Effects of Foreign Bankruptcy on International Arbitration Gabrielle Nater-Bass/Olivier Mosimann*

I. Financial Crisis – A Changed Playing Field In the wake of the financial crisis, bankruptcies are frequent and, likewise, international arbitration is increasingly confronted with bankruptcy issues. The arbitral “playing field” has had to adapt to this situation. Arbitrators not only have to ensure the enforceability of their awards in general, but they also have to pay attention to the particular interests at stake in bankruptcies. In the dispute between, inter alia, Elektrim and Vivendi, which shall be at the center of interest here, Elektrim’s bankruptcy in the midst of arbitral proceedings forced arbitral tribunals in Geneva and London to decide on issues at the heart of fundamental principles of procedural and substantive law applied in international arbitration proceedings. As it will be seen, they have come to very different conclusions. As international arbitration seeks to present an international and, to a certain extent, delocalized approach in order to serve the interests of a predictable and stable arbitral process, such an outcome is far from ideal. However, a harmonized approach to the most common problems may be difficult to achieve as national bankruptcy legislations differ considerably. Moreover, there is a tension between the parties’ selection of arbitration to resolve their disputes on the one hand, and the principle of equality of the creditors in bankruptcy, preferably in proceedings centralized at the forum concursus, on the other hand.1) In the following article, the Elektrim cases will be briefly outlined (II.) and their findings relied upon to illustrate different approaches to common issues in the context of a bankrupt arbitration party (III.). Finally, suggestions to achieve greater predictability in the interplay between bankruptcy and arbitration will be made (IV.).

* Both authors wish to thank Melissa Magliana of Homburger for her valuable assistance and contribution. 1 ) Cf. Lars Markert, Arbitrating in the Financial Crisis: Insolvency and Public Policy versus Arbitration and Party Autonomy – Which Law Governs?, 2 (2) Contemp. Asia Arb. J. 217, 219 et seq. (2009); Philippe Fouchard, Arbitrage et faillite, Rev. Arb. 470, 472 (1998).

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II. The Elektrim Cases A. Facts 1. The English Dispute2) Elektrim S.A. (a Polish company; Elektrim) entered into an agreement with Vivendi Universal S.A. and Vivendi Telecom S.A. (both French companies; Vivendi) for the purpose of acquiring an interest in a Polish mobile telephone company called PTC. The agreement contained an arbitration clause providing for arbitration in London according to the Arbitration Rules of the London Court of International Arbitration (LCIA). Vivendi commenced arbitration pursuant to this clause in 2003, filing claims for breach of the agreement in an amount of 1,9 billion. The arbitral tribunal scheduled a hearing on liability issues for October 15–19, 2007. On August 21, 2007, Elektrim was declared bankrupt by order of the Warsaw District Court. 2. The Swiss Dispute3) Vivendi and others, on one side, and Deutsche Telekom AG (a German company) and others, including Elektrim, on the other, allegedly entered into a settlement agreement containing an arbitration clause providing for arbitration under the Rules of Arbitration of the International Chamber of Commerce (ICC) in Geneva. On April 13, 2006, Vivendi et al. initiated arbitration proceedings in accordance with the arbitration clause. The jurisdiction being objected to, the Court of Arbitration of the ICC decided that it was prima facie satisfied with the arbitral tribunal’s jurisdiction and transmitted the file to the arbitral tribunal for a final decision on jurisdiction. Subsequently, all parties except for one agreed on the Terms of Reference which were approved by the Court of Arbitration. On September 5, 2007, Elektrim informed the arbitral tribunal of the August 21, 2007 bankruptcy order issued by the Warsaw District Court. 3. The Polish Provision at the Center of Debate Both disputes revolved around Elektrim’s bankruptcy and Art 142 of the Polish Law on Bankruptcy and Reorganisation (Prawo upadlo¦ciowe i naprawcze – PLBR), which provides as follows: “Any arbitration clause concluded by the bankrupt shall lose its legal effect as at the date bankruptcy is declared and any pending arbitration proceedings shall be discontinued.”4) 2

) See Syska v. Vivendi Universal SA (2008) EWHC 2155 (Comm) (Clarke J), para. 1 et seq. ) See Swiss Federal Supreme Court, Mar 31, 2009, docket no. 4A_428/2008, available at www.bger.ch/index/juridiction/jurisdiction-inherit-template/jurisdiction-recht/jurisdictionrecht-urteile2000.htm (last visited July 29, 2010). 4 ) Id. available at www.bger.ch/index/juridiction/jurisdiction-inherit-template/ 3

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Although this provision is unusual, it is not entirely unique.5) Therefore, the findings of the Elektrim cases give guidance on bankruptcy-related arbitration issues beyond the scope of the provision of Polish law quoted above.

B. The English Approach: Arbitral Proceedings Unaffected 1. Considerations of the LCIA Arbitral Tribunal in London Upon being declared bankrupt, Elektrim objected to the arbitral tribunal’s jurisdiction alleging that the arbitration agreement had been annulled by virtue of Art 142 PLBR. It was common ground that if Art 142 PLBR were to be applied, the effect of that provision would have been to annul the arbitration agreement.6) Therefore, the arbitral tribunal had to determine whether said provision was applicable. The LCIA arbitral tribunal based its decision on Council Regulation (EC) 1346/2000 on insolvency proceedings (Insolvency Regulation).7) Art 4 (1) Insolvency Regulation sets forth the general rule according to which the law of the Member State8) where insolvency proceedings are opened is applicable to the insolvency and its effects, including in other Member States. Hence, according to this general rule, Polish law, as the lex concursus, would have applied to the effects of Elektrim’s bankruptcy in the English dispute. However, Art 4 (2) (f)9) and Art 15 of the Insolvency Regulation10) provide for the exception that the effects of insolvency on “lawsuits pending” are to be governed solely by the law of the Member State where these proceedings are pending. On the basis of these provisions, the arbitral tribunal concluded that arbitral proceedings fell within the scope of “lawsuits pending” in the sense of Art 4 (2) (f) and Art 15 of the Insolvency Regulation, leading to the application of the lex loci arbitri to the effects of a party’s bankruptcy on pending arbitral proceedings. Consequently, absent any provision of English lex loci arbitri requiring a discontinuation of proceedings against a bankjurisdiction-recht/jurisdiction-recht-urteile2000.htm, para. B (English translation as agreed on by the parties to the dispute, last visited July 29, 2010). 5 ) E.g. Art 478 (8) of the Latvian Civil Procedure Law provides that disputes regarding the rights and obligations of persons that have been declared insolvent before the making of the award by the arbitral tribunal are not arbitrable. See thereto Gary B. Born, International Commercial Arbitration 754 (2009). 6 ) Cf. Syska v. Vivendi, supra note 2, at para. 7. 7 ) Council regulation (EC) 1346/2000 of May 29, 2000 on insolvency proceedings, (2000) OJ L160/1 “Insolvency Regulation”. 8 ) I.e. EU Member State. 9 ) Art 4 (2) (f) of the Insolvency Regulation (“[The law of the State of the opening of proceedings shall determine in particular:] the effects of the insolvency proceedings on proceedings brought by individual creditors, with the exception of lawsuits pending”). 10 ) Art 15 Insolvency Regulation (“The effects of insolvency proceedings on a lawsuit pending concerning an asset or a right of which the debtor has been divested shall be governed solely by the law of the Member State in which that lawsuit is pending.”).

