East Meets West in Sweden1
by Dr. J. GILLIS WETTER
Four score years ago, at the opening of a Law Congress of the American Bar Association in Saratoga Springs, New York, the Lord Chief Justice of England, Lord Russell of Killowen, delivered an address on international arbitration. The meeting was attended by 4,500 members of this distinguished Association. It was printed in extenso in The Times on the following day, 21 August 1896.
Lord Russell spoke of public international law arbitration. His remarks had particular significance as they were made at a time when war between the United States and Great Britain nearly erupted over the Venezuela-Guyana boundary question. Armed conflict was averted by resort to arbitration under a treaty negotiated between Great Britain (acting for its colony British Guiana) and the United States (acting on behalf of Venezuela). Lord Russell in fact was to become a member of the Arbitral Tribunal. Parenthetically, it is ironic and tragic that there exist grave doubts as to the validity of the Award rendered by that Tribunal in 1899, and that the dispute over 50,000 square miles of territory therefore is still unresolved between the United States of Venezuela and the Republic of Guyana.
Lord Russell stated as follows:
It is hardly too much to say that arbitration may fitly be applied in the case of by far the largest number of questions which lead to international differences. Broadly stated, (1) wherever the right in dispute will be determined by the ascertainment of the true facts of the case; (2) where, the facts being ascertained, the right depends on the application of the proper principles of international law to the given facts; and (3) where the dispute is one which may properly be adjusted on a give-and-take principle with due provision for equitable compensation, as in cases of delimitation of territory and the like; in all such cases the matter is one which ought to be arbitrated, and can be satisfactorily dealt with by arbitration.
At that time, towards the end of the 19th century, much discussion was devoted to the establishment of international tribunals. Lord Russell was of the opinion that the resolution of disputes among nations should not be entrusted to a permanent international courtbut to ad hoc arbitral tribunals. He said:
In the first place the character of the best tribunal must largely depend on the question to be arbitrated. But apart from this I gravely doubt the wisdom of giving that character of permanence to the personnel of any such tribunal. The interests involved are commonly so enormous and the forces of national sympathy, pride and prejudice, are so searching, so great, and so subtle, that I doubt whether a tribunal, the membership of which had a character of permanence, even if solely composed of men accustomed to exercise the judicial faculty, would long retain general confidence, and I fear it might gradually assume intolerable pretensions.
In our time, the disputes which may arise between East and West and which are justiciable in the sense of not being capable of resolution only by war or diplomacy, are economic and financial ones in which the party on the Eastern side likely is a Government, or State organ or State enterprise, and on the Western side a corporation or group of companies. The projects which have been realised, are in the process of being executed, or which are still in their planning stage, typically are very large in terms of money and use of manpower. They envisage the construction and operation of huge industrial complexes over long periods of time, involve the transfer of technology and skills and require the import of large quantities of materials and sometimes even labour from abroad into the recipient country. Financial complexity is often a feature of such transactions because of requirements for extensive credits and repayment in kind — that is in the form of products of the plant itself or, on a barter basis, of unrelated products — rather than in money.
For many years, it has been recognised on both sides that deals of this kind cannot be made unless the contracts embody a satisfactory mechanism for the resolution of disputes. Existing such facilities in the West have not appeared acceptable to the East; nor have Western parties had the necessary confidence in Eastern courts or arbitration institutions. A pattern that seems to have gained widespread acceptance and use in a large number of contracts made over the past decade has been the creation of ad hoc arbitration in a third country. Sweden in such clauses has been a favoured location. And so we find, in many important modern East-West contracts, arbitration clauses providing that any disputes which may arise shall be referred to arbitration in Sweden and that the chairman of such
tribunals shall be designated by the Stockholm Chamber of Commerce, its President, or the Board of its Arbitration Institute.
In line with this practice, on 12 January 1977, there was signed here in New York in the offices of the American Arbitration Association, the so-called US/USSR Optional Clause Agreement, which constitutes a joint recommendation by the AAA and the USSR Chamber of Commerce and Industry to their respective members to use an optional clause providing for arbitration in Sweden in cooperation with the Stockholm Chamber of Commerce. The UNCITRAL Rules are to apply, and there are detailed rules for the nomination of arbitrators. The Stockholm Chamber of Commerce shall act as appointing authority and appoint the chairmanfrom a panel of arbitrators comprising six Eastern members, six Western members, and six Swedes.
