F.R. German engineering Company v Polish buyer, Interim Award, 9 September 1983, YCA 1987, p. 63 et seq.

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F.R. German engineering Company v Polish buyer, Interim Award, 9 September 1983

Interim award of 9 September 1983 (Original In German*)

 

 

 

Facts

The claimant is an engineering company incorporated in the F.R. Germany, which engages in the planning and delivery of plants and equipment. Being without its own production facilities, it operates as general contractor and enters into subcontracts for delivery with numerous producers. The defendant is an export trading company of the Polish State.

On 26 January 1980 the parties entered into a contract under which claimant was to construct and deliver a plant for the production of fuel gas from coal in the People's Republic of Poland. Contract negotiations had extended over several years. The Polish ministries for chemistry, foreign trade and mining as well as representatives of the Polish State Planning Commission partly participated in the negotiations. The contract was to enter into force upon various conditions, in particular, the obtaining of permission by all competent authorities in the People's Republic of Poland and issuance of the mandatory Polish import licence. After all these conditions had been complied with, the contract entered into force on 24 March 1980. Claimant's obligations included planning of the plant and delivery of technical documentation, delivery of equipment, technical supervision of the construction process and training of personnel. Besides its obligation to pay the price, the defendant, in particular, agreed to provide the take over of deliveries, transport and storage of equipment in Poland, construction work on the construction site and all necessary governmental working and residence permits for claimant's personnel.

With respect to dissolution of the contract due to “force majeure”, Art. 19 of the contract contained the following provisions:

“As events of force majeure exonerating the contracting parties during the time of the force majeure from their contractual obligations and all

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consequences related exclusively thereto, will be considered unforeseen events beyond the control of the contracting parties, which occurred after the making of the contract and which could not be avoided by the contracting parties with the exercise of due diligence, and which render fulfilment of contractual obligations impossible as a whole or in part, e.g., natural disasters, fires, floods, earthquakes, strikes, war, mobilization, military actions of the enemy, requisitions, riot, embargo, governmental order. Unavailability of workers, materials and raw materials will not be recognized as force majeure.

“Strikes not legalized by the competent trade unions and all lock-outs resulting therefrom will not be considered as force majeure.

“The contracting party claiming force majeure must notify the other contracting party by telegram or telex of the occurrence and termination of the force majeure not later than two weeks from the date of occurrence. Within a period of an additional 15 days, this contracting party must confirm by registered letter, the circumstances of force majeure confirmed by a competent authority of the State or the Chamber of Industry and Commerce or the Chamber of Foreign Trade respectively, in which the nexus between the force majeure and the impossibility of timely delivery or performance of contractual obligations is determined. In the same manner and within 10 days, the contracting party claiming force majeure must notify the other contracting party of the termination of the state of force majeure.

“If the above-mentioned notifications and confirmations are not provided for within the stipulated time limits, the contracting party in breach of this obligation may not rely on rights resulting from force majeure.

“In case of force majeure, and insofar as this will influence time limits for delivery and other contractual time limits, the time limits will be prolonged for the duration of force majeure and the consequences related exclusively thereto.

“If the contracting party concerned is not able to comply with contractual obligations within 4 months due to force majeure, both contracting parties will immediately consult each other and discuss solutions acceptable to both contracting parties.

“If an agreement as mentioned in Art. 19.6 should not be reached, the contracting party which has sustained a loss may call upon the arbitral tribunal after two additional months.” According to Art. 20.5 of the contract, Swiss law is applicable to the contract and its interpretation.

By telex of 25/26 January 1982, defendant notified claimant that the Council of Ministers of the People's Republic of Poland on 21 December 1981 has banned all imports of industrial investment goods for the gas production plant ... and that this created an event of force majeure as defined in Art. 19.1 of the contract. The governmental Order was worded as follows:

“By virtue of the ordered state of war and the decision of the Military Council for the Rescue of the Nation of 19 December 1981 concerning the restriction of industrial investments in progress, based on Art. 11(4) of the Statute of 26 March 1975 - relating to customs law (Reg. Bl. No. 10, Pos. 56) the following is ordered:

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§ 1 According to the annex with investment projects listed therein, a ban is ordered on the import of investment goods for such projects.

§ 2 Permits granted for import of goods as listed in §1 are void.

§ 3 The Minister of Foreign Trade is in charge of executing this order.

§ 4 The order enters into force as of the date of issuance.
Chairman of the Council of Ministers
Army-Gen. W. Jaruselski.

In the annex to the order, twenty-four industrial projects are listed, among them the gas production plant ....

Claimant alleged that no event of force majeure existed. Claimant declared its readiness for timely delivery of the equipment and expressly made an offer to do so. Defendant subsequently did not accept the equipment which was to be delivered according to the delivery schedule.

Before the arbitral tribunal, claimant primarily sought a declaratory award stating that the order of the Council of Ministers of 21 December 1981 does not create an event of force majeure as defined in Art. 19 of the contract and, furthermore, sought payment of DM 76,530,259 plus interest.

The arbitral tribunal rendered by majority vote an interim award on the issue whether a case of force majeure existed.

Extract

In view of the size of this award, the extract had to be limited. The first three Chapters of the award are summarized under Facts (see supra). The portions below are taken from Ch. IV (Basic Legal Considerations) and Ch. V (Application to the Present Dispute). They follow the order of the award.