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rupt party, the arbitral tribunal did not apply Art 142 PLBR and decided in an interim award to proceed with the arbitration with respect to Elektrim. The arbitral tribunal also rejected Elektrim’s argument that Art 142 PLBR applied to the effects of insolvency proceedings on the arbitration agreement by virtue of Art 4 (2) (e) Insolvency Regulation.11) This article provides for the application of the lex concursus to the effects of insolvency proceedings on “current contracts” to which the debtor is a party. It was suggested by Elektrim that the arbitration agreement constitutes a current contract. However, the arbitral tribunal held that the exception of “lawsuits pending” is more specific than the provision on “current contracts” and, therefore, must prevail.12) 2. Considerations of the English High Court and Court of Appeal On April 16, 2008, Josef Syska, acting as the administrator of Elektrim, and Elektrim initiated proceedings before the English High Court to set aside the interim award rendered by the LCIA arbitral tribunal. As alleged before the LCIA arbitral tribunal, Elektrim maintained that the arbitration agreement had ceased to have effect as of Elektrim’s declaration of bankruptcy. The English High Court, in a decision written by Justice Clarke, upheld the LCIA arbitral tribunal’s application of the Insolvency Regulation and further elaborated on the interpretation of the relevant provisions of the Insolvency Regulation. In his decision, Justice Clarke first outlined the general rule contained in Art 4 (1) of the Insolvency Regulation according to which it is the law of the Member State in which insolvency proceedings are initiated that is to apply to these proceedings and their effects.13) In particular, he found, as per Art 4 (2) (e) of the Insolvency Regulation, that this law applied to the effects on current contracts to which the debtor is a party and, as per Art 4 (2) (f) of the Insolvency Regulation, to proceedings brought by individual creditors. However, he declared that, as per Art 15 of the Insolvency Regulation, lawsuits already pending concerning an asset or a right of which the debtor has been divested are governed solely by the law of the Member State in which that lawsuit is pending. Therefore, Justice Clarke concluded that Polish law is applicable to the effects of the bankruptcy with the exception of lawsuits pending.14) In the context of the pending arbitration, Polish law could thus only apply if either the arbitration agreement were to be deemed a current contract within the meaning of Art 4 (2) (e) of the Insolvency Regulation or by virtue of the general rule set out in Art 4 (1), but only to the extent that no exception is applicable.15) Relying on the reasoning of the arbitral tribunal, the 11 ) Art 4 (2) (e) of the Insolvency Regulation (“[The law of the State of the opening of proceedings shall determine in particular:] the effects of insolvency proceedings on current contracts to which the debtor is party”). 12 ) Cf. Syska v. Vivendi, supra note 2, at para. 65–66. 13 ) Id. at para. 11. 14 ) Id. at para. 12. 15 ) Id. at para. 13.

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Virgós-Schmit report,16) doctrine,17) the text of the provisions as restated in various languages of the Member States,18) and on case law of the Austrian Supreme Court19) and of the European Court of Justice,20) Justice Clarke considered Elektrim’s argument that because of the sentence “proceedings brought by individual creditors” contained in Art 4 (2) (f) of the Insolvency Regulation, the term “lawsuits pending” in Art 4 (2) (f) and 15 of the Insolvency Regulation must be read as being limited to individual execution actions against the debtor’s assets.21) Justice Clarke, however rejected this argument,22) holding that the term “lawsuits pending” had to be understood as extending to any kind of proceedings, including those regarding the validity of a claim, and in particular to arbitral proceedings.23) With regard to Art 4 (2) (e) of the Insolvency Regulation, i.e. the provision on “current contracts” leading to the application of the lex concursus, Justice Clarke found the provision to be in conflict with Art 4 (2) (f) of the Insolvency Regulation (the provision on lawsuits pending leading to the application of the lex loci arbitri).24) He concluded that this conflict was to be resolved in favor of the latter provision on the basis that, otherwise, the exception of Art 4 (2) (f) of the Insolvency Regulation would be rendered ineffective.25) However, he clarified that insofar as a case is not pending, Art 4 (2) (e) of the Insolvency Regulation, and hence the lex concursus, applies to the effects of bankruptcy.26) Consequently, Justice Clarke declined to set aside the award. On appeal brought by Josef Syska and Elektrim, the judgment of Justice Clarke was upheld by the Court of Appeal.27) 3. Enforcement of the Award28) Vivendi’s attempt to enforce the award rendered by the LCIA arbitral tribunal in Poland was unsuccessful at first. The Warsaw District Court denied enforcement of the damages awarded as well as recognition of the finding on jurisdiction. 16 ) Miguel Virgós & Etienne Schmit, Report on the Convention on Insolvency Proceedings, May 3, 1996, OJ L 6500/96 (actually commenting on a Convention lapsed because of the UK’s failure to sign it; see Syska v. Vivendi, supra note 2, at para. 17 no. 3). 17 ) I.e. Miguel Virgós & Francisco Garcimartin, The European Insolvency Regulation (2004). 18 ) Syska v. Vivendi, supra note 2, para. 38. 19 ) Cf. the cases indicated in Syska v. Vivendi, supra note 2 para. 42. 20 ) Commission v. AMI Semiconductor Belgium, Mar 17, 2005, docket no. C-294/02. 21 ) Syska v. Vivendi, supra note 2, para. 47. 22 ) Id. at para. 51. 23 ) Id. at para. 52. 24 ) Id. at para. 94. 25 ) Id. at para. 96. 26 ) Id. at para. 105. 27 ) Syska v. Vivendi Universal SA (2009) EWCA Civ 677 (CA [Civ Div]). 28 ) See Ania Farren & Sara Nadeau-Seguin, Enforcement of the LCIA Award in Elektrim v. Vivendi, available at http://arbitration.practicallaw.com/9-501-0419 (last visited July 29, 2010).

