Introduction
Facts
Decision
Comment



Introduction

Under Article 271(1)(6) of the Debt Enforcement and Bankruptcy Law, a creditor may apply for an order to freeze a debtor's assets on the basis of a final enforceable title.

A freezing order may be granted if the creditor proves prima facie that grounds for such an order exist (Article 272(1)). The Debt Enforcement Office serves both the creditor and the debtor with a copy of the freezing order. The debtor may subsequently file an objection against the freezing order if it considers that the conditions laid down in Article 271(1) have not been fulfilled.

The Federal Supreme Court, whose powers when ruling on a freezing order are limited to voiding an arbitrary decision, recently considered that a foreign award without prior exequatur proceedings can constitute a final enforceable judgment, and thus under certain conditions can justify a freezing order.(1)

Facts

On April 14 2011 an award issued by an arbitrator in London ordered the respondents to pay more than $5.13 million to the claimants under a share purchase agreement and as compensation for legal fees incurred. On July 5 2011 the claimants applied to a Swiss district court for an order to freeze ans seize the respondent's property. This application for a freezing order was founded directly on the English arbitral award without prior exequatur proceedings.

The district court granted the freezing order on the basis of:

  • a letter from the arbitration court confirming notification of the award to the respondent;
  • an affidavit provided by an English adviser that the award was final and enforceable; and
  • an extract from the land register in which the respondent's property was recorded.

The respondent filed an objection against the district court order arguing that in the absence of a prior and adversarial exequatur, the English award should not have been considered as a final enforceable judgment under Article 271(1)(6). The district court admitted the respondent's objection.

On appeal, the cantonal court of appeal subsequently validated the initial freezing order and dismissed the respondent's objection. The appeal court considered that under Article 271(1)(6), a freezing order may be granted on submission of a foreign judgment from a Lugano Convention non-member state without a prior exequatur decision. An identical solution must be applied to foreign awards, as the enforceability of a decision appreciated on a prima facie basis can be examined incidentally during the course of proceedings.

On May 14 2012 the respondent filed an appeal before the Supreme Court.

Decision

Limited examination of appellate decision
Under Swiss law, a decision issued by a cantonal court of appeal on a freezing order is considered a decision on a provisional measure (Article 278(3)) and thus can be reviewed by the Supreme Court only when breach of a constitutional right is alleged (Article 98 of the Federal Supreme Court Act).

Therefore, non-conformity of cantonal enforcement and bankruptcy court decisions with the law, in the absence of breach of a constitutional right, does not enable the Supreme Court to overturn such decisions.

The Supreme Court considered that cantonal enforcement and bankruptcy court decisions can be overturned only if such decisions are arbitrary in both their grounds and their effects.

According to Article 9 of the Constitution, a decision is deemed to be arbitrary if:

  • it is unbearable;
  • it seriously infringes a law or a clear and unchallenged legal principle; or
  • it offends the perception of justice and equality.(2)

Enforceability of foreign arbitral award from Lugano Convention non-member state
According to the Supreme Court, Articles 271(1)(6) and 80(1) make no distinctions between Swiss and foreign judgments and between Lugano and non-Lugano judgments. To the contrary, Article 81(3) encompasses all judgments rendered in "another State".

In order to interpret the scope of Article 271(1)(6), the Supreme Court recalled that the legislature intended to modify the rules applicable to freezing orders in order not only to comply with the Lugano Convention with respect to provisional measures, but also to improve the situation of all creditors enforcing Swiss or foreign judgments. In such circumstances, foreign judgments and awards are considered final enforceable judgments within the meaning of Article 271(1)(6).

Further, allowing a court to grant a freezing order on the basis of a foreign judgment or award without prior exequatur proceedings would:

  • contribute to the extension of the possibility for all creditors to obtain such a provisional measure;
  • comply with Article 272, which requires only a prima facie examination of a final enforceable title; and
  • preserve the surprise factor which is necessary to ensure the efficiency of such measures.

Under such circumstances, the Supreme Court held that it is not arbitrary that a court deciding on a freezing order incidentally rules on the enforceability of a non-Lugano judgment. As a result, the Supreme Court dismissed the appeal.

Verification of enforceability of foreign judgments or awards before granting freezing order
The Supreme Court stressed that the courts must carefully examine prima facie the grounds for a freezing order when a foreign judgment or award is alleged to be a final enforceable title. The Supreme Court suggested that the courts should verify that the documents submitted by an applicant prove in all likelihood that the foreign judgment or award can be recognised or exequatur can be obtained in Switzerland in compliance with applicable international agreements or laws – especially if it is a default judgment or a judgment rendered in a state not granting reciprocity.

In the case at hand, the claimant had failed to provide either the district court or the cantonal court of appeal with the relevant documents as required by the New York Convention, which governed this foreign arbitral award. Although the freezing order should not have been granted and the cantonal court of appeal's decision violated Article 271(1)(6) of the Debt Enforcement and Bankruptcy Law, it was not arbitrary and, for that reason, it was not voided by the Supreme Court.

This recommendation from the Supreme Court should be taken into account by the lower courts when assessing any application for a freezing order made on the basis of a foreign judgment.

Comment

As this decision allows a creditor to apply for a freezing order without a prior exequatur decision, it extends access to this provisional measure. However, the decision does not give free rein to creditors, as the Supreme Court has stated that creditors will be required to provide the court with the relevant documents to prove that the foreign judgment or award can be enforced in Switzerland. Should they fail to do so, the application for a freezing order will be dismissed or lifted on objection.

For more information please contact Estelle Huguin at Lenz & Staehelin by telephone (+41 58 450 8000), fax (+41 58 450 8001) or email (Estelle.Huguin@lenzstaehelin.com).

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Endnotes

(1) Federal Supreme Court, 5A_355/2012, December 21 2012.

(2) Decision 5A_697/2010, Section 1.3.