IV. Basic Legal Considerations

A. Applicable Law

“Art. 20.5 of the contract entered into by the parties on 26 January 1980 contains the following provision:

'Swiss law applies to this contract and its interpretation'.

“This choice of law clause is effective and binding on the arbitral tribunal. Therefore, Swiss law applies to the issue of the meaning of force majeure in Art. 19.1 of the contract and to which criteria are applicable to the issue of force majeure and whether these criteria are met in the present case. Furthermore, the question whether a contracting party commits an abuse of rights in relying on a contract clause or certain circumstances, is to be decided under Swiss law.

“The applicability of Swiss law to the dispute does not exclude that preliminary questions can be examined under another law. It is possible that separate connecting factors are to be used for such preliminary questions.

“Thus, Polish law applies to the issue whether the defendant is a legal entity as well as to the question of when a Polish statute enters into force in Poland. Once these preliminary questions have been decided, their legal relevance is to be determined in accordance with Swiss law. Accordingly, Swiss law decides 

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the impact of the decision on the legal personality of defendant on the issue of force majeure. Above all Swiss law applies - in spite of the application of Polish law to the legal personality - to the issue in how far legal separation of legal entities with respect to force majeure may be claimed and to the question under which circumstances such claim is not made in good faith and therefore irrelevant. Also the question as to what extent acts of persons interfering with the business of the defendant - even though not formally organs of the defendant - are to be imputed to the defendant is to be decided in accordance with Swiss law, as also this question depends on the interpretation of the contract and on the question of abuse of rights.

B. Criteria of Force Majeure

1. “A concept of force majeure as a general ground for cancellation of contracts is not known in Swiss law. Statutes merely contain provisions on impossibility of contract performance, such as Art. 97 and Art. 119 OR (Code of Obligations).1 These provisions - as do various provisions in contract law - refer to the situation that an obligation cannot be performed as agreed. The decisive element with respect to legal consequences is fault. Impossibility due to fault is treated differently from impossibility without fault. Furthermore, based on doctrine, a detailed practice has developed regarding the so- called clausula rebus sic stantibus. This concept refers to the right of a party to be discharged of an obligation as a whole or in part, when after the making of the contract, extraordinary and unforeseeable events have occurred, which create a situation in which a performance according to the text of the contract can, by virtue of good faith, absolutely not be expected.2

(....)

“According to these judgments [quoted in the award', conditions for the clausula rebus sic stantibus in Swiss law are:

- the risk of changed circumstances should not have been distributed among the parties in the contract; if so, such a provision would prevail;
- the change should not be due to the fault of the obligated party;
- changes should not have been foreseeable, nor have actually been foreseen by the parties;

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- the obligated party should not have recognized either expressis verbis or, e.g., by negotiations about the performance of its obligations, that the performance may be imputed to him;
- the changes should objectively be extraordinary; in practice, strict requirements are applied;
- the changes should have caused an extraordinary shift of the balance of obligations, making the performance appear objectively unacceptable;
- the court intervention should not lead to results which are unacceptable for the creditor, i.e., the burden may not simply be shifted entirely from the debtor to the creditor.

(....)

2. “The meaning of force majeure in the present case primarily comes from the interpretation of Art. 19 of the contract between the parties.

(....)

“These contract provisions themselves contain a number of clear criteria, which must be considered binding with respect to interpretation.

(....)

“According to the wording of Art. 19.1 of the contract, all these elements must be complied with cumulatively. These criteria are basically similar to the criteria applied in Western European legal literature on force majeure. In principle, governmental orders and Acts of State may qualify as such a force majeure. Along with natural disasters, a fait du prince is a classical example of an event entirely beyond the control of the contracting parties, which may render performance of the contract impossible (as to French literature, see, e.g., Ph. Le Tourneau: La responsabilité civile, 2nd ed., Paris 1976 no. 602, p. 219) with citations; J. Carbonnier: Droit civil, obligations, 9th ed., Paris 1976 pp. 265 - ...).

“The question arises whether the parties by including 'governmental orders' in Art. 19.1 meant to extend force majeure to all governmental orders, regardless of the relationship between a party and the ordering State or authority which issued the order. This is probably not the case, because the parties have used a standard clause with respect to force majeure and it does not appear from the clause that the parties intended that Acts of State would create force majeure under less restrictive conditions. Rather, governmental orders as referred to in Art. 19.1 were merely intended as an example. The contract does not specify what kind of governmental orders are referred to in particular, but it is obvious that, by accepting this wording, claimant did not want to waive the defence of abuse of rights or a particular relationship of defendant to the ordering State. It cannot be overlooked that the criteria of force majeure used by the parties in Art. 19.1 of the contract are very similar to the criteria of the clausula rebus sic stantibus as applied in the practice of the Swiss Federal Supreme Court. The facts in this case include situations where, similar to the clausula rebus sic stantibus, events after the making of the contract fundamentally influence the obligations of the parties. Therefore, it is justified also to apply concepts of the clausula rebus as developed in the practice of the Swiss Federal Supreme Court to the issue of force majeure according to Art. 19.1 of the contract.

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C. Issue of Piercing the Corporate Veil of State Enterprises

(....)

1. Comparative Law References

“Although doctrine and practice in other countries are not binding in the present case, they may provide suggestions by way of comparison....

