles of contract interpretation. Once an arbitral tribunal has found that the parties have agreed on arbitration, there is no basis for a narrow interpretation of the arbitration agreement. The arbitration clause in the QAA thus had to apply to the entire contractual relationship of the parties. This was rather a question of good faith than one of extending the arbitration clause to other independent contracts.

In a decision of 17 April 2020,⁴⁷ the Swiss Federal Supreme Court drew once more the attention to the difference between the question of a claimant or respondent being a party to the arbitration agreement, thus the jurisdiction of the arbitral tribunal, and the issue of a party's standing to sue or to be sued, which is a matter of substance of the claim. The case arose out of an exclusive licence agreement to establish and operate seafood bars in airports and train stations. The licensor had also authorised the licensee to grant sub-licences to its subsidiaries in a contractual clause conferring rights to sub-licensees under Article 112 of the Code of Obligations (contract for the benefit of a third person). The licensee then sub-licensed certain rights to its subsidiary. The licensor objected in the arbitration proceedings that some damage heads claimed by the licensee arose from the sub-licence agreement to which it was not a party. The Supreme Court held that these questions were of a substantive nature and not of a jurisdictional character, confirmed the jurisdiction of the arbitral tribunal and rejected the appeal.

Right to be heard

The ethics council of the Turkish football association TFF had denied a request by the Turkish football club Trabzonspor that, following the match-fixing of 19 matches by its rival football club Fenerbahce, Trabzonspor should be awarded the title of champion in the national league at the end of the season 2010/2011. TFF argued that it was not the football club itself, but only some officials being involved in the scandal. Trabzonspor then turned to UEFA und FIFA but both denied jurisdiction because it concerned a national championship. Trabzonspor filed an arbitration with the CAS against the decision of the TFF. The CAS found that Trabzonspor has no legal standing in the proceedings. Further, it rejected a request of Trabzonspor for a public hearing. It was this last point that Trabzonspor challenged before the Swiss Federal Supreme Court who rendered its decision on 17 August 2020.⁴⁸

Trabzonspor alleged that the Arbitral Tribunal had violated its right to be heard and also the right of a public procedure under Article 6(1) of the European Convention on Human Rights (ECHR). The Supreme Court rejected the appeal. A breach of any provision of the ECHR is not listed in Article 190, paragraph 2, PILA which lists exhaustively the grounds for an appeal. Nor would a breach of the ECHR necessarily constitute a breach of public policy.

Further, the Supreme Court also found no breach of the principle of good faith according to Article 2 of the Swiss Civil Code by TFF when not deducting points in the table of the national league for Fenerbahce as a sanction. This would not constitute a breach of public policy as not every breach of good faith qualifies as such. In any case, the (not public) hearing was a preliminary hearing addressing only purely legal and technical matters. The underlying facts were not in dispute. Finally, the arbitrators had expressly discussed in their decision the preliminary character of the hearing, being without prejudice to the merits of the case and a further hearing.

Scope of res judicata

In a decision of 16 March 2020,⁴⁹ the Swiss Federal Supreme Court had to address the scope of res judicata. It confirmed its practice that the substantive effects of the res judicata are restricted to the dispositive part of an arbitral award. The reasoning of the arbitral tribunal in its award is not binding on a subsequent arbitral tribunal. The tribunal's reasoning can only be consulted to interpret the scope of the operative part, in particular if it is only stated that a claim is dismissed, but it is not binding, even if the subsequent arbitral tribunal has to adjudicate the same preliminary questions.

In a first arbitration against a football club, a footballer's agent claimed the payment of a fee and in addition requested a declaratory judgment that he was entitled to a payment of an additional remuneration. The first arbitral tribunal had denied the agent's request for a declaratory judgment. In the second arbitration, the agent requested the payment of the additional remuneration from the club, which was granted by the second arbitral tribunal. In its appeal, the club argued that the second award was a violation of the binding effect of res judicata and thus of procedural public policy.

The Supreme Court dismissed the appeal. It held that res judicata fully applies to a new procedure between the same parties on an identical claim having been adjudicated in a final decision. The first tribunal having rejected the agent's request for declaratory relief as inadmissible, such decision does not prevent a new claim for the payment. The binding effect was restricted to the question of admissibility as discussed by the first arbitral tribunal in its reasoning and dismissed in the operative part of its award.

