Switzerland’s Department of Foreign Affairs endorsed Federal Supreme Court decision (BGE 136 III 379) not to lift Bank of International Settlement’s (BIS) immunity due to an attempt of NML Capital to freeze $300m (£186m) on Argentina’s bank accounts.

by: Dimitrij Euler, MLaw, PhD Candidate, University of Basle, Switzerland.

Obtaining an award is only half way through; the final step – i.e. to enforce the award or verdict – will be the cherry on the cake. Immunity of states and state entities challenges councils for claimant after investor-state arbitration. Successful claimants against Argentina are facing difficulties to enforce their debts adjudicated in awards and verdicts. In very creative attempts, lawyers enforce debts against boats, airport facilities and assets of international organisations. Numerous international organisations have their seat in Switzerland and enjoy extensive immunities. A limitation of the immunity would set an unfortunate precedent for Switzerland.

NML Capital’s unusual efforts to freeze assets at the oldest international financial institution have failed thus far. On October 17, 2012, the Department of Foreign Affairs in Switzerland informally confirmed the decision of the Swiss Federal Supreme Court not to lift the immunity of the Bank of International Settlement (BIS). NML Capital’s request to freeze Argentina’s foreign currency reserves at the BIS was not satisfied. In the same month, on October 21, the BBC informed about the seizure of the Argentine military ship Libertad in Ghana due to the Argentine Republic’s outstanding bills of about $300m (£186m).[1] NML Capital, which is part of the US Hedge Fund Elliot Capital Management, is enforcing these outstanding bills around the world. These debts relate to one of the biggest defaults in history: In 2001 and 2002, Argentina owed more than $100bn (£62bn). The US Court of Appeal upheld the injunction against Argentina in the name of NML Capital and other plaintiffs[2]. Argentina is not allowed to disadvantage any creditors due to its 2005 and 2010 restructuring programs without making comparable compensations. This blog entry merely recalls the enforcement of NML Capitals NY verdict against the BIS in Switzerland and therewith the immunity from Swiss courts’ jurisdiction.

On November 5, 2009, NML Capital requested Basel’s Debt Enforcement Office to freeze Argentina’s assets, CHF 290’564’577. — (~£192m as of November 11 2012) including interests (Arrestbefehl Nr. 2009/217), at the Bank of International Settlement (BIS) based in Basel, as an interim measure. This was based on two verdicts of the District Court of the Southern District of New York (S.D.N.Y 03 Civ 8854 and S.D.N.Y 03 Civ 2507).[3] The court ordered the freezing of all assets related to the Argentine Republic aiming to recover NML Capital’s debt.

The BIS was established in 1930 by Belgium, France, Germany, Great Britain, Italy, Japan, and several financial institutions of the United States of America (Messrs. J. P. Morgan & Company of New York, the First National Bank of New York, New York, and the First National Bank of Chicago) to overcome the financial crisis at the time.[4] Its mission until today is “to serve central banks in their pursuit of monetary and financial stability, to foster international cooperation in those areas and to act as a bank for central banks.”[5] One of its functions in this regard is to accept deposits from central banks on current or deposit accounts, to accept deposits in connection with trustee agreements that may be made between the BIS and governments in connection with international settlements, and to accept such other deposits as in the opinion of the Board elected by the members come within the scope of the Bank’s functions.

In 1930, Switzerland guaranteed that it would not interfere with BIS’ functions. It thereby granted immunities. In paragraph 10 of the Constituent Charter, the contracting powers agreed that “[t]he Bank, its property and assets, and all deposits and other funds entrusted to it shall be immune in time of peace and in time of war from any measure such as expropriation, requisition, seizure, confiscation, prohibition or restriction of gold or currency export or import, and any other similar measures.”[6] Furthermore, Article 55 of the Statute provides that the Bank enjoys immunity from jurisdiction to the extent that the Chairman of the Board, the General Manager, the Deputy General Manager, or their duly authorised representatives waives such immunity in civil or commercial suits arising out of banking or financial transactions. In particular in Article 55(2) “[p]roperty and assets of the Bank shall, wherever located and by whomsoever held, be immune from any measure of execution (including seizure, attachment, freeze or any other measure of execution, enforcement or sequestration), except if that measure of execution is sought pursuant to a final judgment rendered against the Bank by any court of competent jurisdiction […] [aforementioned].” Additionally, “[a]ll deposits entrusted to the Bank, all claims against the Bank and the shares issued by the Bank shall, without the express prior agreement of the Bank, wherever located and by whomsoever held, be immune from any measure of execution (including seizure, attachment, freeze or any other measure of execution, enforcement or sequestration)”.[7]