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The Warsaw District Court reviewed the validity of the arbitration agreement based on Art V (1) (a) and V (2) (b) New York Convention. It held that Elektrim had lost its capacity to act in arbitral proceedings as a result of its bankruptcy. According to the District Court, this was a matter of public policy. Also, the District Court concluded that the relevant provisions of the PLBR qualified as lois d’application immédiate. Furthermore, the District Court found Art 15 of the Insolvency Regulation to be too narrow in scope in order to cover arbitration proceedings. However, on appeal, the Warsaw Court of Appeal overruled the decisions, thus granting recognition and enforcement of the LCIA award. In essence, the Court of Appeal followed the English Approach and held, in particular, that recognition of an award rendered after a Polish party’s declaration of bankruptcy does not violate public policy if the law at the seat of the arbitration allows for the continuation in these circumstances.

C. The Swiss Approach: No Jurisdiction over a Bankrupt Party 1. Considerations of the ICC Arbitral Tribunal in Geneva29) In the Swiss dispute, Elektrim also objected to the arbitral tribunal’s jurisdiction upon being declared bankrupt. The ICC arbitral tribunal found that Art 142 PLBR deprived an arbitral tribunal of its jurisdiction over a bankrupt party. It thereby followed the view that a party’s capacity to participate in arbitral proceedings is to be determined by the law of its place of incorporation, in this instance Polish law. As a result, Art 142 PLBR was determined by the arbitral tribunal to be applicable to Elektrim’s “continued capacity”30) to be a party to the arbitral proceedings as well. In determining the scope of application of Art 142 PLBR, the arbitral tribunal found the provision to apply to arbitration proceedings irrespective of whether the seat of arbitration was in or outside of Poland, but that the provision could exclude an arbitral tribunal’s jurisdiction over a Polish bankrupt party only. As such, the arbitral tribunal concluded that Polish law intends to regulate the effects of bankruptcy on all Polish bankrupt entities. The arbitral tribunal found that it lacked continued jurisdiction over Elektrim and decided in an interim award rendered in 2008 that the arbitral proceedings against Elektrim were to be discontinued. Since the arbitral tribunal held that Polish law was directly applicable and as such decisive in order to determine the capacity to be a party to the proceeding, it left open the question whether Art 142 PLBR is a mandatory provision (loi d’application immédiate). 29

) See Georg Naegeli, Bankruptcy and Arbitration – What should prevail?, in , 193, 201 (Klausegger et al. eds., 2010). 30 ) See Swiss Federal Supreme Court, supra note 3, at para. B.c.

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2. Considerations of the Swiss Federal Supreme Court On September 15, 2008, Vivendi challenged the ICC arbitral tribunal’s interim award on jurisdiction before the Swiss Federal Supreme Court pursuant to Art 190 (2) Swiss Private International Law Act (Bundesgesetz über das Internationale Privatrecht – SPILA)31). Vivendi argued that the arbitral tribunal had unjustly declined jurisdiction over Elektrim in finding that Elektrim lacked continued capacity to participate in the arbitral proceedings. With regard to its capacity to be a party to arbitral proceedings, which the Swiss Federal Supreme Court addressed as a preliminary question in connection with the challenge of the award, the Swiss Federal Supreme Court held that the SPILA did not contain specific provisions on a foreign party’s capacity to participate in arbitral proceedings. The Swiss Federal Supreme Court found, however, that the capacity to be a party to proceedings depends on a person’s legal capacity, which is a question of substantive law.32) With respect to legal entities, the corresponding rules are to be found in Art 154 and 155 (c) SPILA, which refer to the law of the legal entity’s place of incorporation. Since Elektrim was incorporated in Poland, the Swiss Federal Supreme Court held that Polish law was applicable, which also happened to be the lex concursus. According to the Swiss Federal Supreme Court the application of Polish law therefore lead to the application of Art 142 PLBR because the latter deals with an aspect of a person’s capacity as it deprives a Polish bankrupt party of its subjective capacity to continue with a pending arbitration. Consequently, according to the Swiss Federal Supreme Court, Elektrim had lost its capacity to be a party to arbitral proceedings and, accordingly, the Swiss Federal Supreme Court found that the arbitral tribunal had not erred in declining jurisdiction with respect to Elektrim. A minority of the court dissented, finding that the arbitration clause remained intact despite the effects of Art 142 PLBR.33) In particular, the minority argued as follows: A Polish party as per various articles of the PLBR does not automatically lose its capacity to be a party to proceedings upon the declaration of bankruptcy. Rather, Art 142 PLBR only affects the arbitration agreement, which by the terms of the provision, would lose its effect upon the declaration of bankruptcy. The effects of a party’s bankruptcy on the validity of an arbitration agreement, however, are to be governed by the law applicable to the substantive validity of the arbitration agreement. Swiss law was the lex arbitri which provides in Art 31 ) Under Swiss law, an arbitral tribunal’s decision declining jurisdiction over a party is a partial award which can be challenged before the Federal Supreme Court like a final award. See Swiss Federal Supreme Court, supra note 3, at para. 2.2. 32 ) See id. at para. 3.2. Regarding the capacity to be a party to arbitration proceedings under Swiss law see para. 325 et seq. (2006). 33 ) See Naegeli, supra note 29, at 200 et seq.; Georg Naegeli, The Impact of Bankruptcy on a Pending Arbitral Proceeding, Arb. Newsletter Sept 2009, at 57 et seq., 58 [hereinafter Naegeli, Arb. Newsletter]. Dissenting opinions are not published by the Swiss Federal Supreme Court.