Public policy

In the case of the South African athlete Caster Semenya, the Swiss Federal Supreme Court once more confirmed its jurisprudence regarding violations of public policy. In a decision of 25 August 2020,⁵⁰ the Supreme Court held that it was bound by the facts as established by the CAS. Its own examination would be restricted to the question whether the decision of the CAS would violate public policy. The Supreme Court found no violation of public policy as the CAS pursued a legitimate interest in protecting the fairness of the competition, also in view of the interest of other athletes. The core of the right of integrity of the human body was not significantly affected and the CAS had not in any manner put into question the sex of the athlete. The differentiation drawn by the CAS such that the integrity of the female competitors has to be protected was not against public policy.

Duty of curiosity when investigating an arbitrator's possible bias

In a decision of 22 December 2020,⁵¹ the Swiss Federal Supreme Court examined the necessary extent of screening of social media to ascertain a possible bias of an arbitrator. The case arose from a revision of an CAS award in which the Chinese professional swimmer Sun Yang sought the annulment of the award and disqualification of the presiding arbitrator. He argued that only after the rendering of the award he had discovered on a website that the presiding arbitrator had made disparaging comments on his twitter account about Chinese nationals. These comments could draw into doubt the arbitrator's impartiality in a case involving a Chinese athlete.

The Supreme Court followed the arguments of the Chinese athlete and vacated the award. In its extensive reasoning, the Supreme Court first noted that a party has a duty to conduct searches in relation to an arbitrator's independence and impartiality. However, this duty has its limits. The party is not required to carry out extensive investigations in the absence of any indications of bias. Nor does a party have to continue its investigations during the arbitration proceeding itself. The 'duty of curiosity' as to the existence of possible grounds of challenge of an arbitrator has limits. The circumstances of the individual case are decisive. In this case, the applicant had not breached his duty of curiosity.

Turning to the facts of the case itself, the Supreme Court found that a disqualification of the arbitrator was warranted, also with reference to the decision of the ECHR in the matter Mutu v. Switzerland. There it was held that the mere appearance of bias is sufficient to disqualify an arbitrator. The specific circumstances of each case are decisive. Here the Supreme Court found the doubts justified. There are limits to the expression of arbitrators in social networks, even if they do not act there as an arbitrator, to avoid doubts as to their impartiality. While the arbitrator's remarks were made in another context, he had also used disparaging words which had no context with the subject and were as such inadmissible. Further, the presiding arbitrator had also continued to utter such remarks after his appointment as president of the arbitral tribunal. The doubts were justified.

iii Investor–state disputes

Switzerland is a contracting state to the Convention on the Settlement of Investment Disputes between States and Nationals of Other States (ICSID Convention), which entered into force for Switzerland on 14 June 1968. Switzerland has also concluded among the highest numbers of bilateral investment treaties (BITs).

While, in particular, ad hoc investment treaty arbitrations are regularly seated in Switzerland, the Swiss Federal Supreme Court needs to decide every year only a very limited number of annulment actions against such awards. Last year, the Supreme Court for the first time partially annulled an investment arbitration award rendered in Switzerland.

Swiss Federal Supreme Court annuls for the first time an investment arbitration award

In a decision of 25 March 2020,⁵² the Swiss Federal Supreme Court – for the first time – partially annulled an arbitral award issued in an investment arbitration seated in Switzerland. It found that an arbitral tribunal seated was wrong in declining jurisdiction for an investment treaty claim brought by Clorox España SL against the República Bolivariana de Venezuela in an UNCITRAL arbitration in Geneva. The decision considered only one jurisdictional objection dealt with by the arbitral tribunal, while others still have to be adjudicated by the tribunal. The Supreme Court continued its practice to interpret the meaning of the terms 'investor' and 'investment' in line with the Vienna Convention on the Law of Treaties (i.e., in this case based on the wording of the BIT even though Venezuela has not ratified that Convention). The Supreme Court noted that the definition of the term 'investment' in the BIT entered between Spain and Venezuela, based on which Clorox sought damages for Venezuela's alleged violation of Clorox rights as investor, did not provide for any limitation or requirement regarding the type of protected investment. Rather, the contracting parties had provided themselves for a brought definition of that term. Even though at the time of the conclusion of the BIT, defensive measures against 'treaty shopping' practice had already been commonly provided for by adding additional requirements, this BIT contained no requirement going further than an investor holding assets in the territory of the other contracting party. The Supreme Court therefore found that the arbitral tribunal had without cause put up additional requirements (which were allegedly not met). Accordingly, Clorox's request to annul the award was granted. However, the other jurisdictional objections of Venezuela still have to be adjudicated upon by the arbitral tribunal.

