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29 August 2019
In a recent decision, the Supreme Court annulled a final award. The award was issued further to a first final award that had previously been cancelled by the Supreme Court. The second award was annulled as it did not follow the Supreme Court's findings.(1)
A dispute arose in connection with a tourism project regarding the construction and operation of a hotel and casino in the West Bank involving a Liechtenstein company (A), the state of Palestine and a Palestinian company (B). The general agreement entered into by the parties in 1996 provided, among other things, that B would "organise and procure all necessary permits and licences for A. __ AG in order to build and operate the Tourism Project", failing which it had to "to indemnify A. __ AG for all damages". The agreement was governed by Swiss law and provided for arbitration in Zurich "pursuant to the Commercial Arbitration Rules of the Zurich Chamber of Commerce".
In July 1997 A obtained a 15-year licence for the operation of the casino, which began operations in September 1998. The hotel opened in July 2000.
In October 2000, further to a decree of the Israeli military forces that made it impossible for visitors to enter the territory encompassing the casino and the hotel without authorisation, A was forced to close the casino. The operation of the hotel continued.
In December 2000 the parties entered into two further agreements "to safeguard the further developments of the Tourism Project" and to prolong the term of the licences by up to 30 years. These agreements also provided that the arbitration clause contained in the general agreement was applicable.
In 2002 the state of Palestine issued its criminal code (in fact, it took over the Jordanian criminal code), which provided that "whoever operated a public place for gambling will be imprisoned for six months and fined".
In March 2002, although it appears that access to the territory remained restricted, A requested the state of Palestine to issue new licences for the tourism project. This request (renewed in 2013) remained unsuccessful.
In July 2012 A claimed that the non-issuance of new licences was a violation of the agreements entered into in 2000.
In December 2013 A started arbitration proceedings under the Swiss Rules of International Arbitration against the state of Palestine and B, seeking, among other things:
In 2016 the arbitral tribunal rejected the relief sought by A because mandatory Palestinian law prohibited gambling and thus prevented the specific performance of the agreements and A had not established that the requirements for damages were met.
A challenged this award before the Supreme Court. By decision 4A_532/2016 of 30 May 2017,(2) the Supreme Court partially annulled this award and remanded the case to the arbitral tribunal for a new decision.
The Supreme Court found that the arbitral tribunal had violated its right to be heard by rejecting A's prayer for relief regarding the hotel without taking into account its argument that the operation of a hotel was not illegal in Palestine. It found that the arbitral tribunal had committed such a violation because it had not made any findings as to why the prohibition of gambling provided by Palestinian criminal law would also apply to the operation of a hotel in Palestine. There were no indications that the arbitral tribunal had at least implicitly dealt with this issue and, in its submission to the Supreme Court, the arbitral tribunal confirmed that it had not specifically examined the issue of the hotel licence.(3)
In July 2018 the arbitral tribunal issued a new final award whereby it found that A's prayers for relief did not include the issuance of a separate license for the hotel. A challenged this second final award before the Supreme Court. In A's submission, it claimed that the Supreme Court's decision on the challenge of the first final award had found that A had sought a licence for the hotel by way of a separate prayer for relief. Thus, A claimed that the arbitral tribunal had to ascertain its claim that running a hotel was allowed and legal and, by failing to do so, it had violated A's right to be heard.(4)
The Supreme Court upheld A's challenge. Its decision of 28 November 2016 on the challenge of the first final award had found that A's prayers for relief included a claim for a separate hotel licence. Therefore, there was no room for the arbitral tribunal to find otherwise. The latter had to assess this claim in view of the gambling prohibition provided by Palestinian criminal law. By failing to do so, the arbitral tribunal had violated A's right to be heard. The Supreme Court thus annulled the second final award as well.(5)
In principle, if an application for an annulment of an arbitral award is upheld, the Supreme Court may cancel only the award (the so-called 'cassatory' nature of setting aside proceedings).(6) However, as shown by this decision, the Supreme Court's findings underlying a cancellation for the violation of a party's right to be heard seem to qualify as directions – not to say instructions – for the arbitral tribunal which must remake the decision. This makes sense, as otherwise any successful challenge based on the right to be heard could generate an endless back and forth between the arbitral tribunal and the Supreme Court.
For further information on this topic please contact Frank Spoorenberg or Daniela Franchini at Tavernier Tschanz by telephone (+41 22 704 3700) or email (firstname.lastname@example.org or email@example.com). The Tavernier Tschanz website can be accessed at www.taverniertschanz.com.
(2) For further details on this decision, please see "Supreme Court partially annuls award for violation of right to be heard".
(6) To the exception of challenges based on reasons of jurisdiction and constitution of an arbitral tribunal, where the Supreme Court may make a finding of jurisdiction and respectively revoke an arbitrator (ATF 136 III 605, Ground 3.3.4).
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