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In a world where country borders can be unstable and we increasingly witness aspirations to split or annex territory, foreign direct investment faces a growing risk. In a recent dispute, the Swiss Supreme Court (“SSC”) affirmed that despite a partial state secession, agreements and any arbitration clause contained therein may be transferred to a newly independent state – which thereby guarantees the protection of investors’ rights. The judgment is available in German.
The Background
In October 2003, two telecom companies concluded a licensing agreement with a license distributor for the operation of a telecommunications network in the then southern part of the Republic of Sudan, today the Republic of South Sudan. In October 2007, the telecom companies and the Ministry of Technology and Postal Services for the Government of Southern Sudan concluded amendment no. 2, which included an arbitration clause providing for ICC arbitration in Geneva, Switzerland, and a waiver of the right to appeal against any award. In 2011, South Sudan became independent from the Republic of Sudan. In July 2018, the telecom companies initiated ICC proceedings against South Sudan seeking payment of USD 2,7 billion for damages resulting from breach of the licensing agreement and its amendments. The sole arbitrator accepted jurisdiction over the dispute in a partial award issued in November 2022. South Sudan challenged the partial award before the SSC and argued that the sole arbitrator (i) lacked jurisdiction because there was no valid arbitration agreement between the parties; and (ii) had violated South Sudan’s right to be heard. The telecom companies objected to the admissibility of the challenge by referring to the waiver of the right to appeal any award in amendment no. 2.
The Supreme Court Decision
The bar to succeed before the SSC is high, and this case did not satisfy the requirements.
The SSC confirmed its consistent case law that a waiver of the right to appeal is permitted, including for decisions on the jurisdiction of an arbitral tribunal, provided that no party is domiciled, habitually resides, or has its seat in Switzerland. The validity of the waiver in this case, however depended on the validity of the arbitration clause, which South Sudan was challenging with two arguments.
First, South Sudan referred to its national law to claim that the Ministry of Technology and the license distributor were not authorized to conclude the licensing agreement and the amendments, and thus everything, including the arbitration clause, was “already invalid from the beginning”. Such an argument is always designed to fail under Swiss arbitration law. In order to protect parties and investors who sign an arbitration agreement with a State and a state-owned entity, the Federal Act on Private International Law (a/k/a Swiss international arbitration law) expressly provides that “[w]here a party to the arbitration agreement is a State, or an enterprise held by, or an organization controlled by, a State, it may not invoke its own law in order to contest the arbitrability of a dispute or its capacity to be a party to an arbitration.”
In a second argument and more interesting, South Sudan argued that the arbitration agreement did not transfer over to it after it gained independence from Sudan. The assignment of an arbitration agreement is an issue of the substantive law applicable to the secession, and if the conditions are met, a state who gains independence through a (partial) secession may be bound by an arbitration agreement concluded by the predecessor state. In the present case, the sole arbitrator had relied on an economic agreement between the two states, as well as a ministerial decree of South Sudan expressly confirming the telecom license. The SSC who does not review the assessment of the evidence and the establishment of the facts by arbitral tribunals, concluded that the sole arbitrator was correct in finding that the arbitration clause had transferred over to South Sudan as part of the state succession settlement.
As the arbitration agreement was valid, so was the waiver to appeal against the award.
The SSC still briefly addressed South Sudan’s argument of a violation of its right to be heard. The State claimed that the sole arbitrator applied the law in a surprising manner by relying on unspecified principles of state secession not raised by the parties or the sole arbitrator during the proceedings. There is consistent case law on this argument establishing in clear terms that the parties do not have a constitutional right to be heard, in particular not in connection with the legal assessment of the facts. The parties only have a right to be informed in advance of the facts deemed relevant for the decision, if the court intends to rely on a legal ground never invoked by either party and that they could not reasonably expect to be relevant. Here the subject matter of the jurisdictional dispute was the license and the economic agreement between Sudan and South Sudan. None of the laws relied upon by the sole arbitration could surprise the parties.
Over the years, the Swiss Supreme Court – which is the only judicial level of review for all international arbitration awards rendered in Switzerland – has maintained and strengthened its arbitration friendly approach and reluctance to interfere with arbitral awards. This decision also confirms the Swiss confidence in the principle of sanctity of contracts (pacta sunt servanda) allowing parties and investors to have faith in the enforcement of their contractual rights.