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178 (2) SPILA for a favor validitatis rule to be respected so that an arbitration agreement is valid if it complies with either the law chosen by the parties, the law governing the dispute or Swiss law. As under Swiss law a party’s declaration of bankruptcy does not void an arbitration agreement, the arbitration agreement remains valid and binding upon the parties. The minority also determined that Art 142 PBLR was not a loi d’application immédiate requiring mandatory application thereby referring to the Insolvency Regulation which also provides that the effect of a bankruptcy on “lawsuits pending” is governed by the lex fori.34)

D. A Comparison of the Approaches It is striking that arbitral tribunals (and, on appeal, the respective courts) in two jurisdictions facing essentially the same issue, i.e. a Polish party declared bankrupt after the arbitration proceedings have commenced, may come to contrary findings. Admittedly, the LCIA arbitral tribunal and the English courts applied the Insolvency Regulation, an option not available in the Swiss dispute, Switzerland not being a member of the EU. Nevertheless, both disputes could have led to the same result. In both disputes, the law at the seat of the arbitration did not provide for the arbitration agreement to be affected by a (foreign) bankruptcy. Also, none of the competent authorities considered Art 142 PLBR to be directly applicable or to have extraterritorial effect with respect to either the validity of the arbitration agreement, or the jurisdiction of the arbitral tribunal. Rather, the findings in the Swiss dispute relied on an approach not contemplated in the English dispute: a loss of the continued capacity to be a party to arbitral proceedings and as such on a question governed by substantive law. This, however, is not the only possible conclusion, as the minority opinion demonstrates.35) Furthermore, this approach is in conflict with the Insolvency Regulation: Since the latter stipulates that the law at the place where proceedings are already pending solely determines the effects of insolvency, the lex concursus cannot have the effect of removing jurisdiction if the arbitral tribunal had retained jurisdiction pursuant to the law of the place where proceedings are pending. It follows that no EU Member State will be legally able to follow the Swiss rationale, at least if arbitral proceedings are already pending.36) By contrast, the English dispute focused neither on the capacity to be a party to pending proceedings, nor on the continued validity of the arbitration agree34

) See supra II.B.2. ) For further critical comments see Naegeli, Bankruptcy and Arbitration, supra note 29, at 201 et seq.; id., Arb. Newsletter, supra note 33, at 58 et seq.; id., Die Auswirkungen der Konkurserklärung auf ein hängiges Schiedsverfahren, Jusletter Aug 31, 2009, para. 21 et seq. [hereinafter Naegeli, Jusletter]. 36 ) Cf. Dominique Vidal, Arbitration and Insolvency Proceedings, 20 (1) ICC Int’l Ct. Arb. Bull. 51, 66 (2009) (considering the Swiss solution to be questionable notwithstanding application of the Insolvency Regulation). 35

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ment in such circumstances. Rather, the English dispute revolved around the interpretation of the Insolvency Regulation to establish which law was to apply to the effect of bankruptcy on pending proceedings. Hence, the English dispute relied on a procedural approach.37) The effect of a direct application of Polish or English law apparently was not an issue: either Polish law applied pursuant to the Insolvency Regulation, causing the arbitration agreement to terminate on the date of declaration of bankruptcy, and the arbitral tribunal to lose jurisdiction over Elektrim; or, English law applied, in which case the arbitration agreement remained unaffected and the arbitral tribunal retained jurisdiction.38) Whereas the reasoning and the decision in the English dispute have been welcomed in the arbitration community with respect to the application of the lex loci arbitri based on Art 4 (2) (f) and 15 of the Insolvency Regulation,39) the obiter dictum on the conflict of the aforementioned provisions with Art 4 (2) (e) Insolvency Regulation (“current contracts”) and the qualification of the arbitration agreement as a current contract have been criticized.40) According to leading commentators, the purpose of Art 4 (2) (e) of the Insolvency Regulation is to apply the lex concursus to allow for the special regime provided for by some laws according to which the trustee may adopt or reject a contract of the debtor that has not yet been executed by the parties.41) However, as Art 15 of the Insolvency Regulation was meant to avoid the application of more than one law, the effects of bankruptcy on lawsuits pending are to be determined solely according to the law of the EU Member State where the proceedings are pending.42) Therefore, there can be no cumulative application of the law of the place where proceedings are pending and the lex concursus.43) Accordingly, as per these authors there is no conflict between Art 4 (2) (e) and Art 4 (2) (f) or Art 15 of the Insolvency Regulation.44)

III. Does the Sudden Bankruptcy of a Party Necessarily Affect a Pending Arbitration? The Elektrim cases give guidance as to the problems arbitral tribunals and courts may be confronted with in case of a sudden bankruptcy of a party and the approaches arbitral tribunals or courts may take in such a situation. As shown, the 37 ) Cf. Naegeli, Arb. Newsletter, supra note 33, at 59 (inferring a procedural approach from the procedural nature of Art 142 PLBR). 38 ) Cf. Syska v. Vivendi, supra note 2, para. 9. 39 ) Cf. Naegeli, Jusletter, supra note 35, para. 26 & 41; Christian Koller, Auswirkungen der Insolvenzeröffnung auf ein anhängiges Schiedsverfahren in einem anderen EU-Mitgliedstaat 2 (2009) ZIK 52, 53. 40 ) Cf. Koller, supra note 39, at 54. 41 ) Cf. supra note 17, at 122. 42 ) Cf. id., 141. 43 ) See Koller, supra note 39, at 54. 44 ) Accord id., at 54.

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cases focused on whether the arbitral tribunal retained jurisdiction with a view to (A.) the validity of the arbitration agreement and (B.) a bankrupt party’s continued capacity to be a party to an arbitration. The question of whether the arbitral tribunal should stay the proceedings was not addressed in either of the Elektrim cases, although it appears as a reoccurring and pressing issue in the case of bankruptcy of an arbitration party (C.).45) In the following chapter, these three questions shall be further analyzed with a special focus on Swiss law, not restricted to Art 142 PLBR and the particularities of the Elektrim disputes.