The Stockholm Chamber of Commerce has not yet been called upon to act in any case arising under the US/USSR Optional Clause Agreement, nor indeed has any significant number of arbitrations not involving any Swedish party been conducted in Sweden under commercial contracts between East and West. So far, proceedings have taken place in three cases, one between a party in the Federal Republic of Germany and a party in the German Democratic Republic, one between an Italian party and a Soviet party, and one between a French party and a Soviet party. The first two cases were settled in 1975 and 1977, respectively, while an award was issued in the third arbitration in 1976. It should be emphasised, however, that on the domestic level, and in transnational matters in which a Swedish party appears, a large number of commercial and similar disputes are referred to arbitration rather than to the courts. This is no reflection on the quality of the courts but is due particularly to a desire to avoid publicity and time-consuming appeals. For our Courts of Appeal try the entire case anew, and while access to the Supreme Court is restricted to cases where it grants leave (principally for the purpose of allowing the creation of precedents), it may retry both facts and legal issues. Hence a case of any complexity may take five years or even more to process through the courts.
East and West have chosen Sweden as a forum not only because Sweden is one of the few developed countries in the world which is non-aligned (this is the cornerstone of Swedish foreign policy, and the word "neutral" is not perhaps the adequate one to use). You find among Swedish lawyers a cool, dispassionate attitude to the resolution of international disputes, and efficient administrative capacity. It may be an awareness of these qualities that has inspired
the confidence of East and West alike in Sweden as a preferred locale.
In devising a method for solving potential conflicts in the current international context, East and West thus have adopted the approach advocated by Lord Russell in arranging for the appointment of ad hoc tribunals located in a designated third jurisdiction. However, a new dimension has been added. It has not been deemed enough to select the forum and the nationality of the chairman of arbitral tribunals. In contract practice, it has become the rule to incorporate the entire legal system of the forum.
I shall devote the remainder of my address to this feature, which has not received the full attention that it deserves.
For some years, many Soviet and other Eastern parties insisted on the inclusion of governing law clauses referring to Swedish conflicts of law rules; certain Soviet foreign trade enterprises still do so. Swedish counsel therefore from time to time are required to give opinions on what law will become applicable to the substance of disputes, and this normally will be either the seller's law or the buyer's law or a mixture of both.
Under a clause referring to the Swedish conflicts of law rules, reference initially must be made to the Swedish statute which implements the Hague Convention of 15 June 1955 on the Law Applicable to Sales of Goods. Two immediate difficulties then arise, the first being to identify what (if any) elements in the proposed transaction are such that the transaction as a whole, or parts of it, are identifiable as a sale of chattels, rather than a contract other than a sale, or one concerning real estate appurtenances, for the Act applies only to sales of chattels. Second, the Act does not govern the competence of the parties to contract, the form of the agreement or the effects of the transaction on third parties. Even assuming that some guidance can be had from the statute as to the choice of law indicated under Swedish conflicts rules, the answers are at best insufficient.
Particular difficulties also have been encountered in stating, with reference to Swedish conflicts law, what law should govern licensing and lease agreements and contracts of novel legal conceptions where there is not enough case law available for guidance.
It then became increasingly common, and since some years appears to be general practice, to provide that Swedish substantive law shall govern disputes. Contracts containing such a clause naturally must be examined closely to ascertain their legal meaning and effect under Swedish law. That task is fraught with difficulties, as even a
superficial examination of the problem reveals that all elements of Swedish substantive law simply cannot apply in the different factual and territorial context of the related contracts and investment projects. It becomes in fact a necessity in some measure to refer for guidance on some aspects to the law of the place where a construction is to be located.
Reportedly, in a few agreements of recent date, governing law clauses have been used which, in lieu of a reference to the law of the jurisdictional forum, stipulate that the contracts will be governed by the laws of both parties. To my mind, such a concept is a compromise among businessmen that lacks a defineable legal meaning and is bound to create disputes incapable of foreseeable legal determination. The same can be said about references to "general principles of law" and similar language which sometimes appears.
