Transnational Notes

I. Introduction

In judgment T 4982-11 of November 23, 2012, the Swedish Supreme Court (the “Supreme Court”) upheld an arbitral award challenged primarily on the ground that the matter was non-arbitrable since it was regulated by mandatory law at the time of the conclusion of the arbitral agreement.^[1] The Supreme Court discussed the limits of arbitrability and addressed the question of when arbitrability should be assessed. This paper evaluates the Supreme Court’s conclusions, with regard to this latter issue, which has been little explored by Swedish courts. First, the factual and procedural background is outlined, followed by a description of the Supreme Court’s decision. The decision is then evaluated before final conclusions mark the end of the paper.

II. The factual and procedural background

On January 24, 1990, the Soviet entity, Moscow City Golf Club OOO (“City Golf”), entered into a loan agreement (the “Loan Agreement”) with a Swedish bank, Nordea Bank AB (publ.) (the “Bank”), to finance the construction of a golf course in the former Soviet Union. Under the Loan Agreement, which was governed by Swedish law and contained an arbitration clause providing for arbitration in Stockholm, the Bank was to lend to City Golf SEK 22,000,000 (USD 3,584,155.48). The loan was made through drawdowns by City Golf’s Swedish general contractor. However, when the Loan Agreement was entered into, mandatory law that prohibited, invalidated, and imposed penal sanctions on import and export of currency without due authority approval was in force in both Sweden and the former Soviet Union.^[2]

The Swedish general contractor made its drawdowns and performed the construction but City Golf later failed to repay the loan. The Bank initiated arbitration to recover the outstanding amount and on May 11, 2010, the sole arbitrator gave a final award under which the Bank was allowed to recover from City Golf. At this point, the Swedish and Soviet mandatory currency laws were no longer in force. City Golf challenged the award before the Svea Court of Appeal (the “Court of Appeal”), which upheld it.^[3]City Golf therefore appealed to the Supreme Court.

III. The decision by the Supreme Court

City Golf argued that the award was invalid since it concerned a matter that, at the time of the conclusion of the arbitration agreement, was regulated by mandatory Swedish and Soviet laws requiring authority approval for transfer of currency and therefore was non-arbitrable. City Golf alleged that approval never was granted and that Russian laws to similar effect still were in force. However, the Supreme Court deemed the dispute arbitrable and upheld the award.

The Supreme Court determined that Swedish law was applicable, not only to the Loan Agreement, but also to the arbitration agreement^[4] and made reference to Section 33 of the Swedish Arbitration Act (1999:166) (the “SAA”), under which an arbitral award is invalid “if it includes determination of an issue which, in accordance with Swedish law, may not be decided by arbitrators.”The Supreme Court stated that generally under Swedish law, an issue may be decided by arbitrators, and is arbitrable, if it is amenable to out-of-court settlement. This follows from Section 1 of the SAA. The Supreme Court also stated that foreign mandatory provisions of economic or political nature generally do not affect arbitrability under Swedish law.

The Supreme Court conceded that the issue of when arbitrability is assessed depends to some extent on the circumstances of the case. However, it deemed the amenability to out-of-court settlement when the dispute was resolved to be determinative in this regard, irrespective of the amenability to out-of-court settlement when the arbitration agreement was concluded.  

The Supreme Court noted that there were no longer any Swedish mandatory currency regulations in force when dispute was resolved, which was the relevant time to assess arbitrability. The only mandatory currency regulations allegedly still in force at that point in time were Russian provisions and the Supreme Court held that those foreign provisions were not of such nature that they could affect arbitrability under Swedish law. The dispute was deemed amenable to out-of-court settlement and arbitrable.

IV. Evaluation and comments

Admittedly, the outcome of this case may not have been entirely contingent on when arbitrability was assessed. The Supreme Court did point out that the mandatory provisions did not target the creditor-debtor relationship under the Loan Agreement; only the actual transfer of currency. Even if the repayment contemplated by the Loan Agreement was proven invalid and punishable under current Swedish law, the Supreme Court may still have deemed the issue of payment liability amenable to out-of-court settlement. However, it is easy to see that had the circumstances been just slightly different, the issue might certainly have prejudiced the outcome of the entire dispute.^[5] The Supreme Court correctly found the issue relevant enough to address specifically.

