Switzerland: Arbitration Newsletter Switzerland: The West Bank Casino And The Expensive Fight For The Right To Be Heard

Last Updated: 5 March 2018
Article by Hansjörg Stutzer, Michael Bösch and Simon M. Hohler

On 16 June 2017, the Swiss Federal Supreme Court (the "Court") put its most recent decision in the field of international arbitration on its website (the "Decision").1

In a dispute concerning concessions for a tourism project, including a casino and a hotel, in the West Bank, the Court partially granted the action for annulment of an award rendered in a Swiss Rules arbitration due to a violation of the right to be heard: the Court concluded that the arbitral tribunal had not taken into account the claimant's main argument for one of its prayers for relief which might have resulted in a different outcome.

1 Facts

In December 1996, the Liechtenstein company A, the State of Palestine and the Palestinian company B (the latter two together the "Respondents") entered into an agreement concerning the construction as well as the operation of a casino and a hotel in a city in the West Bank (the "General Agreement"). The General Agreement provided, inter alia, that B undertook to organize and procure all necessary permits and concessions for A in order to build and operate the casino and the hotel. B agreed that, in the event of a breach of this undertaking, it would indemnify A for all damages incurred irrespective of fault or negligence, but excluding any acts of foreign states. The General Agreement stipulated arbitration in Zurich under the Rules of the Zurich Chamber of Commerce as the means of dispute resolution.

A few months after the conclusion of the General Agreement, A started with the construction of the casino. In June 1997, A was provided by the Ministry of Justice of the State of Palestine with a concession for the operation of a casino. The concession was valid for 15 years as of the date of the opening of the first casino. The concession stipulated that the concession decree shall not be revoked or altered by any authority by law or decree. In 1998 and 1999, concessions and permits were issued to A for the construction of the hotel.

The casino opened in 1998 and was successfully operated until 2000, generating a profit of more than USD 190 million. The hotel opened in 2000.

Shortly after the start of the second Intifada, the Israeli military forces, by way of a decree, closed entry to the territory that encompassed the casino and the hotel. Therefore, A considered itself forced to close the casino in October 2000, but continued with the operation of the hotel.

In December 2000, the parties entered into two additional agreements to safeguard the further development of the tourism project. In these two agreements, the concession with the casino license granted to A was stipulated to run for 30 years as of 12 September 1998. The parties further agreed that the arbitration clause of the General Agreement also applied for disputes arising out of these agreements.

In 2002, the State of Palestine issued a criminal code that prohibited the operating of a public place for gambling, accompanied by the sanction of a six-month imprisonment and a fine.

In 2012, even though the territory encompassing the hotel and the casino was still inaccessible due to Israeli law, A formally requested the State of Palestine several times to issue a new concession for the tourism project and alleged that the non-issuance of a prolonged concession would constitute a violation of the General Agreement and the two other agreements. ence and content of the contract in dispute by considering the agreements valid and by assessing the claims resulting therefrom in taking into account the law chosen by the parties as well as the mandatory provisions of Palestinian law.

The Court also rejected the assertion that the award would protect disloyal and abusive legal conduct of the State of Palestine. A alleged that the State of Palestine had acted abusively by interpreting its own law in a way to escape its contractual commitments towards A by changing its position with regard to gambling only after the start of the arbitration proceedings. The Court held that A had failed to demonstrate any trust worthy of protection as well as any extraordinary circumstances that would allow the invoking of mandatory law to be considered as abusive.

With regard to the third assertion, expropriation without compensation, the Court dismissed A's argument by stating that A had not even asked for any compensation for the alleged expropriation.

2.3 Violation of the Right to be Heard

The Court then turned to A's allegation that the arbitral tribunal had violated its right to be heard by rejecting its prayer for relief regarding the hotel. In A's view, the arbitral tribunal had rejected that prayer for relief without taking into account its argument that the operation of a hotel resort is not illegal in Palestine. Hence, there would be no reason not to order the State of Palestine to issue the necessary concessions for the operation of the hotel, valid until 13 September 2028.

The right to be heard in international arbitration includes in particular the parties' right to express their views on all facts essential for the decision, to present their legal points of view, to appropriate evidential measures (if timely and formally correctly requested), to participate in hearings and to access the files.

While the right to be heard ("due process") does not require an international arbitral award to be reasoned, it requires the arbitral tribunal to examine and deal with all relevant issues. If the arbitral tribunal, inadvertently or due to a misunderstanding, does not take into consideration relevant assertions, submissions, arguments, evidence or evidentiary offers by a party, the right to be heard is violated.

If the arbitral tribunal renders an award that does not discuss significant elements of the decision, the arbitral tribunal or the opposing party has to justify this omission in its answer to the action for annulment by setting forth that the elements in questions - contrary to the appellant's submission - were not relevant for the decision or that the arbitral tribunal had implicitly rebutted them.