“Andrzey Wisniewski (Exoneration from Contractual Obligations on the Basis of the General Conditions of Delivery of the CMEA, Legal Problems, (Warsaw 1979)) ... argues on p. 93 against the view that from interpretation of the CMEAGeneral Conditions of Delivery and their additional protocols it would follow that an Act of State is not a ground for exoneration. This is affirmed in the publication Problems of Liability in CMEA countries (Warsaw 1975) p. 65: 'As circumstances excluding liability only those events will be recognized which occur after the making of the contract.... The Act of State must render performance of the contract impossible. The contracting party not able to perform his obligations must prove that he did all he could do to prevent the act rendering performance impossible.'

“Kazimierz Kruczalak (Impossibility of Performance in the Law of Obligations) (Gdansk 1981) ... takes the view that an Act of State must be accepted as fait du prince as it could deprive the foreign trade enterprise of the legal possibility to fulfil its obligations (p. 246).

(....)

“It cannot be overlooked, however, that these views - especially brought forward by the defendant - also in the doctrine of the Socialist States cannot be regarded as generally prevailing and that the positions quoted refer also to trade between State enterprises of the same State. In this internal trade it seems a matter of course that acts of the State to which the enterprises belong have a liberating effect. It is only in foreign trade %AA that clearly the problems arise.

“There are parallels between this problem and the reverse case, in which a State uses a State enterprise in order to evade obligations under public international law, e.g., the prohibition of delivery of war materials by neutral States. For Böckstiegel, the starting point here is the principle of public international law that reliance on national law is not an excuse in public international law, 'because this State could otherwise manipulate its own law accordingly. Since the separate legal personality normally is created by the national law of the controlling State, application of this principle in public international law as such leads to the conclusion, that reliance on the separate legal personality (according to national law) cannot be an excuse for the controlling State in public international law' (Der Staat als Vertragspartner ausländischer Privatunternehmen, 1972, p. 68). This refers to the doctrine of piercing the veil by virtue of responsibility under public international law (Durchgriff kraft völkerrechtlicher Verantwortung). Conversely, imputation of certain legislative and administrative acts to the legal entity is a piercing of the veil by virtue of the sphere of influence (Durchgriff kraft Einflußsphäre).

“Böckstiegel points out that a State may choose freely to a large extent in which legal form it wishes to perform its functions. On the other hand it 

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follows from this possibility of exchange at the option of the State that to a larger extent these different forms of State activity may be imputed to the State. If a State has chosen to act through the intermediary of a separate legal entity the State has, under circumstances, to accept that acts for which it has chosen the form of legislative or governmental acts, be imputed to it (p. 70).

“The question of piercing the corporate veil (Durchgriff) of course only arises when those acts could not be imputed to the State enterprise if treated like any other private legal person. This means that reference to piercing the veil is superfluous, e.g., if the legal entity itself has caused the respective act, for instance by application to the authorities. In such cases, according to general principles, the enterprise is liable for the consequences of the order it caused (see Böckstiegel ibid. p. 72). This may apply, accordingly, if the State enterprise has not exhausted possible remedies against an act of government.

“In order not to allow the State the opportunity of manipulating the choice of the legal form, further cases in which acts may be imputed on the basis of piercing the veil should be distinguished along specific criteria. It is by no means acceptable, that the State enters into obligations through a State enterprise which is subject to its instructions and then could avoid its obligations by means of an act of government directed against the contract, with the consequences that the State enterprise claims force majeure and is excused of its obligations.

“Böckstiegel (ibid., 74-75) suggests the following distinction: As regards governmental acts (Verwaltungsakte) there is first of all the presumption that the State would not let its executive branch act to the detriment of its own legal entity. Therefore, it should also be presumed that governmental acts are to be imputed to the legal entity regardless of its separate legal personality (functional piercing the veil) (funktioneller Durchgriff).

“The burden of proof is shifted back again from the State or its legal entity to the private contracting party, if prima facie or on the basis of evidence submitted by the State the measure is one of a general nature, executed for other reasons. The private contracting party may rebut this presumption by proving that the measure considered to be general did not have such consequences in comparable cases or, in the particular case, could not be the reason for the governmental act.

“According to Böckstiegel, the same principles apply to legislative acts, (Gesetzgebung) if they concern individual cases or if, in the States concerned, laws concerning individual cases are usual. With regard to general laws, on the other hand, a presumption should apply that they are non-imputable. The private enterprise however, may rebut this presumption by submission of evidence that the particular interest the State has in its interposed legal entity played a role in enacting the legislation. Then, again, there is a presumption for imputation (Zurechenbarkeit).

(....)

“As to the identification of the State party, Böckstiegel in another publication ('Besondere Probleme der Schiedsgerichtsbarkeit zwischen Staatsunternehmen und ausländischen Staaten oder Staatsunternehmen', in: Neue Juristische Wochenschrift 1977, p. 1578) points out anew that not formal, but material

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considerations are to be applied to the issue as to what extent the contracting party is under control of the State concerned.

(....)

“In two Supplementary Protocols, to the CMEAGeneral Conditions of Delivery of 1968, State interference is not treated as force majeure. These are the Supplementary Protocols GDR/Poland of 19 December 1968 and GDR/Hungary of 13 December 1968.

(....)

“Kemper/Strohbach/Wagner (Die ALB/RGWin der Spruchpraxis sozialistischer Aussenhandelsgerichte (Berlin 1975)) generally argue against the view that one should consider plan modification-orders of a Socialist State as force majeure when its own enterprises are concerned.

(...)

