Switzerland: Swiss Supreme Court Cancels Arbitration Award On Hotel And Casino Project Due To Violation Of The Right To Be Heard

Last Updated: 22 June 2017
Article by Thomas Rihm

A company under the law of the Principality of Liechtenstein entered in 1996 into a development and construction contract on a hotel and casino project in the West Bank. This contract was concluded with the Palestinian Autonomy Authority along with a company registered under local Palestinian laws in 1964. The casino and the five-star hotel opened their doors with 1'800 local employees in September 1998 and July 2000, respectively, whereby guests consisted to 95 percent of people from Israel. Immediately after the second entifada began, the Israeli army barred all routes leading to the hotel and casino compound which required a closing of the entire operations in fall of 2000.

"The principle of "pacta sunt servanda" was not violated, as local Palestinian laws did not forbid any gambling in 1996 and 2000."

In the following, the above parties concluded in December 2000 a further agreement extending the contractor's license to operate the hotel and casino project until 2028. As the hotel and casino operations could not be resumed in the following years, the contractor requested an arbitral tribunal established under the Swiss Rules of International Arbitration to order the Palestinian Autonomy Authority to grant a casino and hotel license until 2028 including the repayment of lost profits of close to USD 1,5 billion (2008 to 2014) and of income taxes paid in the amount of up to USD 35 million.

By an award rendered on August 2, 2016, the arbitrational tribunal dismissed the contractor's requests on three accounts. The Swiss Federal Supreme Court reviewed the arbitrational award under the public policy test. A violation of public policies in Switzerland requires that fundamental principles of Swiss laws are violated. Such fundamental principles are breached if basic cornerstones of Swiss laws like "pacta sunt servanda" or the acting against good-faith principles ("venire contra factum proprium") are affected. Further fundamental cornerstones in Switzerland are the prohibition of discriminationy actions, the expropriation w/o an adaequate consideration and the personal freedom against excessive contractual restrictions.

"The Palestinian Autonomy Authority did no act against good-faith principles by concluding and renewing the hotel and casino contract in 1996 and 2000, whilst enacting a gambling ban in 2002."

The Swiss Federal Supreme Court held that the principle of "pacta sunt servanda" was not violated, as local Palestinian laws did not forbid any gambling when the above two project contracts were concluded-extended in 1996 and 2000, respectively, so the claimant could not argue that the arbitral tribunal contradicted itself by saying that the project contracts were valid on the one hand and on the other hand: could not longer be enforced following the enactement of a gambling ban by the Palestinian Autonomy Authority in 2002.

The hightest court in Switzerland's also dismissed the claimant's allegation that the Palestinian Autonomy Authority acted against good-faith principles by concluding and renewing the hotel and casino project contract in 1996 and 2000, whilst enacting the above gambling ban in 2002. The Swiss Supreme Court held that the Palestinian Autonomy Authority acted legitimately and w/o creating a justified trust on the contractor's side that the casino licenses would go on until 2028. In terms of the claimant's third account regarding undue expropriation, the Swiss Supreme Court confirmed the arbitral tribunal's position that the damage claims regarding repayment of lost profits did not reflect the exproriation claim whilst both judicial instances did not see any legal grounds for the alleged repayment of income taxes paid.

"The arbitrational tribunal overlooked the claimant's allegation for a separate compensation of its hotel operation - not affected by the gambling ban and operable on a stand-alone basis."

The clamaint was, however, successful in arguing that the arbitrational tribunal violated its constitutional right to be heard since it had overlooked the claimant's allegations for a separate compensation of its hotel operation, as the five star hotel was not affected by the subsequent gambling ban and could be operated on a stand-alone basis, i.e. w/o any ongoing casino operation. To that end, the arbitrational tribunal must review the case again and decide whether the Palestinian Autonomy Authority should have allowed at least the claimant's hotel operations and is therefore responsible for any pertaining financial consequences.

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