Similarly, Article 4 of the Headquarters Agreement provided for the same immunities under the title “Immunity from jurisdiction and execution”: ”The Bank shall enjoy immunity from jurisdiction, save: (a) to the extent that such immunity is formally waived in individual cases by the President, the General Manager of the Bank, or their duly authorised representatives; […]” and again to emphasise the immunity in particular of any person that holds assets on the account of the BIS in paragraph 3 “[t]he Bank shall enjoy, in respect of its property and assets, wherever located and by whomsoever held, immunity from any measure of execution (including seizure, attachment, freeze or any other measure of execution, enforcement or sequestration, and in particular of attachment within the meaning of Swiss law), […]”[8]

Despite this immunity, NML Capital applied for an arrest of the assets in Basel in accordance with Article 271 Abs. 1 Ziff. 4 SchKG (Code of Debt Enforcement and Bankruptcy)[9]. This article states that a creditor may for the purpose of enforcement of debts freeze assets in Switzerland if the creditor lacks domicile in Switzerland (Schuldner im Ausland). The response of Basel’s Debt Enforcement Office was an order to freeze Argentina’s assets at the BIS. However, the BIS was afraid of becoming a party to the dispute; therefore, the BIS decided not to request the intervention of the Department of Foreign Affairs (EDA) but to intervene solely at the EDA of the Swiss Confederation.

The EDA affirmed BIS’ request on November 26 and December 24, 2009. Thereupon, on April 23, 2010, the supervisory committee of the Debt Enforcement Office decided that the orders of this office were void. NML Capital appealed against this decision to the Swiss Supreme Court alleging inter alia the violation of the right of access to court protected by Article 29a of the Swiss Constitution together with Article 6 of the European Convention of Human Rights as well as an abuse of law.

The Swiss Supreme court followed the decision Waite and Kennedy v Germany of the European Court of Human Rights. It involved the European Space Agency (ESA), employees of ESA and Germany. The employees argued that the German court had jurisdiction since the ESA failed to offer access to court. However, the ESA enjoyed immunity. The European Court of Human Right stated, “a material factor in determining whether granting [IGOs] immunity from [courts of the seat country’s] jurisdiction is permissible under the Convention is whether the applicants had available to them reasonable alternative means to protect effectively their rights under the Convention.”[10]

Generally, a third person has no access to a court or impartial and independent tribunal concerning the BIS. The Swiss government may request arbitration in case of a dispute about the interpretation of the Headquarters Agreement at the Permanent Court of Arbitration in The Hague, pursuant to Article 27 of the Agreement. In addition, Article 11 of the Constituent Charter and Article 54 of the Statutes mention it. Other mechanisms exist for the employees. Apparently, the BIS has its own Arbitral Tribunal, whose secretariat is at the PCA.[11]

The Swiss Supreme Court stated that the violation of the claimant’s right to access to court was proportional and justified. In the case at hand, no court access is acceptable in a situation in which the right to the court renders the function of the IGO futile. The Swiss Supreme Court stated that the attempt to seize assets would directly interfere with a BIS core function, to accept and hold deposits of Central Banks such as those of the Argentine Republic’s Central Bank. It recalled the mission of the BIS, that is to say, to assist in preserving monetary and financial stability at the international level. Therefore, the interim measure threatened the operation of the BIS. Hence, the limitation to the right to a court is proportional and justified by its aim to guarantee the stability of the financial markets.[12]

The decision of NML Capital to freeze $300m (£186m) was unlucky since the argument of threatening the BIS’ function presumably would not hold water if the interim measure aimed to freeze only $1000. Furthermore, what happens if the Debt Enforcement Office requires claimant to provide securities in exchange for this measure?

Moreover, the Swiss Supreme Court stated that, although international law prevails (Art. 30a SchKG), the Debt Enforcement Office in Switzerland in general lacks competence to review the merits of the title to be enforced. In this proceeding, the review follows the freeze of the assets. Only in the case of obvious violations of international law does the Office of Debt Enforcement have competence to review the merits. Moreover, it confirmed the immunity of the BIS and elaborated on the abuse of law, which will not be considered here.

To sum up, what started as an interim measure in the Office of Debt Enforcement ended as an affair of international relations in the Department of Foreign Affairs via Federal Supreme Court and the BIS was never a party to the proceeding. However, the competency of the EDA to decide or affirm this issue may be questionable since the Headquarter Agreement provides for a dispute resolution procedure in case of disagreement and grants the Swiss Government solely a right to request arbitration. However, such a request may lead to a limitation of the immunity and would set an unfortunate precedent for Switzerland.