“In the arbitration practice of Socialist States various views have been expressed as well; apparently, there has recently been a tendency not to accept governmental and planning acts as force majeure with respect to state enterprises:

“One of the first arbitral decisions dealing with this subject is the award of the Moscow Arbitration Commission re Jordan Investments Ltd. v. Sojuzniefteeksport of 3 July 1958.3 The defendant, a Russian foreign trade organization, was obliged to deliver mineral oil to an Israelian company. The defendant invoked an export prohibition to Israel by the Russian State. The Foreign Trade Arbitration Commission accepted this defence as the export organization was an independent legal entity and was bound by the export ban (which made the execution of the contract impossible). Although this decision has been often criticized Böckstiegel (Der Staat als Vertragspartner ausländischer Privatunternehmen, p. 72/73) agrees with the outcome ... as the Soviet Government, in view of the war events in Israel, would have declared a general export prohibition to Israel, applicable also to all private export firms. Under these circumstances the State- character of defendant played no role.

“An essentially different reasoning but same decision is to be found in a comparable arbitration case between State foreign trade enterprises of the GDRand Poland of 11 February 1958 (reported by Jakubowski in JCLQ, 1962, p. 806 seq.). In this case the delivery of coal becomes impossible for the Polish party because the Government reduced, especially for coal, the export quota. According to the Arbitration Court a governmental act which makes it impossible for a party to fulfill its contractual obligations, constituted 'undoubtedly force majeure', regardless whether a Commercial Treaty exists between the States and regardless whether under international public law the Government of a State would have the right to issue a governmental act in violation of the Treaty.

(...)

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“Further, an arbitration commission of the Bucharest Arbitration Court (case no., 28/58), in principle, affirmed a ban on exports issued by the Romanian Council of Ministers, as an instance of force majeure. In the particular case, however, relief of liability was not granted due to late notification of the buyer.

“On the other hand the arbitration commissions of the Arbitration Court in Budapest, have regularly taken the opposite view. In an arbitral award of 4 December 1961 it stated: 'the tribunal has held on several occasions, as a matter of principle, that a unilateral change of plans by its superior authorities does not discharge the supplier of the liability for default.'

“The Third Conference of Presidents of Arbitration Courts in the CMEAhas taken the view - according to Kemper/Strohbach/Wagner correctly - that State orders cannot be considered as instances of force majeure as defined in §46 No. 1 CMEAGeneral Conditions 1958 (now §68, 1 and 2). (cf. Kemper/Strohbach/Wagner, ibid., p. 278; Böckstiegel, “Schiedsgerichtsbarkeit als Entscheidungsinstanz in deutsch-polnischen Wirtschaftsbeziehungen”, Drittes deutsch-polnisches Juristenkolloquium (1976) Vol. 3, p. 110; Conference Reports by Wagner/Kretschmar, Text Edition of the cmea General Conditions 1968 (East Berlin 1970), p. 203 note 14. Böckstiegel (ibid.) remarks in this respect: 'Meanwhile, the view seems to be generally accepted among CMEAcountries that such acts of planning and government should not be recognized as force majeure'.

“The arbitration awards Berlin No. 93/61 and 28/68 also rejected the possibility of regarding the State act as force majeure.

“The defendant argues that awards from the Socialist countries in which force majeure is rejected, mostly stem from the GDRand are not representative.

“In light of the view of the Third Conference of Presidents of CMEAArbitration Courts and the tendency emerging from the cited literature, this view appears to be incorrect.

“Finally, this question may be left undecided, because - as mentioned - in any event an autonomous solution must be found which should be in accordance with Swiss law and arbitral awards from other countries applying another law are not binding.”

The arbitrators examined in this connection the reasoning in the English case Czarnikow Ltd. v. Rolimpex.4

In this case Rolimpex, a Polish foreign trade enterprise, invoked force majeure as the Polish Government after a bad sugar harvest, issued a ban on the export of sugar which made it impossible for Rolimpex to fulfill its contractual obligations to Czarnikow. The Court examined the status of Rolimpex and held that, although Rolimpex was bound to follow instructions, it should be regarded as a separate legal entity and not as a department of the Government of Poland (see Lord Denning, Lloyd's Report 1977 p. 214 seq.). The connection between Rolimpex and the State was not such that the export ban could not be invoked as a force

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majeure. Essential for the acceptance of force majeure were the controversies between Rolimpex and the Polish Government: Rolimpex tried to fulfill its obligations but was prevented from doing so by the State.

2. Swiss Law

(....)

“In Swiss law, first of all the doctrine of piercing the corporate veil (Theorie des Durchgriffs) offers the possibility to disregard the formal separation of two legal entities. This concept is based upon the principle of good faith and inadmissibility of an abuse of rights, i.e., the inadmissible abuse of the separation of legal entities. Furthermore the doctrine of factual instrumentality (Lehre von der faktischen Organschaft) offers a possibility to impute measures. Since Polish law applies to the formal status of an organ in the State enterprise, the Swiss concept of factual instrumentality is applicable only insofar as the invoked lack of a formal status as an organ would not be contrary to good faith and, thus, violate Art. 2 Swiss Civil Code,5 with respect to the invocation of force majeure. The issue of abuse of rights, when force majeure is invoked, is to be decided according to Swiss law.

a. Piercing the Corporate Veil

(....)

“Also under Swiss law piercing of the corporate veil takes place, where the independence of a legal entity is used for purposes for which it is not intended according to the law.

