Court finds state not bound by arbitration clause signed by state-owned entity

In a recently published German-language decision, the Swiss Supreme Court rejected an application to set aside a partial award where the tribunal had refused to extend an arbitration clause signed by a state-owned entity in Libya (respondent 1) to the non-signatory state (Libya) (respondent 2).

The underlying dispute arose from a contract entered into in 2006 by two Turkish companies, their joint venture company (appellants) and respondent 1 which was created to carry out a major infrastructure project, the "Great Man-Made-River". Following riots in Libya in 2011, the appellants suspended the execution of the project. The parties subsequently failed to continue the works and the appellants eventually initiated International Chamber of Commerce (ICC) arbitration proceedings with a seat in Geneva against both respondents 1 and 2. However, the latter was not a signatory to the contract.

In a partial award rendered by a majority decision, the tribunal, amongst other things, declared that it lacked jurisdiction in respect of Libya. In its application to set aside before the Swiss Supreme Court, the appellants argued that the landmark "Westland" case (P 1675/1987 of 19 July 1988) denying the extension of an arbitration clause signed by a state-owned entity to a state was outdated and therefore, Libya should become a party to the arbitration.

The Swiss Supreme Court recalled that, under Swiss case law, non-signatory third parties could be bound by an arbitration clause in exceptional circumstances. However, in the present case, the Swiss Supreme Court confirmed the partial award. It rejected the appellants' allegation that under Libyan law respondent 1 was a simple organ or auxiliary of Libya. It also confirmed the tribunal's decision under Swiss law not to extend the arbitration clause based on Libya's unproven involvement in the contract, despite respondent 1 being a state-controlled entity. It thereby confirmed that under the Swiss lex arbitri, the fact that a party is a state-owned entity is not sufficient, per se, to extend an arbitration clause to a non-signatory state. (Decision 4A_636/2018 (24 September 2019) (Swiss Supreme Court).)