The bankruptcy of a party in an ongoing arbitration does not affect the enforceability of the award (Swiss Supreme Court)
In decision 5A_910 / 2019, the Swiss Supreme Court considered that an award rendered in a foreign arbitration can be recognized and enforced in Switzerland, even if the award was issued after the bankruptcy of a party. The object of the arbitration does not become non-arbitrable following the bankruptcy of a party, if the arbitration was initiated before the bankruptcy.
In a recently published decision, the Swiss Supreme Court dismissed an appeal against a lower court judgment recognizing and enforcing an LCIA award.
The origin of the dispute was an agreement between a third-party funder and a Swiss company for the financing of an ICC arbitration in Switzerland. The Swiss company terminated the financing agreement and the third-party funder initiated LCIA arbitration in England contesting the validity of this termination. During the LCIA proceedings, the Swiss company went bankrupt and the Swiss bankruptcy authorities ceded the right to defend itself in the arbitration to the former director of the Swiss company (A). In its final award, the tribunal concluded that the financing agreement had not been terminated and ordered A to pay the costs of the arbitration.
To recover the costs, the third-party funder initiated legal proceedings against A in Switzerland. A opposed the preliminary recognition and enforcement of the award and initiated appeal proceedings, arguing that the dispute was no longer arbitrable (Article V (2) (a), New York Convention) following the bankruptcy of the Swiss company.
The Supreme Court dismissed the appeal. Among other things, the court underlined that any dispute involving an “economic interest” is arbitrable from the point of view of Swiss law. The concept of economic interest is understood in the broad sense and encompasses all claims having a financial value for at least a part. Although matters governed by Swiss insolvency law are generally of economic interest, they cannot be settled by arbitration if they are closely linked to the administration of the insolvency proceedings, as they are matters over which the public authorities have exclusive jurisdiction. However, while the court recognized that the bankruptcy of a party may change the nature of a dispute, it held that it did not necessarily affect the arbitrability of the substantive issue and prevented the execution of the sentence. While Swiss law provides for an automatic stay of disputes in Switzerland at the time of bankruptcy, this principle does not apply to foreign disputes or arbitrations. The court considered that in view of its previous case law in matters of foreign litigation, the recognition and enforcement of a foreign award, issued after the bankruptcy of a party, is not in itself excluded, to provided that the arbitration was initiated before the bankruptcy. The object of arbitration does not suddenly become non-arbitrable.