A. Is the Validity of the Arbitration Agreement Affected? A declaration of bankruptcy does not necessarily affect the validity of the arbitration agreement. The Elektrim disputes illustrate this quite well: although the relevant Polish law could have been interpreted as affecting the validity of the arbitration agreement upon a party’s bankruptcy,46) such a consequence was not inferred in either the English or the Swiss dispute. Upon a declaration of bankruptcy, a trustee usually administers the estate of the bankrupt entity. Some authors consider this to constitute a transfer of the bankrupt entity’s rights and obligations to the trustee and, accordingly, contemplate whether the arbitration agreement is transferred to or is binding on the trustee.47) Pursuant to this view, the effect of bankruptcy on the arbitration agreement is an issue of the personal scope of the arbitration agreement which is governed by the lex arbitri. For an arbitration with seat in Switzerland this would lead to the application of Art 178 (2) SPILA which stipulates a favor validitatis of the arbitration agreement pursuant to either the law chosen by the parties, the law governing the dispute, or Swiss law. Leading case law48) deems the arbitration agreement to be binding on the trustee according to Swiss law.49) Accordingly, un45 ) This issue was most probably not raised in the Elektrim cases because Art 142 PLBR aims at a final discontinuation of arbitral proceedings. Therefore, if applicable, the issue of a stay is obsolete (which was the case in the Swiss dispute) and it is not at issue whether the proceedings are to be stayed until certain legal requirements are complied with. 46 ) Cf. Syska v. Vivendi Universal SA (2009) EWCA Civ 677, para. 31 (CA [Civ Div]) (Lord Justice Patten concurring). 47 ) Cf. Gabrielle Kaufmann-Kohler & Laurent Lévy, Insolvency and International Arbitration, in The Challenges of Insolvency Law Reform in the 21st Century 257, 267 (Henry Peter et al. eds., 2006); Vesna Lazi¬, Insolvency Proceedings and Commercial Arbitration 181 et seq. (1998). 48 ) Cf. DFT 117 II 94, 98 (Clear Star). This decision is in contrast to a judgment of 1907 in which it was held that the arbitration agreement was obsolete upon bankruptcy; cf. DFT 33 II 648, 654. 49 ) See Kaufmann-Kohler & Lévy, supra note 47, at 267; cf. Naegeli, Arb. Newsletter, supra note 33, at 60; id., Jusletter, supra note 35, para. 33; Dominique Brown-Berset & Laurent Lévy, Faillite et arbitrage, 16 (4) ASA Bull. 664, 668 (1998); Martin Bernet, Schiedsgericht und Konkurs einer Partei, in

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less based on the interpretation of the parties’ arbitration agreement it has to be inferred that the parties intended the arbitration agreement to become invalid upon declaration of bankruptcy, an arbitration agreement will be binding on the trustee.50) This approach has been criticized. Critics maintain that it is incorrect to speak of a transfer of the arbitration agreement as there is no transfer of the bankrupt party’s rights and obligations.51) These authors rather share the view that the lex concursus is applicable to determine whether the trustee is bound by the arbitration agreement.52) However, authors following this approach, too, draw the conclusion that the arbitration agreement is binding on the trustee if Swiss bankruptcy law applies, irrespective of whether the arbitral proceedings are already pending or not.53) The same is true under e.g. Belgian, German and Swedish bankruptcy law.54) Although the trustee is bound by the arbitration agreement under French law, the situation is unclear if the trustee decides not to perform the main contract.55) A similar uncertainty exists with respect to U.S. law if the main contract is not performed.56) Under English law, the trustee is bound by the arbitration agreement if he decides to adopt the main contract. If he does not adopt the main contract, it is in the discretion of the state court whether or not to refer the parties to arbitration.57) It follows that the arbitration agreement usually will survive bankruptcy and, as such, the sudden bankruptcy of a party does not necessarily affect a pending arbitration proceeding.

3, 7 et seq. (Monique Jametti Greiner et al. eds., 2005); for Germany see also Stefan M. Kröll, Arbitration and Insolvency Proceedings, in para. 18–41 et seq. (Loukas Mistelis & Julian D. M. Lew eds., 2006). 50 ) See Bernet, supra note 49, at 7 et seq. 51 ) See François Perret, Faillite et arbitrage international, 25 (1) ASA Bull. 36, 43 et seq. (with references to Swiss case law in no. 44); Werner Wenger & Christoph Müller, Art 178, in Basler Kommentar Internationales Privatrecht para. 78 (Heinrich Honsell et al. eds., 2nd ed. 2007). 52 ) See Wenger & Müller, supra note 51, para. 78; Bernhard Berger & Franz Kellerhals, Internationale und interne Schiedsgerichtsbarkeit in der Schweiz para. 511 (2006); see also Peter Schlosser, Das Recht der internationalen privaten Schiedsgerichtsbarkeit para. 428 (2nd ed. 1989). 53 ) See Wenger & Müller, supra note 51, para. 78; Berger & Kellerhals, supra note 52, para. 511; cf. para. 290 (2nd ed. 2002) (Stephen V. Berti & Annette Ponti trans. 2007). 54 ) Cf. supra note 53, para. 290; Lazi¬, supra note 47, at 188 et seq.; Bernet, supra note 50, at 7. 55 ) See ¬, supra note 47, at 195 et seq. 56 ) Cf. id. at 197 et seq. 57 ) See Sec 349A Insolvency Act 1986.