Another challenge of an award in an investment dispute was dismissed by the Swiss Federal Supreme Court. In a decision of 7 February 2020,⁵³ the Supreme Court held that the submission of new legal arguments is in principle admissible in proceedings before it, unlike that of new facts and evidence. An applicant may also file a judgment related to the case. Arbitral award and foreign court decisions are admissible only if they were rendered before the date of the issuance of the challenged award. However, investment treaty awards do not have any binding effect on tribunals in subsequent investment treaty arbitrations. Thus, the appellant Czech Republic was not allowed to rely on the Achmea decision of the European Court of Justice,⁵⁴ nor on the Antaris Solar award by the PCA,⁵⁵ both having been rendered after the award. The Supreme Court thus rejected the Czech Republic's interim challenge limited to the tribunal's findings on jurisdictions. The tribunal's decision that the state is liable for reforms to its solar power sector cannot be challenged at this juncture but only together with the tribunal's forthcoming decision on the damages. The arbitration is now in the damages phase.

Switzerland facing its first ICSID claim

On 17 August 2020, ICSID registered an arbitration by Human Rights Defenders Inc., as assignee of Natale Palazzo, Rodolfo Scodeller and Antonio Basile against the Swiss Confederation.⁵⁶

The Seychelles entity claims US$300 million as assignee of three Italian investors whose properties were allegedly devalued by measures of the Swiss authorities back in the late 1980s. The claim has been filed under the Swiss–Hungarian BIT. The claimants argue that they are entitled to rely on the dispute resolution provisions of the Swiss–Hungarian BIT pursuant to a most-favoured nation clause in a 1868 treaty on consular relations between Switzerland and Italy. A 1989 Swiss Federal decree which aimed at limiting real estate speculation imposed a retroactive ban on the sale of property within five years of its purchase. The claimants argue that this was in contravention of a 1988 referendum.

The arbitral tribunal was constituted on 13 January 2021. On 29 January 2021, the respondent filed preliminary objections pursuant to ICSID Arbitration Rule 41(5). On 12 March 2021, the Secretary-General moved that tribunal stay the proceedings pursuant to ICSID Administrative and Financial Regulation 14(3)(d). Pursuant to this provision, on 22 March 2021 the tribunal issued its Procedural Order No. 1 staying the proceedings for non-payment of the required advances.

Cases involving Swiss parties pending in ICSID proceedings

In the ICSID arbitration of Koch Minerals Sàrl and Koch Nitrogen International Sàrl v. Bolivarian Republic of Venezuela⁵⁷ concerning the construction and operation of a fertiliser plant, the proposal for the disqualification of the three members of the tribunal had been declined by the Chair of the Administrative Council. The parties filed their post-hearing briefs on 30 January 2015 and their statements of costs on 13 February 2015. Following the passing away of one arbitrator, the arbitral tribunal had been reconstituted with the appointment of a new arbitrator on 1 February 2016. On 30 October 2017, the tribunal rendered its award with a partial dissenting opinion by one arbitrator. It found Venezuela liable under its BIT with Switzerland for the expropriation of Koch Minerals' 35 per cent interest in Fertinitro, the country largest fertiliser producer, which had been nationalised. On 18 December 2017, Venezuela filed a request for rectification of the award, upon which the tribunal issued on 11 April 2018 a decision on the rectification of the award. The tribunal also ruled that the second claimant, Koch Nitrogen, should be compensated for the loss of its rights under an associated long-term agreement for the purchase of ammonia and urea produced at the Fertinitro plant. After a stay of the annulment proceedings, initiated by Venezuela on 17 August 2016, the ad hoc committee issued three procedural orders. On 20 November 2020, Venezuela filed a memorial on annulment. On 5 April 2021, the claimants filed their counter-memorial on annulment.

In the ICSID arbitration Alpiq AG v. Romania⁵⁸ concerning cancelled energy supply contracts, the tribunal rendered its award on 9 November 2018 and a rectification of the award on 21 March 2019. It rejected the US$450 million claim brought by Alpiq under the Romania–Switzerland BIT and the Energy Charter Treaty. After rejecting a number of jurisdictional objections raised by Romania, the tribunal concluded on the merits that Romania was not liable for the decision of its state-owned energy company Hidroelectrica to terminate two energy supply contracts with the local subsidiaries of the claimant, Alpiq RomIndustries and AlpiqEnergie. These decisions had not been taken by the government but by the judicial administrator appointed after the insolvency of Hidroelectrica. The arbitral tribunal found that this decision making was not controlled by the government. Alpiq had also failed to establish a denial of justice, as the Romanian courts decided sometimes in favour of and sometimes against Hidroelectrica. On 23 July 2019, Alpiq AG filed an application for partial annulment. The parties filed a double exchange of memorials on annulments and a double exchange of post-hearing briefs, with the reply post-hearing briefs and submissions of costs filed on 15 February 2021.

