In an ongoing multi-party arbitration conducted under the ICC Rules and seated in Geneva, one of the co-respondents, Elektrim SA (Elektrim), a company incorporated under the laws of Poland, informed the arbitral tribunal that a Bankruptcy Court in Poland had issued an order declaring the company insolvent. Elektrim requested the arbitral tribunal to confirm that the arbitration proceedings against it were terminated. Elektrim argued that in the circumstances, Polish law (the lex concursus, or law of the country of the opening of the insolvency proceedings) provided for the invalidity of arbitration agreements to which it was party, and relied in particular on Article 142 of the Polish Bankruptcy and Recovery Law (Prawo upadłościowe i naprawcze (PBRL). Article 142 reads:

Having heard the parties' comments, the arbitral tribunal rendered an interim award granting Elektrim's request. The tribunal held that under Swiss conflict of laws principles, namely Articles 154 et seq. of the Swiss Private International Law Act (the SPILA), a company's "continued capacity" to participate in an ongoing arbitration must be determined in accordance with the rules of the law of incorporation (lex societatis). In this case, that meant in accordance with Polish law, which included Article 142 PBRL . Under Article 142 PBRL, which is understood to apply to domestic arbitrations as well as arbitrations seated outside Poland, an insolvent party lacks subjective arbitrability and therefore, cannot continue to be party to ongoing proceedings. Consequently, the tribunal discontinued the arbitration vis-à-vis the insolvent co-respondent.

Subsequently, the claimants appealed to the Swiss Federal Supreme Court seeking to set aside the tribunal’s interim award. They argued that the effects of foreign insolvency proceedings on an international arbitration seated in Switzerland were governed by Swiss law (lex arbitri), pursuant to which the insolvency of a party did not terminate an ongoing arbitration.

In its 3 to 2 decision , the Swiss Federal Supreme Court rejected the request to set aside the interim award and held that the arbitral tribunal was correct in discontinuing the proceedings against the insolvent co-respondent. The Supreme Court held that Swiss law was silent on the issue of subjective arbitrability of non-state parties. It therefore applied general procedural principles under which the capacity to be a party to proceedings (Parteifähigkeit) depends on the preliminary question of legal capacity (Rechtsfähigkeit). Since Elektrim was a corporation, the Supreme Court applied Articles 154 and 155 of SPILA to determine the law which governed the issue of legal capacity. It concluded that the legal capacity and thus the capacity of the Polish co-respondent to be a party to international arbitration proceedings were to be determined in accordance with Polish law. Since Article 142 PBRL deprived an insolvent Polish company of its subjective arbitrability, such an insolvent company could not continue to be party to arbitration proceedings.

The decision of the Swiss Federal Court has triggered controversy among arbitration practitioners in Switzerland. Until this decision, the Swiss view was predominantly that the lex arbitri determines the issue of subjective arbitrability. The Supreme Court, however, interpreted Article 142 PBRL as depriving an insolvent party of its subjective arbitrability. It therefore discontinued the arbitration vis-à-vis the insolvent company although the wording of Article 142 does not specifically address the issue of subjective arbitrability, but merely states that the respective arbitration clause would lose its legal effect and therefore any pending arbitration proceedings vis-à-vis the insolvent party would be discontinued.

Interestingly, in Syska & Elektrim SA v Vivendi & Others [2008] EWHC 2155 (Comm), the English High Court dealt with the question of whether to discontinue a London arbitration vis-à-vis the very same insolvent Polish company, and came to a conclusion contrary to that of the Swiss Supreme Court (see Legal update, Court of Appeal determines effect of party's insolvency in one EU jurisdiction on arbitral proceedings in another). The question before Christopher Clarke J was whether Article 15 of the EU Insolvency Regulation (the Regulation) applied to international arbitrations seated within the EU but taking place outside the state where the debtor was subject to insolvency proceedings. Christopher Clarke J (whose decision was upheld by the Court of Appeal) decided that the Regulation was applicable and accepted Vivendi's submission that arbitrations count as "pending lawsuits" as defined in the Regulation. He upheld the decision of the London arbitral tribunal which determined that under Article 15 of the Regulation, the effect of the insolvency on the tribunal's jurisdiction was to be determined by English law as the lex arbitri, rather than Polish law as the lex concursus.