(....)

“Different views exist in Swiss law as to whether piercing of the corporate veil is a problem of abuse of rights in general as referred to in Art. 2(2) Swiss Civil Code or as a problem of interpretation.

(....)

“The relevant Swiss judgments are all based on the concept of abuse of rights. (....)

“Where a corporation is used inappropriately as a shield against liability and is essentially under the influence of a natural or legal person (the State as well), this veil can be pierced and private property of the owner concerned may be subject to liability. However, in view of certainty of justice, it is required to confine the doctrine of piercing the corporate veil to gross and clear cases.

b. Liability of an Organ of the Company (Faktische/Funktionelle Organschaft)

“Liability provisions in Swiss company law regard not only such a person as an organ of a limited liability company who formally has the status of an organ, but also the person, who not having such formal position of an organ,

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participates essentially in the policy making of the company and independently exercises company functions (see Forstmoser, Die aktienrechtliche Verantwortlichkeit, Zurich 1978, N 491 et seq. with citations). According to this functional concept of instrumentality (funktioneller Organbegriff) liability is imposed on the controlling person or majority shareholder as an organ of the company.

“This does not mean that the person who is an organ in the functional sense should be dependent on the company or have executive functions in it. Rather, what is decisive is the position of the person concerned with respect to instructions and decision making (see Forstmoser, ibid.).

(....)

D. Application of the Doctrine of Piercing the Corporate Veil (Durchgriff) and Factual Instrumentality (Faktische Organschaft) to State Enterprises

“The question arises as to what extent the concept of piercing the corporate veil and factual instrumentality applies to State enterprises in Socialist States. The distinction between abuse of right and the basic question whether a Socialist State enterprise may invoke a State Act as force majeure cannot be applied in the sense proposed by the parties. Insofar as the wording and interpretation of Art. 19.1 of the contract permit reliance on force majeure, the question remains, whether the State enterprise should, nevertheless, be disallowed such reliance. Such a decision can only be based on Art. 2 of the Swiss Civil Code, the principle of good faith and the prohibition of abuse of rights.

(....)

“Guidance for a solution under Swiss law must be, 'that the State party may neither be privileged nor discriminated as compared to private parties.'(Böckstiegel, 'Besondere Probleme der Schiedsgerichtsbarkeit zwischen Privatunternehmen und ausländischen Staaten oder Staatsunternehmen', in: Neue Juristische Wochenschrift 1977, p. 1581).

“It must be recognized as a principle that the State enterprise by virtue of its particular legal status, as opposed to the contracting private party, should not have specific advantages nor specific disadvantages. The relation of Socialist State enterprises to the State must therefore be seen as one comparable to the trust-relation (Treuhand) in Western States or the relation between the single shareholder and the company controlled by him.

“This results also from the considerations which will follow on the relation of the defendant to the Polish state (see infra IV. B).

“This relationship by no means excludes that such 'trustee' (Treugeber) or 'single shareholder', i.e., the State, may perform acts, which in relation to the company may be considered as acts of an outsider, or that completely external influences would apply.

“Therefore, criteria must be determined, when such external acts exist, and when the relationship enterprise/State is decisive.

“As regards the issue of piercing the corporate veil and factual instrumentality (faktische

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Organschaft), the test whether the enterprise concerned had the opportunity or has used the opportunity to influence the national authorities that have issued the order, is unsuitable. Piercing of the corporate veil cannot be justified with the argument that the State acts as an organ dependent of the State enterprise. If there is a close relationship by means of instructions, this goes in the opposite direction: the directives emanate from the State authorities, thereby interfering with the decision making process in the enterprise. By virtue of this power to give instructions and to determine the fundamental terms of business, a functional role of an organ may be acquired by the State authorities. By arguing that the State can never be an organ of its enterprise, the defendant overlooks that the issue here is not in respect of an organ in the executing sense but in the sense of participating in the decision making process. However, since also in case of most intensive use of instructions, even in day to day business, the enterprise in view of its internal structure must not necessarily be unable to have essential influence on these decisions, the criterion of the opportunity to have influence is irrelevant for the functional piercing of the corporate veil as well as for the question of abuse of rights regarding when the lack of formal instrumentality (formelle Organfunktion) is invoked.

“However, if it could be shown that a State enterprise has used its influence in order to obtain a State order or was in a position without difficulty to prevent a State order which interferes with a contract, the issue of piercing the corporate veil does not arise at all. In these cases it results already from contract interpretation that force majeure does not exist. With regard to such an order it is namely impossible to say that, having taken all care, it could not have been prevented by the party to the contract.

“The same considerations would apply in case of a privately organized enterprise to the majority shareholder or trustee ...

“Where a State authority has the power to impose plan instructions on an enterprise, and this authority then imposes another instruction contradicting previous planning acts or does not permit execution of contracts entered into, it does not merely act by virtue of its function as a State organ, but also as an organ of the State enterprise having decision making and directive powers. Also when the enterprise with its formal organs did not have influence on the State decision, in such cases it is precluded from invoking the State order as force majeure on the basis of Art. 2 Swiss Civil Code.

“Therefore, it is the character of the State Act and the intended objectives which are decisive. It is irrelevant whether the same State organ, which is also authorized to give instructions to the enterprise, issues the interfering order or, e.g., a superior or equal- ranking authority. Unilateral and specific interference of the State with contracts already entered into, by which the contracting parties are discharged of their contractual obligations is unacceptable under the principle of good faith according to Art. 2 Swiss Civil Code.

