•<i> Capacité de compromettre</i>

'Lack of authority of [State X] representatives

139. In the Defendant's Answer . . . to the Claimant's Request for arbitration, the Defendant "disputes that the formalities necessary to bring about a contract binding upon the then Government of [State X] were complied with" and also disputes that the Minister of Agriculture and Forestry "had the necessary capacity validly to bind the then Government of [State X] to any contract which had financial implications" and the "necessary capacity to execute bills of exchange", or had the necessary approval to sign as an aval on the bills of exchange . . . so as to bind the then Government of [State X]."

140. Furthermore, in the same answer, the Defendant raises a distinct objection, to the effect that "there would not have been any authority on the part of those who purported to represent the then Government of [State X] in a contract dealings" if it were "established that there was corruption, illegality or fraud" - a question discussed in other chapters of Defendant's various written Memorials and which will be examined below.

141. In the Defendant's Memorial on the issues of jurisdiction and admissibility, it is repeated (p. 3) as one of six grounds for denying the jurisdiction of the Arbitral Tribunal,

"That those persons who purported to represent the then Government of [State X] in the contract dealings did not possess the necessary capacity and/or authority to enter into legal relations between [sic] the Claimant and binding that Government to any enforceable financial obligations".

142. . . . In the oral argument . . . it was submitted that "the issue of lack of authority is a matter which relates to the capacity to bind [State X] and therefore [State X] is the correct law to be applied in order to determine whether the persons who sought to bind it did so lawfully and therefore validly bound their principles [sic] to any contractual arrangements including the arbitration".

143. It was further submitted . . . that "the issue of lack of authority . . . is largely a factual one" and "raises obvious disputes of facts", which involved three points:

(a) "Whether or not there was proper compliance by the officials concerned with the law of [State X];

(b) "Whether either or both the Claimants acted in good faith and on some representation which was made by officials or officers of the Government that everything was regular and that they had apparent authority to do so";

(c) Whether or not there was "any ratification".

144. On the Claimant's side . . ., it is contended that "all Ministers and officials acting for Defendant had the authority to do so" (as shown by legal opinions, Cabinet's resolutions and various letters), and that, if those persons had not been authorized, "Claimant was not aware of such lack of authority and could not be expected to be aware", as it was "in good faith considering the persons acting for Defendant to be authorized to act as they did".

145. In a further Memorial . . . "it is denied that any government procedures were circumvented by Claimant" or that it "did not make sufficient inquiries about the authorization and power of representation of the representatives of Defendant".

146. If there had been a lack of authority under [State X] law, which is denied by Claimant, it is pointed out that "the Defendant is estopped from relying on such 'lack of authorization', because of the Claimant's behaviour" and because "Defendant continued to accept Claimant's deliveries, used the financial facilities made available . . . and did not inform Claimant that it did not feel itself to be bound by Contracts IV and V" . . .

147. Claimant further emphasizes that several contracts were ratified by the Defendant, who made a number of payments ". . . without any reservations whatsoever and without informing Claimant of its opinion that it considered the Contract V not to be binding". The Arbitral Tribunal is of the view that this objection calls for the following observations, which - it is perhaps worthy of note - are strictly limited to the field of jurisdiction.

148. It may perhaps be regretted that the Defendant limited its allegations as to a lack of capacity and a lack of authority to the contract in general and did not attempt to explain whether any provisions of [State X] law or regulations related to international contracts and, in particular, to contracts containing an arbitration clause. But this "general" approach appears to be in harmony with the theory developed in another context by the Defendant, who emphasized his view that the arbitration clause was no more than an integral part of the contract as whole.

149. A first question to be addressed is that of the applicable law. On this question, Defendant has stated . . . that "in any event, Swiss law would not govern the determination as to whether or not those who purported to contract on behalf of and bind the Defendant had the necessary capacity and authority to do so, as the question is governed by [State X] law".

150. While not inaccurate, properly speaking, this statement is incomplete and needs to be qualified. First, it is for the Arbitral Tribunal sitting in Switzerland to determine, with or without reliance to a rule of conflict of laws, what is the applicable law. As regards a question relating to the merits of the case, the Arbitrators would have to follow the rules of Article 187 of the Swiss Statute on private international law, but the question under discussion is different and the Arbitrators would appear to possess a wide discretion in the choice of law. It is sufficient to state here that, according to a wide-spread practice, which regards questions of capacity as relating to status and the personal law, in particular of a State, it is indeed likely that [State X] law would be held to be applicable and the same appears to hold true regarding the authority of public officials of [State X].

