State-owned entity's consent to arbitrate does not bind state – in principle

Facts
Decision
Comment

The fact that a party to an arbitration agreement is fully owned by a state is insufficient grounds to have that agreement extended to said state.(1)

Facts

A dispute arose in connection with the Libyan Great-Man-Made River project. This project aimed to bring water from the south of Libya to the north through a vast infrastructure. In this context, in June 2006 two Turkish companies (the applicants) forming a joint venture under Turkish law entered into a contract with a Libyan state-owned entity. The state entity had been incorporated solely for the purpose of the Great-Man-Made River. Under this contract, the applicants committed to build a 383km water pipeline. The contract provided for International Chamber of Commerce arbitration, with the seat in Geneva.

In 2011 the applicants had to stay their work (70% of which had been completed) due to riots throughout Libya. As the parties failed to agree on the resumption of the work, the applicants started arbitration in Geneva against both the state entity and the state of Libya. Libya objected to the jurisdiction of the arbitral tribunal. The objection was sustained by an interim award, which the applicants challenged before the Swiss Supreme Court.(2)

Decision

The applicants first argued that the state entity and the state of Libya were a sole and same entity. The Supreme Court dismissed this argument based on the factual findings of the arbitral tribunal which showed that the state entity was standing alone. To reach this conclusion, the Supreme Court considered, in particular, the facts that:

• the state entity's financing did not come entirely from the state;
• the state's supervisory authority, which would have been relevant if the type of transaction underlying the contract had been made by the state, had not been involved in the negotiation of the contract;
• the contract had been concluded without the state's prior authorisation; and
• while a public authority (the Libyan Ministry of Waters) had intervened in relation to the contract, said intervention related to the appellants' possible compensation for the loss of equipment during the riots.(3) It thus did not interfere with the performance of the contract as such.

The applicants then argued that the arbitration agreement had to be extended to the state of Libya pursuant to the Swiss arbitration law. In this respect, the Supreme Court pointed out that contracts bind only the parties thereto (pursuant to the principle of privity of contracts) and that their extension to a third party is thus exceptional. It also referred to its line of decisions according to which such an exception may arise if a third party intervenes in the performance of the main contract so as to express its willingness to be party to the arbitration agreement.(4) The Supreme Court found, again based on the arbitral tribunal's binding findings of facts, that no such intervention had been established in the case. Interestingly, the Supreme Court added that the authoritarian nature of the then government of Libya and the importance that it had put on the project did not suffice to create a legitimate expectation that the state of Libya was party to the agreement.(5)

The Supreme Court thus dismissed the challenge.

Comment

The decision confirms the landmark Westland decision.(6) The independence of a state-owned entity from the state itself is, once again, acknowledged in the context of the personal scope of an arbitration agreement.

Therefore, an arbitration agreement concluded by a state-owned entity does not necessarily bind the state itself. In order to do so, the arbitration agreement must be extended to the state. The circumstances warranting such extension are not different from those generally applying to the extension of arbitration agreements in which no party is a state-owned entity.

For further information on this topic please contact Frank Spoorenberg or Daniela Franchini at Tavernier Tschanz by telephone (+41 22 704 3700) or email (spoorenberg@taverniertschanz.com or franchini@taverniertschanz.com). The Tavernier Tschanz website can be accessed at www.taverniertschanz.com.

Endnotes

(1) Supreme Court, 4A_636/2018, 24 September 2019.

(2) Ground A.

(3) Ground 4.3.

(4) Ground 4.5.3. For a recent restatement of this line of decisions, see ATF 145 III 199, which applies the same principle in the context of the New York Convention, despite the formal requirement (signature or inclusion in an exchange of letters of telegram) provided for by Article II(2).

(5) Ground 4.5.3.

(6) Decision 4P 1675/1987, 19 July 1988.