“When an enterprise is integrated in the State economic planning and enters into contracts within the objectives of the State economic planning, then modifications of the plan interfering with contracts entered into cannot be invoked as force majeure by the enterprise. Where, on the other hand, a Socialist State for other reasons issues a general order, which would affect a privately organized company in the same way as a State enterprise,andwheretheconsequencesofthisorderarenotrelatedtothespecific nature of the

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State enterprise as a dependant enterprise, nothing would preclude reliance on force majeure.

“With this distinction, based on Swiss law, between economic planning acts and legislative acts of a general nature, the solution in Swiss law comes close to the one proposed by Böckstiegel in the publications cited above. Furthermore, it comes close to the comments of the Presidents of CMEAArbitration Courts at the Third Conference (cited supra) and those awards of Socialist arbitration tribunals, which have denied the possibility of invoking economic planning acts as force majeure. There would be a privileged position of the Socialist enterprise as well as of the Socialist State if the State, in case it or a State enterprise under its control is no longer interested in performance of a contract entered into, could 'provide' the enterprise with a suitable case of force majeure by promulgating an appropriate Act of State and through that serve its own interests; for western private enterprises which do not have an equally close relationship to the State where they are situated such a possibility does not exist.

“In accordance with Art. 8 Swiss Civil Code, when a party submits evidence about the nature of an act it suffices that, on the basis of the submitted facts, a natural presumption in favour of or against a planning act is created. To produce a stricter evidence as to the motives of the legislator will often not be possible. Only in rare cases the private party will be able to offer conclusive proof that a certain executive or legislative act of the State was issued because of the State's interest in its legal entity. As also is the case in other fields of business law the difficulty of proof should be overcome by dividing the burden of proof in order to obtain foreseeable risks as is required in business relations. (For the division of proof in respect of State orders see Böckstiegel, ibid. p. 108/109.) For these reasons it is primarily the wording of the order which should be consulted.

“Under Swiss law the following principles apply when evaluating the impact of State orders:

- Reliance on force majeure cannot be taken into consideration insofar as the State Act is an economic planning act. This is particularly true when the order is an individual one, which affects a specific contract or specific contracts. The foregoing is subject to the possibility to show that the State Act itself is based on circumstances which constitute an event of force majeure within the meaning of the contract in question and for which there exists an appropriate causal link with the impossibility of performance.

- This applies regardless of whether it can be proven that the formal organs of the enterprise gave their approval to the State order.

- Where the statute is of a general nature and is based on general considerations, which would affect private enterprises in the same manner, the State party may rely on force majeure.

- If the private enterprise is able to prove (e.g., by means of parliamentary protocols or government notes) that in the statute concerned, the particular interest of the State in the affected legal entity or a purely economic or financial interest has played a role, reliance on force majeure is excluded.

“Before examining in this way the imputation of an order, and leaving aside the question of the connection between the State enterprise and the State, it must of course be determined under Swiss law as well whether force majeure within the meaning of the contract exists at all. This is above all a question of

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contract interpretation. In this respect, the following points must for instance be considered:

- Where a State enterprise has effected a State order, there is no external event which the State enterprise, exercising due diligence, could not have avoided.

- If a State enterprise has not used all available means in order to prevent the State Act, due diligence was not observed in order to prevent the specific event, and the order must be imputed to the State enterprise.

- Where the State enterprise guaranteed certain State Acts it is responsible for these acts under the contract. This may be the case where the enterprise guaranteed the issuance of an export or import licence. Whether such guarantee exists, is a question of contract interpretation. (In the cited English case, the Court of Appeal and the House of Lords denied such a guarantee on the basis of contract interpretation.)

- If certain events were dealt with in the contract specifically, or where it was stipulated that such events have certain legal consequences or that they shall not be considered as force majeure, it follows from the contract itself that these events do not constitute force majeure. An example in this respect is the wording in Art. 19.2 of the present contract, according to which strikes, not legalized by the competent trade unions and lock-outs resulting therefrom, shall not be considered as force majeure.

- If the contract includes a stipulation that force majeure can only be invoked within certain time limits subsequent to its occurrence, the defence of force majeure is excluded after the expiration of such time limits. When the time limit starts to run is a matter of interpretation. Also in the absence of a stipulation of a certain time limit, an obligation to notify in due time may exist according to the principle of good faith. In the absence of a specific contract stipulation, late notification may make reliance on force majeure an abuse of right or at least, the contracting party relying on force majeure may have to bear the costs of the other party, which have arisen due to the delay.

“In the following, these criteria must be applied to the Order of 21 December 1981 and the relationship of the defendant to the Polish State as well as the involvement of the Polish State in contract negotiations and contract performance.”

V. Application to the Present Dispute

A. Prevention of Performance by the Order of 21 December 1981

(....)

“The order of the Council of Ministers prevents the orderly performance of the contract in general, including the obligation of the defendant to provide the necessary import licence, to accept the goods, etc.

(....)

“As the order prevents the execution of the contract as a whole, the defendant has undoubtedly an interest to invoke force majeure in connection with its frustrated obligations.

B. Legal Nature of Defendant

“First of all the legal nature of defendant under Polish law has to be considered.

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(....)