151. But the question does not rest there and, assuming the "personal law" of the foreign contracting party (State, Government or other entity) to contain limitations or conditions which have not been complied with, it would remain to be decided whether such limitations or violations can be "opposed" to the other contracting party.

152. In order for the objection to succeed, three conditions must be simultaneously fulfilled by the Defendant:

1. Defendant must show the existence of [State X] laws or regulations on the capacity and/or authority of Ministers and other public officials regarding international contracts and in particular, contracts containing arbitration agreements.

2. Defendant must show that these laws and regulations have in fact been violated by the Ministers and public officials concerned, and

3. Defendant must show that it can invoke that state of affairs as regards the Claimant.

Should one of these three conditions fail to be met, the objection should accordingly be dismissed.

153. As regards the first two conditions which, as rightly pointed out by the Defendant, give rise essentially to issues of fact, they have not been elucidated in a way allowing any definite conclusion. The documents offered are, to say the least, inconclusive, and the Defendant has offered a few witnesses, challenged by the Claimant, whose testimony hardly appears justified or admissible in preliminary proceedings limited to jurisdiction. On the basis of the information produced so far by the Parties, the Arbitral Tribunal would have to conclude that Defendant has not shown a prima facie case of lack of capacity and/or authority of those persons who purported to sign the contracts on behalf of [State X].

154. Be that as it may, the third above-mentioned condition is sufficient to give the Arbitral Tribunal a clear basis for deciding on the objection based on "lack of authority".

155. As stated above, the Terms of Reference signed by the Parties have conferred on the Tribunal the mission and duty to decide on its jurisdiction and on the admissibility of the claims, i.e. in particular in the light of the various objections of the Defendant, in accordance with the Swiss Statute on private international law dated December 18, 1987, in force on January 1, 1989, because, under Article 5, the place of this arbitration is in Switzerland. (See also Article 6). It follows that, as already mentioned, this arbitration is governed by Chapter 12, Article 176 (of the Swiss Statute).

According to Article 177, para. 2:

"If a party to the arbitration agreement is a State or an enterprise or organization controlled by it, it cannot rely on its own law in order to contest its capacity to be a party to an arbitration or the arbitrability of a dispute covered by the arbitration agreement." (emphasis added)

156. It follows from that provision, which is binding both on the Arbitrators and on the Parties, that, assuming the existence in [State X] law of a provision depriving the Ministers concerned of the capacity to agree to arbitration, such a provision could not be invoked or relied upon in an international arbitration in Switzerland.

157. The discussion could end here, but it is advisable not to limit it to an application of Article 177, para. 2 of the Swiss Statute, for two reasons : the first is that general principles of arbitration law and of international practice would in any case lead to the same result, and the second is that it is not clear that the provision would apply beyond the domain of capacity proper and also to the regularity of the powers of the signatories of the contracts.

158. The principle underlying Article 177, para. 2 of the Swiss Statute (which applies not only to States and to any of its sub-divisions or entities but also to corporations or organizations, whether of public or private law, controlled by it) has been recognized in a vast body on [sic] arbitral and judicial cases and doctrinal writings, too voluminous to be reproduced here (see in particular K.H. Böckstiegel, Arbitration and State Enterprises, 1984; P. Lalive/J.-F. Poudret/C. Reymond, L'Arbitrage international en Suisse, p. 309, ad 177 and p. 324, ad 178 and references).

159. It is enough to quote, in this connection, three ICC awards, where similar objections to jurisdiction based on the alleged lack of capacity and/or authority of the State or its public officials were discussed and rejected :

160. In the first case (ICC case N° 1939, of 1971, see Journal Clunet 1975, p. 919), the Arbitrator said: (translation)

"International public policy would strongly reject the idea that a State organ, having contracted with foreign persons, could openly and intentionally agree to an arbitration clause which attracts the confidence of the contracting party and could later, whether during the arbitral proceedings or at the stage of enforcement, invoke the nullity of its own word."

161. Similarly, in the case N° 3896, in 1982 (the well-known case Framatome vs. Iranian Agency of Atomic Energy, Journal Clunet 1984, p. 58), the capacity and, more precisely, the authority of the signatories of the contract were challenged and, interestingly enough, certain irregularities, informalities and violations of Iranian law were recognized by the Arbitrators. The award states, however, that the Iranian agency

"could not be allowed, as a legal person party to proceedings relating to jurisdiction, to invoke and take advantage of irregularities, violations of the regulations and of Iranian law which had been committed, by omission or action, by its own organs or representatives".