The Court applied this standard on the arbitral tribunal's assessment of the prayer for relief regarding the concessions for the tourism project, including the operating of a hotel resort and A's arguments in this respect. The Court noted that the arbitral tribunal had not presented any reasoning as to why the operation of a hotel would not be legal in Palestine, in particular it did not state that the operation of a hotel would be illegal in Palestine under past or present law or that the criminal prohibition of gambling would also apply to the operation of the hotel. The award did also not contain any indication that the arbitral tribunal had at least implicitly dealt with that question. Notably, the arbitral tribunal, in its statement to the Court, also confirmed that it had not dealt with that questions given that the separate issuance of a concession for the operating of a hotel would not have been part of the present dispute. The Court, however, disagreed with the latter part of the arbitral tribunal's statement.

Accordingly, the Court held that the arbitral tribunal should have dealt with the request for a separate concession for the operating of the hotel. As the arbitral tribunal had not done so, it had violated A's right to be heard and, hence, the award was annulled in this respect.

Due to the amount in dispute of approx. CHF 1.4 billion (approx. USD 1.47 billion) and the fact that the annulled part of the award seemed to have almost no monetary value, the Court ordered A to bear 95% of the Court's costs, i.e. CHF 190'000, and to indemnify the State of Palestine and B for their legal costs with USD 225'000 respectively USD 250'000.

3 Conclusions

Whilst the Decision does not contain any groundbreaking new arguments by the Court it nevertheless provides helpful clarifications on a number of issues:

  1. A requested that its action for annulment be forwarded to the opposing party only once the deadline for answering of the action of annulment is set to them touches indeed upon a structural imbalance. An appellant has, by virtue of law, only 30 days for the filing of its all-embracing action for annulment, whereas the other party receives appellant's submission shortly after it has been filed but the deadline for its answer is set only once the advance on costs has been paid-in by appellant. In the case at hand, A was also compelled to provide security for costs and therefore only after such security was paid did the deadline for the Respondents start to run. Consequently, B and the State of Palestine had had more time than A for the filing of their legal briefs. The argument of the Court that the 30 day period for the filing of an action for annulment is a time limit set by law whereas all further time limits are set by the Court is not very helpful.

    Given the way proceedings are structured at present, the parties are not treated equally - at least as to the timing. The statutory 30-day period seems also unlikely to be amended in conjunction with the present attempt to "polish" Chapter 12 PILA.

  2. Whilst proceedings at the Court in actions for annulment provide in fact for only one exchange of brief, a second round of briefs has now increasingly become the rule. But parties seem to forget that this second round is, in particular for appellant, reserved to new arguments only, as presented by appellee in its first submission.

    This second round of submissions also has, of course, an impact on the duration of the proceedings at the Court. Nevertheless, the Court was still able to render the Decision within 8½ months from the date of initiation of proceedings.

  3. The clarification of the limited area of application of the principle of pacta sunt servanda is helpful: the Court makes it crystal clear that this principle, under the concept of public policy pursuant to Art. 190 (2) (e) PILA, has only a very limited area of application. So far, no decision has ever been overturned by the Court on this ground and this is most likely going to remain so because it is indeed difficult for an arbitral tribunal to err in a way that a violation of such principle must be assumed. Practitioners are therefore well advised to consider very diligently whether or not to base their actions for annulment on such principle.
  4. It is also plausible that the Court concluded that the tribunal's failure to have dealt with the question of whether the operation of a hotel would not have been legal under Palestinian law amounts to a violation of the right to be heard.

    But is this really going to help A? The Decision reveals that the arbitral tribunal expressed in its statement to the Court its view that in denying the claim for the concession of the casino it had, at least impliedly, also denied the claim for the concession of the hotel. The Court refused this argument and gave the arbitral tribunal directions for the issues still to be resolved in its amended award. But the above position of the arbitral tribunal provides at least an indication of the potential outcome of the amended award. Had the arbitral tribunal actually accepted that it would not decide on the hotel concession at all, the case would have been about infra petita.

  5. Given the high amount in dispute the fees of the Court and the party remunerations to be paid to the prevailing parties are significant, indeed. But to burden A with 95% of the costs, i.e. CHF 190'000,2 and the legal costs of Respondents in the amount of CHF 475'000 seems to be inadequate. After all, the award of the arbitral tribunal was overturned due the violation of A's right to be heard. By reading the reasoning of the Court it becomes also obvious that Respondents pleaded, amongst other matters, that the action for annulment was inadmissible which argument was then rejected by the Court. Hence, another failed argument of Respondents which should have been taken into account in assessing the costs.

    The case was about a casino, but this does not justify that costs and compensation to Respondents should be assessed in a casino-like manner. Who can reasonably invest CHF 680'000 (plus its own lawyer's costs) to score a pyrrhic victory only?

  6. The topic of this arbitration - fair and equitable treatment of A as investor in the State of Palestine respectively uncompensated expropriation - would actually have been well suited to be dealt within the framework of an investment treaty arbitration, but the State of Palestine seems - according to the list published on the website of ICSID - to have entered only into two bilateral investment treaties, namely with Egypt and Germany. Therefore, this platform was not available to A.

Footnotes

1 BGE 4A_532/2016 of 30 May 2017, in German.

2 Generally, the fees of the Court are capped at CHF 100'000 but in "extraordinary circumstances" the Court may increase its fee up to the double - which it did in the present case. For lawyer's fees the maximum to be awarded is 1% of the amount in dispute - which is not met in the present case by far. Nevertheless, the remunerations awarded are certainly one of the highest ever.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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