“According to the Decree of 26 October 1950 of the People's Republic of Poland concerning State enterprises, the State enterprise is the basic organizational unit in the planned economy. It is established in order to satisfy the needs of the society, which are mentioned in the articles of association (Art. 1.1). According to Art. 1.2, the State enterprise autonomously organizes and performs its activities in order to fulfil its tasks according to its articles of association and the targets assigned to the enterprise by the plan.

“According to Art. 2 of the Decree, the State enterprise is a legal entity. (....)

“Indisputably, defendant was registered on 27 March 1962 under the Decree of 26 October 1950 concerning State enterprises. The objectives of defendant were described in more detail in the Ministerial Orders of 23 July 1971, 6 August 1971 and 10 March 1975.

(....)

“According to Sect. 4.1 of the Order (of 23 July 1971) the enterprise is economically managed within the framework of the national economic plans and settles its accounts with the central budget. With respect to foreign trade activity the enterprise must follow the guidelines of the Ministry of Foreign Trade; ultimately, the enterprise is supervised by the Minister [...]

(....)

“The competent ministers may give instructions to defendant and determine the fundamental terms of business ....

“Within the scope of instructions from the ministries and the national economic plan, defendant is authorized to decide autonomously on commercial activities. In principle, defendant may also decide whether and with whom the enterprise will conclude contracts.

“Under Polish law a State enterprise acquires legal personality at the time of its registration. It is uncontested that the defendant has been registered as State enterprise.

“Under Polish law State enterprises do not enjoy State immunity. Although a State enterprise may dispose of the assets attributed to it, these assets remain the property of the State as nationalized State property. This creates a relationship between State and State enterprise, comparable with trust.

“Following these observations, according to Polish law, defendant clearly is a legal entity not identical with the State, notwithstanding the clear integration in the Socialist economic planning and the obligation of the State enterprise to follow instructions. In principle, also Switzerland recognizes the separate legal personality as it distinguishes between States debts and the debts of such a State enterprise (Federal Court of 10 May 1950,BGE 76 III 60 seq.).”


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C. Application of Contractual Criteria to the Order of 21 December 1981

The tribunal stated that the Order of 21 December 1981 was an unforeseen event, which occurred subsequent to the making of the contract. It was of the view that defendant did not intentionally influence the Order of the Council of Ministers. It left undecided here, however, to what extent the event was beyond control of the contracting parties.

“... Therefore, the Order of 21 December 1981 was a governmental act which is capable of fulfilling all requirements of force majeure as defined in Art. 19.1 of the contract. The question is left open whether the Order was beyond control of the contracting party and whether it was not avoidable with the exercise of due diligence.

D. Issue of Contractual Guarantee for Import Licence

(....)

“Under Swiss law, this is a matter of interpretation. (....)

“The obligation, to make an effort for maintenance of the licence, does not imply, that the party is liable for a guaranteed issuance and maintenance of the licence regardless of any fault. The wording of the present contract speaks well for a conclusion to the contrary. When the parties have made the entry into force of the contract dependent on the issuance of necessary licences, it cannot be assumed that the parties unconditionally wanted to guarantee issuance of licences. There is a fundamental difference between the obligation of a party to make an effort to obtain or maintain a licence, and the unconditional guarantee for the success of these efforts.

(....)

“It follows therefore that - at the present stage of the proceedings - the obligation of defendant to provide for the import licence would not exclude reliance on force majeure regarding the order of 21.12.1981.

 

E. Functional Piercing of the Corporate Veil (Funktioneller Durchgriff) and Functional Instrumentality (Funktionelle Organschaft)

“As to the criteria of piercing the corporate veil and functional instrumentality under Swiss law, reference is made to Ch. IV under D. The following results from the application of these criteria to the present case.

“- It is clear and uncontested that defendant is a Polish State enterprise subject to instructions of the competent ministries. These ministries are authorized to define defendant's activities, to elect the top functionaries, to define the principles of business policy and to issue instructions concerning particular projects.

(....)

“The enterprise is a legal person, the capital of defendant ultimately remaining State capital.

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(....)

“- It is clear from the statements of the parties that the competent ministries were involved in the contract negotiation and used their power to issue instructions in connection with the present contract. It is however contested by defendant that the Council of Ministers made the contract.

“Involvement of competent ministries in the course of consultations is admitted, however. There is documentary evidence that, according to the request for an offer by the Ministry [...] of May 1979, the competent Ministry [...] was mainly responsible for the project. Negotiations in connection with the contract with various authorities, alleged by claimant, are not contested by the defendant.

“.... In any case, the fundamental decision on the realization of the project could not exclusively be made by defendant ....

“In this respect the present case essentially differs from the one that is contemplated by the cited English decisions of 1977/1978. They dealt with sugar exports within the limits of granted export quotas, where there was almost no decisive influence of the Government on the question of the contracting parties and the agreed price. The present case shows a fact pattern of a specific decision connected with the economic planning which is taken in full cooperation between defendant and the Government.

“However, such involvement of the Government in the contract negotiations and the conclusion of the contract does not exclude in itself that the State enterprise can invoke force majeure on the basis of an order which is general in nature and not connected with the economic planning.

“It must be decided, therefore, whether the Order in question is a general law or a law for an individual case having the character of an act of economic planning.


“The Order of 21 December 1981 bans import of investment goods for certain projects listed in the annex. It concerns 24 industrial projects of mainly industrial nature. The Order cancels the licence granted for the import of goods in connection with these projects.

“It follows from the wording of the Order that it is a governmental act of economic planning which is not of a general character, but affecting certain projects ...