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B. Is the Bankrupt Party’s Capacity to be a Party to Arbitration Proceedings Affected and if so, does it Affect the Jurisdiction of the Arbitral Tribunal? One issue normally raised as a preliminary defense is the bankrupt party’s loss of its locus standi.58) Under Swiss law, an arbitral tribunal’s jurisdiction is dependent on a valid arbitration agreement which, inter alia, depends on the parties’ capacity to enter into an arbitration agreement and to be a party in arbitral proceedings.59) The capacity to be a party in arbitral proceedings (subjektive Schiedsfähigkeit) presupposes the capacity to sue and to be sued (Parteifähigkeit) and the capacity to conduct proceedings in one’s own name (Prozessfähigkeit). The capacity to sue and be sued is the procedural aspect of one’s legal capacity (Rechtsfähigkeit) whereas the capacity to conduct proceedings in one’s own name is the procedural aspect of one’s capacity to act (Handlungsfähigkeit).60) In the Elektrim case, it was held in the Swiss dispute that the arbitral tribunal had lost jurisdiction over the bankrupt party because the latter lacked continued capacity to be a party in arbitral proceedings. The Swiss ICC arbitral tribunal found that the law of the place in which the bankrupt party is incorporated and, as such, the lex concursus, is decisive in determining a bankrupt party’s legal capacity, irrespective of whether or not the relevant provisions of that law are deemed to be a loi d’application immédiate.61) Although it is in line with arbitral practice to apply the lex incorporationis to matters related to a company’s capacity,62) whether Art 142 PLBR in fact aims at affecting the legal capacity of the bankrupt entity was subject to a heated debate and is questionable.63) Even assuming that a bankrupt party loses continued capacity to be a party to arbitral proceedings by virtue of the applicable law (for companies, the law of incorporation or the law of its seat), this need not necessarily affect the jurisdiction of the arbitral tribunal. If the arbitration agreement is valid and binding and the parties had legal capacity when they entered into the agreement and initiated arbitral proceedings, it is somewhat contradictory to infer that the arbitral tribu58 ) See Fernando Mantilla-Serrano, International Arbitration and Insolvency Proceedings, 11 (1) Int’l Arb. 51, 64 (1995). 59 ) See Berger & Kellerhals, supra note 52, para. 323. 60 ) See id at para. 324 et seq. 61 ) Whether Art 142 PLBR is a loi d’application immédiate was not addressed in the English dispute. In the Swiss dispute, it was left open by the arbitral tribunal and the majority of the Swiss Federal Supreme Court, but addressed and rejected by the minority of the Swiss Federal Supreme Court. See Naegeli, Arb. Newsletter, supra note 33, at 58; id., Jusletter, supra note 35, para. 16. 62 ) See Mantilla-Serrano, supra note 58, at 64; cf. Brown-Berset & Lévy, supra note 49, at 666. 63 ) See Naegeli, Bankruptcy and Arbitration, supra note 29, at 201; id., Arb. Newsletter, supra note 33, at 59; id., Jusletter, supra note 35, para. 24 et seq.; but see Martin Aebi & Harold Frey, Impact of Bankruptcy on International Arbitration Proceedings, 28 (1) ASA Bull. 113, 116 et seq.

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nal loses jurisdiction upon a party’s bankruptcy just because that party’s legal capacity, according to the lex concursus, is supposedly affected. The lex concursus may be decisive to determine how the bankrupt party is to be represented in the proceedings, e.g. by a trustee.64) However, the lex concursus should not lead to a final discontinuation of the proceedings with respect to the bankrupt party.65) Consequently, the arbitral tribunal should in general retain jurisdiction although it may be up to a trustee to continue the proceedings. In fact, arbitral case law other than the Elektrim cases has repeatedly considered the arbitral tribunal’s jurisdiction to be unaffected by the sudden bankruptcy of a party pursuant to the lex arbitri, notwithstanding foreign bankruptcy legislation aiming to affect the arbitration agreement or the bankrupt party’s legal capacity.66) Accordingly, arguments to the contrary have usually been rejected.67) This is in line with the parties’ expectations that the validity of the arbitration agreement and the jurisdiction of the arbitral tribunal are governed by the law of their choice or the law at the seat of the arbitration, but not by the law at the place where one of the parties is incorporated (or declared bankrupt).68) If at all, such a law can only be taken into account if it qualifies as a loi d’application immédiate in view of international public policy at the seat of the arbitration.69) Moreover, this approach is also in line with the parties’ choice to have their dispute resolved by an arbitral tribunal and not by courts on either party’s home turf.70) Consequently, irrespective of whether foreign bankruptcy law may have adverse effects on a bankrupt entity’s capacity to be a party in an arbitration proceeding, the jurisdiction of the arbitral tribunal should remain unaffected.

64 ) With respect to the Swiss dispute see Naegeli, Arb. Newsletter, supra note 33, at 59; id., Jusletter, supra note 35, para. 26. 65 ) On the issue of a possible mandatory or discretionary stay prompted by such a situation see infra III.C. 66 ) See ICC Case No. 2139 (award of 1974), in Collection of ICC Arbitral Awards 1974–1985, at 236 et seq. (Sigvard Jarvin & Yves Derains eds., 1990); ICC Case No. 2073 (award of 1972), in id., at 240; ICC Case No. 4415 (award of 1984), in id., at 530 et seq.; ICC Case No. 6057 (award of 1991), in Collection of ICC Arbitral Awards 1991–1995, at 487 et seq. (Jean-Jacques Arnaldez et al. eds., 1997); ICC Case No. 10507 (Interim Award, Jul 2002), 20 (1) ICC Int’l Ct. Arb. Bull. 71 et seq. (2009); ICC Case No. 11714 (Final Award, Jun 2004), 20 (1) ICC Int’l Ct. Arb. Bull. 85 (2009); cf. Naegeli, Arb. Newsletter, supra note 33, at 59; id., Jusletter, supra note 35, para. 26; see also the awards indicated by Born, supra note 5, at 815 n.1270 & 1271. 67 ) See supra note 5, at 815. 68 ) The same reasoning applies to those jurisdictions following another theory with respect to the seat of a company. 69 ) See Perret, supra note 51, at 45; cf. Markert, supra note 1, at 237 et seq. (suggesting the arbitral tribunal should duly consider policy interests of the potentially applicable insolvency laws); Kaufmann-Kohler & Lévy, supra note 47, at 260 (applying the same reasoning under arbitrability). 70 ) Accord Markert, supra note 1, at 237; cf. Vidal, supra note 36, at 54.