In the ICSID arbitration OperaFund Eco-Invest SICAV PLC and Schwab Holding AG v. Kingdom of Spain⁵⁹ regarding a renewable energy generation enterprise under the Energy Charter Treaty, the tribunal rendered its award on 6 September 2019 (with a dissenting opinion by one arbitrator) and a rectification of the award on 28 October 2019. The tribunal ordered Spain to pay about €30 million to the Maltese and Swiss investors. On 29 March 2021, Spain filed its reply on annulment.

In the ICSID arbitration Glencore International AG and CI Prodeco SA v. Republic of Columbia,⁶⁰ the claimants asserted that the Columbian authorities had sought to revoke an amendment to a concession agreement after it was signed, and after significant investments had been made to expand the Calenturitas thermal coal mine on the basis of the amendment. On 27 August 2019, the tribunal rendered its award. Colombia was ordered to pay a US$19 million as restitution of a fine. The tribunal dismissed most of Columbia's jurisdiction and admissibility objections, and also alternative claims by Glencore for US$575 million plus interest under the previous royalty regime, whose reinstatement the tribunal rejected. On 30 December 2019, Columbia filed an application for annulment. On 6 November 2020, the ad hoc committee held a hearing on annulment by video-conference. On 24 November 2020, each party filed a statement of costs.

In the ICSID arbitration Pawlowski AG and Project Sever sro v. Czech Republic⁶¹ concerning a real estate development, the tribunal held a hearing on jurisdiction, merits and quantum in Paris in January 2020. On 15 July 2020 and 5 August 2020, the parties filed their post-hearing briefs and statements of costs, respectively.

The ICSID arbitration Mabco Constructions SA v. Republic of Kosovo⁶² concerns a dispute about the acquisition of shares in a company in the tourism industry under the BIT between Switzerland and the Republic of Kosovo of 2011 and the investment law of the Republic of Kosovo of 2014. On 23 January 2020, a hearing on jurisdiction was held. In February 2020, the parties filed their post-hearing briefs and submissions on costs. On 30 October 2020, the tribunal issued a decision on jurisdiction with a dissenting opinion by one arbitrator. On 16 April 2020, the claimant filed its memorial on the merits.

In the ICSID arbitration DCM Energy GmbH & Co. Solar 1 KG and others v. Kingdom of Spain,⁶³ four German claimants and one Swiss claimant filed a claim concerning a renewable energy generation enterprise in Spain under the Energy Charter Treaty. After a hearing on jurisdiction and merits held in Paris in February 2020, post-hearing briefs, further comments, observations, responses, supplements and requests for the tribunal to decide on the admissibility of new documents were filed. On 6 April 2021, the tribunal decided on the admissibility of new documents.

In the ICSID arbitration EBL (Genossenschaft Elektra Baselland) and Tubo Sol PE2 SL v. Kingdom of Spain⁶⁴ regarding a renewable energy generation enterprise in Spain filed under the Energy Charter Treaty, the exchanges on jurisdiction were completed. In October and November 2020, the organisation of the hearing was prepared by a pre-hearing organisational meeting and two procedural orders of the tribunal.

The ICSID arbitration Glencore International AG, CI Prodeco SA and Sociedad Portuaria Puerto Nuevo SA v. Republic of Columbia⁶⁵ concerns a dispute about the construction and maintenance of an access channel for the public service port, Puerto Novo, in Ciénaga on Colombia's northern coast. Note that it is unrelated to ICSID Case No. ARB/16/6 discussed above. On 22 February 2021, the tribunal issued a decision on the respondent's preliminary objections pursuant to ICSID Arbitration Rule 41 (5).

In the ICSID arbitration United Agencies Limited SA v. People's Democratic Republic of Algeria⁶⁶ concerning a dispute about the acquisition of shares, the claimant filed several observations on respondent's request to address the objection to jurisdiction as a preliminary question. A Procedural Order No. 2 addressed this request. Further procedural orders addressed procedural matters, provisional measures and the production of documents, the last of them dated 3 May 2021.

In the ICSID arbitration, Philip Morris International Inc. and others v. Ukraine⁶⁷ concerning a dispute in the tobacco industry, the tribunal was constituted on 27 April 2021.

In the ICSID arbitration APG SGA SA and D.O.O. za promet i usluge Alma Quattro Beograd v. Republic of Serbia⁶⁸ concerning a dispute in the advertising industry, the Secretary-General registered a request for the institution of arbitration proceedings on 17 March 2021.