“Defendant contests qualification of the Order as an act for an individual case as it concerns projects spread all over the nation, with a value of billions. Notwithstanding the value of the affected projects and the spread over the country this does not alter the fact that particular projects are affected by the order and that other projects not affected by the order - be it in the same field or in other fields - can be completed. Therefore, the order is undoubtedly an act for an individual case.

“Also in this respect, facts are essentially different from the facts underlying the cited English decision whereas the Order of the Polish authorities concerning the Rolimpex contracts banned export of sugar in general, the

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present Order only affects particular, though numerous, industrial projects while others not affected by the order, obviously may be completed.

“This qualification of the act as an economic planning act for an individual case means that it has to be assumed in principle that a piercing of the corporate veil or functional instrumentality according to Swiss law applies to the State enterprise, unless it can be shown that the act was based on general purposes which in practice would have caused similar bans on financially independent private enterprises as well. Furthermore, defendant could argue that an event constituting a case of force majeure had adequately caused the prohibition order”.

The Tribunal referred to the Brochure issued by the Press Department of the Ministry of Foreign Affairs “der Dreijahrenplan von 1983 - 1985” [the Three Year Plan 1983-1985] which demonstrates that the dynamic development strategy of the Polish Government had overburdened the Polish economy by the investment boom.

“These comments demonstrate that the measures of economic planning of the government acting under the law of war, primarily aimed at stabilizing the Polish balance of payments and to prevent an overly onerous burden of the Polish economy by investments already commenced. Therefore, the reasons for the interruption of industrial projects affected by the order of 21 December 1981 are mainly of a financial nature. Another general purpose - besides the lifting of overly onerous financial burdens in favour of the Polish economy - cannot be found. The financial motive, however, does by no means preclude a piercing of the corporate veil. In light of this reason for the Order, it also turns out that the State character of the enterprises concerned was a decisive factor. The Polish State would have had no reason to prevent private enterprises, acting on their own account, from completing the projects. The financial burden of the State resulting from the completion of industrial investments by State enterprises was decisive. All this clearly pleads for a piercing of the corporate veil under Swiss law.

“Also, in this respect, a difference with the facts underlying the cited English decision can be noted. The prohibition of sugar exports was general in nature and primarily intended by the Polish government to prevent rationing of sugar in its own country. The present case dealt with financial consequences of a project which, from an economic point of view, practically should no longer be completed.

“- Furthermore, it must be decided, whether war or strikes as force majeure adequately caused the prohibition of imports.”

The tribunal found that the promulgation of the law of war in Poland was only an internal governmental and constitutional measure. “It is obvious that the People's Republic of Poland was not involved in a war ....”They concluded that neither war nor strikes have created an event of force majeure rendering contract performance impossible.

“In conclusion, the defendant may not invoke the Order of 21 December 1981 as force majeure.

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F. Time Limits for Invoking Force Majeure

The tribunal found that claimant was also notified too late of the occurrence of force majeure according to Art. 19.4 of the contract.

G. Conclusion

“Based on the above grounds it must be stated that the defendant is not entitled to rely on force majeure with respect to the Order of 21 December 1981.

“The proceedings, therefore, will be continued ....

“Dissenting Opinion of One of the Arbitrators:

1. “He is convinced that the decision is not in accordance with the principles of contract autonomy and pacta sunt servanda. The parties in Art. 19.1 of the contract clearly and expressly have agreed to recognize governmental Orders as an event constituting force majeure. The parties confirmed and sanctioned the categorical and exhaustive character of this stipulation in Art. 22.8 of the contract. No exceptions as, e.g., in Art. 19.2 regarding strikes, were provided for with respect to governmental Orders. The organization and function of the defendant were well known to the claimant when entering into the contract. The claimant does not act in good faith when he tries after an event has occurred which is expressly and exhaustively dealt with in the contract, to circumvent this clear stipulation. The arbitral tribunal cannot adopt this view.

2. “The Order of the Council of Ministers of the People's Republic of Poland of 21 December 1981 is binding on the defendant as an Act of State. The decision of an organ which has State power is not subject to the control of the arbitrator. It is inadmissible in this respect to apply criteria of civil law, such as the doctrine of piercing the corporate veil, which in Swiss legal theory is considered for the relationship between private commercial companies and partners, and to apply this to an intervention with the nature of a fait du prince.

3. “In the present case the exceptional and unforeseeable character of the event is also confirmed by the fact that the decision of the government was made under pressure of an exceptional organ not provided for in the constitution (National Council for the Rescue of the People's Republic of Poland). This fact (as well as some others), which the defendant rightly asserts - as the arbitrator in the minority knows of the events in Poland at the time - is not given decisive relevance by the majority arbitrators.

4. “Some findings as to the facts, particularly those regarding the 'amalgamation' of the Polish State and the defendant were, in the opinion of the minority arbitrator, inappropriately restricted due to the influence of German legal literature on the interpretation of Polish regulations concerning the establishment of enterprises. These findings are based on incorrect assertions which are contested by the defendant, even though defendant offered more information in a hearing. In the opinion of the minority arbitrator a hearing was indispensable. Having failed to hold a hearing, the arbitral tribunal lost the opportunity to examine some other relevant circumstances, e.g., which influence the state of war in Poland, pointed out by the defendant as an event interfering with the contract, could have had on the possibility of prompt notification of claimant of the occurrence of force majeure.”