162. Furthermore, the award relies on the fact that the contract as a whole had been partly performed by the Iranian party, who had never, prior to the commencement of the proceedings, expressed doubts as to the validity of the contract or informed the foreign party, as good faith would have required, of its doubts as to the regularity or validity of the contract.

163. Thirdly, in ICC case N° 4381, of 1986 (Journal Clunet 1986, p. 1102) the defendant denied the jurisdiction of the Arbitrators, in particular, on the basis that the signatory of the Agreement lacked capacity to bind the organization and that, as a State company, it could not enter into an arbitration undertaking without an approval of the competent authority of the State. The Arbitral Tribunal, sitting in Stockholm, rejected the objection, although it was admitted that no authorization had in fact been given. One of the grounds for the decision, which is worthy of note, was that, at the time of execution of the contract, the irregularity and lack of authorization had not been notified to the Claimant. The award refers to a long line of arbitral decisions from which it follows that international public policy does not allow a State organ to invoke its own internal law in order to nullify or avoid the effects of an arbitration agreement:

"Whereas the Claimant has agreed in good faith to the arbitration clause and the Defendant's lack of authority must therefore be considered as inoperative, by reason of its violation of international public policy, the applicability of which cannot be excluded by that of Iranian law . . ."

164. In its [sic] commentary of the decision (Clunet, 1986, p. 1111), Mr. Yves Derains, a wellknown commentator, rightly observes that what is a violation of international public policy is not the fact that, under its national law, a State or State entity may be limited in its capacity or authority to conclude arbitration agreements. What is recognized by international arbitral practice as a violation of international public policy, "is the fact for a State or legal entity of public law to conclude an arbitration agreement without revealing its incapacity or lack of authority and then later to invoke such lack of authority in order not to respect the agreement". The same author notes that such a behavior destroys the trust which is necessary to international commerce, which the international arbitrator must protect, and that:

"One may argue whether this principle is related to the concept of good faith, or of abuse of right, or of "venire contra factum proprium", or even to the concept of "estoppel" . . . but it is undisputable today that it belongs to international public policy".

165. The present Arbitral Tribunal, in keeping with a long line of precedents, fully agrees with the ideas just expressed and notes furthermore that the concept of international public policy has been relied upon extensively by the Defendant himself, although in a different context . . . Its relevance in international arbitration cannot, for that reason also, be disputed.

166. Independently of the preceding and decisive considerations, it may also be noted that the Defendant has, in the Arbitral Tribunal's opinion, totally failed to show that the Claimant itself, and even its local representatives, "were fully aware that the correct procedures had not been followed by [State X] Government officials prior to the signing of contracts, etc." . . .

167. Even if it may be assumed that, as stated by Defendant, the Claimant "knew of the requirements for Cabinet approval and authorization . . .", nothing has been shown which could lead the Arbitral Tribunal to believe that the Claimant knew, not only the requirements as such, but the alleged violations of [State X] laws or regulations and would thus have taken the risk of entering into contractual undertakings whose validity might later by called in question.

168. The mere affirmation of the Respondent . . . though accompanied by the offer of two witnesses, challenged by the Claimant is hardly sufficient to give credibility to such an allegation. Moreover, the Defendant has not explained, nor attempted to explain, how the Claimant could in practice be expected to see to it that [State X] regulations were complied with by Government officials, while the [State X] Government itself appeared to have been unable to do so. Reference may be made here to a similar situation in the Framatome case already quoted (ICC N° 3896, Journal Clunet 1984, pp. 58, 63), where the Iranian Defendant had contended that the Claimant could not assert that they were under no duty to verify that, when the contract was executed, the provisions of Iranian law had been complied with. The Arbitral Tribunal stated as follows:

"It is true that the foreign contracting party is, as a general rule, bound by such a duty, but the Iranian party itself and its organs and officials were bound by that duty at least to the same extent. And the precise extent [of the duty to see that the regulations are complied with] must be measured, not in abstracto but in the context of the concrete circumstances of the time".

169. The same principle applies in the present case where, if some [State X] regulations, formalities or procedures were not followed, at the time of execution of the contracts, the Defendant government was in a much better position than the Claimant to remedy the situation, and had a much greater duty to prevent such irregularities.

170. To sum up and for all the above-mentioned reasons, the Arbitral Tribunal is unable to accept the objection based on an alleged lack of capacity and/or authority of the [State X] officials. An identical result would moreover be arrived at, in all likelihood, according to general principles (good faith, estoppel, appearance of authority) even if the Defendant was not (or is not) a State in the sense of Article 177 of the Swiss Statute but a privately organized entity not controlled by a State.'