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Death of a salesman: arbitration and insolvency in Switzerland (Chapter 2)

In our previous contribution, we examined the impact of insolvency proceedings on the validity of arbitration agreements designating Switzerland as the relevant seat. As we saw, such proceedings have no effect on the substantive validity of arbitration agreements. However, this does not necessarily mean that the insolvent party has the capacity to be a party to arbitration proceedings (although the two issues can be difficult to distinguish from one another). The notion of “capacity to arbitrate” (or subjective arbitrability) relates to the ability of a person or entity to enter into an arbitration agreement and act as a party to arbitration proceedings.

To examine the impact of insolvency proceedings on a party’s capacity to arbitrate, it is necessary to conduct a three-step choice of laws analysis:

  • First, the characterisation of the relevant issue (for example, as one of capacity or one of substantive validity of the arbitration agreement).
  • Second, the identification of the choice of laws rule that applies to this issue.
  • Third, the identification of the applicable law designated by the choice of laws rule.

Characterisation of the relevant issue

The characterisation of an issue as pertaining to either the substantive validity of the arbitration agreement or a party’s capacity to arbitrate can be delicate in practice. Indeed, the Swiss Supreme Court reached opposite conclusions in two decisions dealing with the issue, one rendered in 2009 (characterising provisions of foreign insolvency law restricting an insolvent party’s capacity to arbitrate as one of subjective arbitrability) and the other in 2012 (considering that such provisions must be regarded as pertaining to the substantive validity of the arbitration agreement).

In its most recent decision, the Swiss Supreme Court explained that subjective arbitrability must be examined according to the lex arbitri, that is, Chapter 12 of the Swiss Private International Law Act (PILA) in case of Swiss-seated arbitrations. The Swiss lex arbitri does not contain any provision dealing with the issue of subjective arbitrability in case of non-state parties. Indeed, article 177(2) of PILA only relates to state parties and provides that such parties cannot invoke their own law to contest their capacity to arbitrate. Absent any specific provisions for private parties, the issue has to be addressed in accordance with general principles of procedure. On that basis, the Supreme Court held that the capacity to be a party to an arbitration (so-called “Parteifähigkeit”) presupposes that the person or entity has general legal capacity (Rechtsfähigkeit).

The Swiss Supreme Court then clarified that, if the foreign entity continues to have legal capacity under the applicable law, then it also has the capacity to be a party to arbitration proceedings seated in Switzerland. Accordingly, provisions of foreign bankruptcy law that merely impose restrictions in relation to arbitration proceedings, but which do not annihilate the insolvent company’s legal capacity, do not prevent that entity from being a party to a Swiss-seated arbitration. Said foreign law provisions would instead pertain to the substantive validity of the arbitration agreement. This issue is governed exclusively by article 178(2) of PILA. As we explained, according to the system set out by this provision, a party’s insolvency does not lead to the invalidity of the arbitration agreement.

Applicable choice of law rules

In relation to the applicable choice of law rules, the Swiss Supreme Court also held that the law governing the issue of legal capacity should be determined pursuant to the general conflict of laws provisions contained in PILA, in particular articles 154 and 155 of PILA in relation to companies. The Swiss Supreme Court therefore rejected the views expressed by some commentators, according to which Swiss-seated tribunals do not apply the conflict of law rules set out in Chapters 1 to 11 of PILA, but rather apply their own autonomous set of private international law rules, as per article 187(1) of PILA. According to this provision, the tribunal must therefore identify “the rules of law with which the case has the closest connection” when determining the law applicable to the issue of subjective arbitrability. For its part, the Swiss Supreme Court considered that article 187(1) of PILA only governs the issue of the substantive law applicable to the merits of the dispute (and not the issue of legal capacity).

Applicable law

As to the applicable law, and regardless of whether articles 154 and 155 of PILA or article 187(1) of PILA apply, it seems that the law at the place of incorporation of the company should in any event govern the issue of legal capacity. Indeed, articles 154(1) and 155(c) of PILA provide that the law of the state where the company is incorporated governs the issue of that company’s legal capacity. Furthermore, it seems that the law of the place of incorporation has the closest connection to the issue of a company’s legal capacity.

In accordance with the Swiss Supreme Court’s case law presented above, if the law at the place of incorporation of the insolvent company provides that this company loses its legal capacity as a result of insolvency proceedings, then that party will lose its capacity to be a party to any Swiss-seated arbitration. For companies incorporated in Switzerland, Swiss bankruptcy law provides that companies keep their capacity to act as a party to arbitration or court proceedings in case of insolvency proceedings. That being said, the right to dispose of the estate is then vested in the trustee and the right to conduct legal proceedings is transferred to the insolvency estate.

In conclusion, the issue of an insolvent entity’s capacity to be a party to a Swiss-seated arbitration is not a straightforward one. After dealing with delicate issues of characterisation, a Swiss-seated tribunal will have to interpret the scope and effect of the law of the place of incorporation of the insolvent company. That law will ultimately decide on the issue of subjective arbitrability. This solution can lead to great uncertainty and frustrate the enforcement of an (otherwise valid) arbitration agreement. Furthermore, it cannot be ruled out that the tribunal’s (or, ultimately, the Supreme Court’s) interpretation of foreign insolvency law might conflict with that of foreign national courts, thus leading to difficulties at the enforcement stage.

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