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C. Should the Arbitral Tribunal Stay its Proceedings? The issue of a stay was raised neither in the English nor in the Swiss Elektrim disputes. However, as will be shown below, the question of a mandatory or discretionary stay will often arise in constellations in which a party to a pending arbitration proceeding is suddenly declared bankrupt. Not granting (when requested) or not ordering (sua sponte) a stay may affect the parties’ rights and, therefore, arbitral tribunals should be prudent.71) Therefore, the questions of (1) whether the arbitral tribunal may be required to stay its proceedings by virtue of bankruptcy law and (2) whether an arbitration party’s bankruptcy may warrant a discretionary stay based on other grounds will be contemplated in the following chapter. 1. Mandatory Stay by Virtue of Bankruptcy Law In Switzerland, whether a stay is to be ordered upon a party’s bankruptcy is to be determined according to the lex arbitri.72) Laws of many jurisdictions provide for a stay of proceedings upon bankruptcy although the relevant provisions typically are addressed to state courts.73) The relevant provision of Swiss law is Art 207 of the Debt Enforcement and Bankruptcy Act (Bundesgesetz über Schuldbetreibung und Konkurs – DEBA) according to which civil court proceedings to which the debtor is a party are stayed (ex lege) when one party is declared bankrupt, although there is an exception for urgent matters. It is disputed that this provision must be respected as well by international arbitral tribunals with seat in Switzerland. A vast majority of authors, however, is against a mandatory stay.74) Moreover, there appears to be consensus that Art 207 DEBA does not form part of Swiss international public policy.75) The rationale of Art 207 DEBA and comparable provisions of other laws76) is to enable the trustee to get familiar with the case and to assess the overall situation in order to be able to make the necessary decisions (such as, e.g., whether or not to

71 ) Cf. Perret, supra note 51, at 46 et seq. (“principe de prudence”); Fouchard, supra note 1, at 493. 72 ) See Wenger & Müller, supra note 51, para. 78. 73 ) See Bernet, supra note 49, at 19 (highlighting the relevant provision of French law which, as an exception, is directly addressed to arbitral tribunals). 74 ) Against mandatory application by (international) arbitral tribunals see supra note 52, para. 1076; Poudret & Besson, supra note 53; Bernet, supra note 49, at 19; Kaufmann-Kohler & Lévy, supra note 47, at 269 et seq.; for the same position under German law see also Kröll, supra note 49, para. 18–41; in favor of mandatory application by arbitral tribunals see Thomas Rüede & Reimer Hadenfeldt, Schweizerisches Schiedsgerichtsrecht 244 (2nd ed. 1993). 75 ) See Kaufmann-Kohler & Lévy, supra note 47, at 270; Brown-Berset & Lévy, supra note 49, at 674 et seq.; Poudret & Besson, supra note 53, para. 584; Berger & Kellerhals, supra note 52, para. 1076; Bernet, supra note 49, at 19; Perret, supra note 51, at 46. 76 ) E.g. § 240 German ZPO. See thereto Kröll, supra note 49, para. 18–36.

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continue the proceedings in view of a reasonable chance of success) in the best interests of the realization of the assets and thereby of the creditors.77) Foreign provisions stipulating a mandatory stay in case a party is declared bankrupt may, however, be considered a loi d’application imméditate.78) Failure to stay the proceedings may lead to the setting aside of the award or may have detrimental effects to later attempts to enforce the award in the country of bankruptcy.79) A refusal of recognition and enforcement of the award could be based on, e.g., Art V (2) (b) of the New York Convention80) because a failure to stay the proceedings may be in conflict with the principle of the equal treatment of the creditors and, if the aforementioned principle is considered to form part of public policy, may be deemed to violate public policy.81) For example, French law – in the event of a party’s bankruptcy and when it comes to individual debt collection proceedings – not only requires a mandatory stay, but such a stay is even considered to be a principle of French and international public policy.82) In fact, the Cour de Cassation has held “that the principles of suspension of the individual proceedings initiated by creditors, of surrender of the debtor’s assets and of interruption of proceedings in case of bankruptcy form part of internal as well as international public policy”.83) This notwithstanding, it has been suggested that enforcement in France would be possible as long as the dispositive section of the award is restricted to the existence and the amount of the claim.84) To be on the safe side, arbitral tribunals, however, are well advised to stay the arbitration proceedings until necessary steps contemplated by the applicable bankruptcy law have been complied with. 2. Discretionary Stay Even absent any express mandatory requirements for a stay set forth by the bankruptcy law applicable to the bankrupt arbitral party, an arbitral tribunal confronted with the sudden foreign bankruptcy of a party may consider it necessary to stay its proceedings. In case of a trustee “replacing” the bankrupt party, such a 77 ) See Brown-Berset & Lévy, supra note 49, at 674 et seq.; Kaufmann-Kohler & Lévy, supra note 47, at 270; Poudret & Besson, supra note 53, para. 584. 78 ) Cf. Kaufmann-Kohler & Lévy, supra note 47, at 269. 79 ) See supra note 53, para. 584. 80 ) Cf. Art V (2) (b) New York Convention (“[Recognition and enforcement of an arbitral award may also be refused if the competent authority in the country where recognition and enforcement is sought finds that:] The recognition or enforcement of the award would be contrary to the public policy of that country”). 81 ) See , supra note 53, para. 584; Mantilla-Serrano, supra note 58, at 69 et seq. 82 ) See Poudret & Besson, supra note 53, para. 584; Fouchard Gaillard Goldman on International Commercial Arbitration para. 1662 (Emmanuel Gaillard & John Savage eds., 1999). 83 ) Cass civ 1, May 6, 2009, 08-10281, Bull 2009 I no. 86. 84 ) See Perret, supra note 51, at 46.