The question of when a dispute needs to be amenable to out-of-court settlement in order to be arbitrable has been subject to debate.^[6]Some argue that the relevant time is when the arbitration agreement was entered into,^[7]whereas others think it is when the dispute was resolved and that arbitrability should be assessed only at that point.^[8] 

The wording of Section 1 of the SAA, which draws up the limits of arbitrability, appears inconclusive in respect of the point at which arbitrability is to be assessed. On the one hand, it stipulates that “[d]isputes concerning matters in respect of which the parties may reach a settlement may, by agreement, be referred to one or several arbitrators for resolution.”The use of present tense, “may reach a settlement,”here suggests that the relevant time is when the matter is referred to the arbitrators. However, on the other hand, the same section stipulates that “[s]uch an agreement may relate to future disputes,”which makes the words “may reach a settlement”rather seem to relate to whether the parties could settle when the arbitration agreement was concluded.

However, the Supreme Court takes a strong position that a dispute, in order to be arbitrable, only needs to be amenable to out-of-court settlement when the dispute is resolved. Although the Supreme Court expresses the caveat that the issue to some extent depends on the specific arbitration agreement and the circumstances in general, it does state that “the determining factor must be whether the parties could have reached an out-of-court settlement at the time when the dispute was resolved, irrespective of whether the arbitration clause could be deemed in breach of peremptory legislation when it was entered into.”^[9]Several arguments may be made in support of the Supreme Court’s conclusion.

Importantly, the restriction that only disputes amenable to out-of-court settlement may be referred to arbitration originates from a principle of party autonomy.^[10] Logically, if parties are free to reach a settlement they should be equally free to refer the matter to arbitration. Therefore, if a dispute currently is amenable to out-of-court settlement, it may be argued that the underlying principle of party autonomy permits either of them to refer it to arbitration even if they previously were not allowed to settle. Mandatory substantive laws change with time and it would seem reasonable that arbitrability change with them.

Also, it may be inappropriate if historical political whims were to affect present day arbitrability of disputes over old agreements. Sweden is a popular forum for “east-west arbitrations”involving parties from the former Soviet Union. The issue of when to asses arbitrability is particularly important for such arbitrations since the highly politicized law of the Soviet Union may differ much from the present law of the remaining republics. If arbitrability were to be assessed at the conclusion of the arbitration agreement, such old politicized legislation may be perpetuated within the parties’relationship. 

Admittedly, the Court of Appeal came to the opposite conclusion on the issue of when arbitrability was to be assessed. It stated that “[t]he relevant time for ruling on whether the dispute is arbitrable is the time of entry into the [L]oan [A]greement.”Already at that point, reasoned the Court of Appeal, should the parties have been able to foresee its consequences; “at least with respect to invalidity.”^[11] Given that the entry into of the Loan Agreement coincided with that of the arbitration agreement, the conclusion is not unreasonable since arbitrability is a requirement for a valid arbitration agreement.^[12] If the arbitration agreement was flawed at its conclusion due to lacking arbitrability it would therefore seem incoherent if that flaw was allowed to “heal”with time.

In support of the Court of Appeal’s view, it may also be argued that assessing arbitrability based on the conditions after the conclusion of the disputed agreement might weaken the effect of certain mandatory legislation. Some mandatory law, such as currency regulations, may be of temporary nature yet serve a valid purpose. If a party knew that once such law is repealed the party would be able to arbitrate and later obtain enforcement of an agreement forbidden by the mandatory provisions, the impetus of such legislation may be weakened.

However, the Court of Appeal did attach significance to the entry into of the Loan Agreement rather than that of the arbitration agreement, which renders these arguments in support of its conclusion weaker. In contrast, the Supreme Court’s view appears more persuasive since it gives maximum effect to party autonomy and takes into account an international trend of increasing arbitrability.^[13] The Supreme Court’s view is also more pragmatic. It would seem unnecessarily formalistic to prevent arbitration of an issue that the parties have already agreed to arbitrate and that under the current political values is amenable to out-of-court settlement. The Supreme Court’s view may be positive for Sweden’s attractiveness as a forum for international arbitrations since it favors a broad notion of arbitrability and slightly less room for finding an award invalid due to lacking arbitrability. It should also increase foreseeability as to whether a dispute is arbitrable since arbitrability will depend on current conditions rather than the conditions at the conclusion of the arbitration agreement, which may be less lucid.^[14] 

V. Conclusions

In the court proceedings between City Golf and the Bank, the Supreme Court answered the question of when arbitrability should be assessed under Swedish law. It held that a dispute is arbitrable if the matter it concerns is amenable to out-of-court settlement when the dispute is resolved. This holding by the Supreme Court is persuasive since it is pragmatic, well in line with the principle of party autonomy and with the international trend of increasing arbitrability. It is positive for Sweden since it contributes to a broader and more foreseeable notion of arbitrability, which should work to maintain Sweden’s attractiveness as a forum for international arbitrations.

 

Eric Schultz