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stay may in fact be recommendable in order to secure the trustee’s right to be heard and as such to prevent a later challenge of the award or problems in enforcing the award.85) The trustee or insolvency administrator “replacing” the bankrupt party in the arbitral proceedings usually needs reasonable time to become familiar with the case in order to decide whether or not to continue the proceedings and, possibly, to prepare the further submissions.86) Furthermore, it may also be necessary for the non-bankrupt opposing party to be granted some time to take necessary steps prompted by the other party’s bankruptcy, such as the registration of the claim with the insolvency administration. In that case, the arbitral tribunal should stay its proceedings until corresponding decisions and steps have been complied with. The arbitral tribunal should also verify that the bankrupt party’s appointment of its representative has not lapsed upon bankruptcy.87) Swiss law, in Art 35 (1) Code of Obligations (Bundesgesetz betreffend die Ergänzung des Schweizerischen Zivilgesetzbuches [Fünfter Teil: Obligationenrecht] – OR), assumes that a power of attorney expires upon the bankruptcy of the person granting it. If it has lapsed, the arbitral tribunal has another reason to consider a stay in order to allow the affected party to clarify the situation in view of securing that party’s right to be heard.88) Should a change of the legal representative become necessary, the same reasoning elaborated above in respect of the trustee applies analogously, i.e. the new representative needs to be granted sufficient time to become familiar with the case and be able to render the necessary decisions. Mere difficulties in payment of the party’s representative do not, however, constitute a mandatory reason for a stay.89) While the sudden bankruptcy of a party may affect its mandate with the legal counsel retained, leading commentators are of the opinion that the mandate of the arbitrator is independent from a valid legal relationship between the arbitrator and the parties.90) Therefore, the arbitrators’ mandate neither lapses upon a

85 ) Cf. Art V (1) (b) New York Convention (“[Recognition and enforcement of the award may be refused, at the request of the party against whom it is invoked, only if that party furnishes to the competent authority where the recognition and enforcement is sought, proof that:] The party against whom the award is invoked … was otherwise unable to present his case”); see thereto Born, supra note 5, at 1765 et seq. 86 ) Cf. Brown-Berset & Lévy, supra note 49, at 674 et seq.; Kaufmann-Kohler & Lévy, supra note 47, at 270. With respect to German law see Karl-Heinz Böckstiegel, Stefan Michael Kröll & Patricia Nacimiento, General Overview, in Arbitration in Germany para. 162 et seq. (Karl-Heinz Böckstiegel et al. eds., 2007). 87 ) See Brown-Berset & Lévy, supra note 49, at 678. 88 ) See Schlosser, supra note 52, para. 663; Mantilla-Serrano, supra note 58, at 64; cf. Art V (1) (b) New York Convention. 89 ) Cf. Swiss Federal Supreme Court, Jun 2, 2004, docket no. 64/2004, available at www.bger.ch/index/juridiction/jurisdiction-inherit-template/jurisdiction-recht/jurisdictionrecht-urteile2000.htm, para. 3.3 (last visited 29 July 2010); Berger & Kellerhals, supra note 52, para. 1077. 90 ) Cf. Berger & Kellerhals, supra note 52, para. 892.

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party’s bankruptcy nor can the trustee exercise his right (not) to perform contracts of the bankrupt entity 91) to this effect.92) In conclusion: Staying the proceedings may very well enhance the enforceability of an award subsequently rendered. The enforceability of the arbitral award is generally in both parties’ interests and is likely to exceed their interest in a speedy resolution of their dispute. This is particularly true since the delay caused by such a stay should, under normal circumstances, be relatively short.

IV. Which Approach Leads to a Predictable Interplay Between Arbitration and Bankruptcy? As illustrated by the Elektrim cases, contradicting findings in respect of the effects of a party’s bankruptcy on arbitral proceedings are possible even in comparable circumstances. In order to ensure the parties’ trust in arbitration proceedings, it is desirable to find an approach leading to a more or less predictable interplay between arbitration and bankruptcy. Predictability can in our view be best achieved if the validity of the arbitration agreement is to be determined according to the law chosen by the parties or, absent such a selection, pursuant to the lex arbitri.93) In particular, a party’s bankruptcy should not lead to the application of the lex concursus in order to determine the validity of the arbitration agreement precisely because provisions such as Art 142 PLBR may otherwise lead to unexpected results. When entering into an arbitration agreement, the parties express their desire to have their disputes resolved outside of the state courts, and in particular outside of the parties’ respective “home” courts. They expect their selected law or, in the absence of such, the legal framework of the seat of the arbitration to govern their arbitration. Also, pursuant to this approach, the arbitration agreement will generally94) be valid and binding, irrespective of whether a trustee continues the proceedings upon a party’s bankruptcy.95) The same approach is in our view advisable when it comes to questions that may endanger the arbitral tribunal’s jurisdiction. Accordingly, regardless of whether the bankrupt party’s continued capacity to be a party to an arbitration proceeding may be affected pursuant to the lex concursus, the question of whether

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) As provided for by, e.g., Swiss law in Art 211 (2) DEBA. ) For German law see Peter Schlosser, vor § 1025, in Kommentar zur ZPO para. 15 (Friedrich Stein & Martin Jonas eds., 22nd ed. 2002). 93 ) Accord Naegeli, Bankruptcy and Arbitration, supra note 29, at 202; id., Arb. Newsletter, supra note 33, at 59; Markert, supra note 1, at 240; contra Aebi & Frey, supra note 63, at 123. 94 ) An exception would be the parties’ intention that the arbitration agreement is to lapse upon bankruptcy. 95 ) See supra III.A. 92

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this has at the end any bearing on the arbitral tribunal’s jurisdiction should as well be generally decided as per the lex loci arbitri.96) In fact, in our view one of the few questions to which application of the lex concursus would be acceptable, is the question of whether the bankrupt party may continue to appear as a party in the arbitral proceedings or whether a trustee will do so in its name. If it is for a trustee to do so, this does not, however, have an influence on the jurisdiction of the arbitral tribunal. Rather, the arbitral tribunal should stay its proceedings if necessary for the protection of the trustee’s (i.e. ultimately the bankrupt party’s) rights, thereby facilitating recognition and enforcement of the award. If, contrary to what is suggested above, the lex concursus were generally deemed to apply to the effects of bankruptcy on pending arbitral proceedings, this would often undermine the expectations of the parties and pose a serious threat to the stability of the arbitral process. A party seeking to evade its arbitration agreement could attempt to rely on its bankruptcy to argue that the arbitration agreement has become invalid and has caused loss of its capacity to be a party to the arbitral proceedings, thus removing the arbitral tribunal’s jurisdiction in favor of a state court at the place of bankruptcy.

96 ) Exceptions are of course applicable, where one has to conclude that the bankruptcy law affecting the arbitral tribunal’s jurisdiction must be considered as a loi d’application immédiate.