For the sake of clarity, I must recapitulate the two principal approaches which have been used particularly in Soviet contract forms. The first is an explicit reference to the Swedish conflicts of law rules. Such a clause will be applied in the same way that a court would establish the governing law in a contract which had no provision at all on the subject. As the related agreements often are executed in the East, and certainly are performed largely in the buyer's country and concern plants which are of a real property nature, the net effect of a governing law clause referring to Swedish conflicts of law rules largely is the same as that of a clause providing for the application of the laws of the buyer's country.
If this effect is not desirable, a clear reference should be made to Swedish substantive law. Language so providing may be cast interms of "Swedish substantive law", "Swedish material law", or simply "Swedish law". Since the doctrine of renvoi is not accepted in Sweden (Estate of Erik Kristoffersson, NJA 1939, p. 96), such aprovision will be applied in accordance with its apparent meaning. On balance, in view of the confusion which sometimes has existed on the subject in East-West trade, I would advise using the words "Swedish substantive law". And in the following, I will restrict myself to considering a governing law stipulation of this last kind.
I cannot of course review here in any depth so vast a subject. I will only briefly mention a number of specific problems to which, in my practice as a Swedish counsellor on East-West contracts, I have found that a Western negotiator generally must direct his attention. The points are in the realm of general contract law, as typically experienced in long-term plant and hotel construction agreements, sometimes combined with multipartite financing and guaranty agree-
(i) In the arbitration clause itself, no time period for the rendering of an award should be stated, for such a period can be extended only by mutual agreement between the parties. Some Soviet trading organisations have insisted on the inclusion of a time limit so brief that it facilitates obstruction and may render the arbitral remedy illusory. In fact, in several very large contracts between Soviet and Western parties, a three-month period for the rendering of an award is provided. I would fear the practical consequences of such clauses if they were ever to be invoked.
(ii) Certain limitations are inherent in any Swedish arbitration and governing law provisions. Tort claims by third parties of course cannot be covered, and to avoid liability exposure an indemnity clause must be inserted. Recourse claims based on third-party tort claims require mention if they are to be encompassed by the governing law and arbitration clauses. The definition of real estate and real property appurtenances probably would be deemed to be governed by the law of the situs rather than Swedish law except as relevant solely as between the contracting parties. Thus, any contractual provision derogating from the rights in rem system of the situs (questions of title, mortgages, liens, etc.) would be unenforceable. And the definition of what rules form part of such real estate law also probably must be derived from the law of the situs. Similarly, such matters as limitations on the right of use of property likely will not be resolved with reference to Swedish law. For these reasons, agreements on rights in respect of real estate ought to be drafted so as to include provisions on contractual liability and self-executing set-off and other payment stipulations, coupled with clear risk of loss provisions. Again, restrictions on the competence to conclude contracts, and on arbitrability, may not be resolved with reference to Swedish law.
(iii) Although I am speaking of substantive law rather than procedural law, there are two cardinal principles of the Swedish law of evidence to which attention must be drawn.
First, "with some exceptions, the concepts of relevance and admissibility are co-extensive". (Ginsburg & Bruzelius, Civil Procedure in Sweden 281 (1963).) It is the duty of a court, and of an arbitration tribunal, to establish the correct interpretation of a contract on the basis of the intent of the parties. Any evidence reasonably relevant to this end is admissible. The Procedural Code (RB 35: 1) provides:
After evaluating everything that has occurred in the proceeding in ac-
cordance with the dictates of its conscience, the court shall determine what has been proved in the case.
Therefore, too much reliance should not be placed on entire agreement clauses. On the other hand, there are situation-oriented burden of proof rules of which account should be taken in drafting particular clauses.
Second, the Procedural Code (RB 35: 14) prohibits the taking of depositions or production of affidavits made out of court by reason of a pending or contemplated proceeding, unless the court finds admission justified based upon special circumstances. Arbitral tribunals may not apply this rule as strictly as courts, however, and in international proceedings may find special circumstances prevailing rather more often than in a purely domestic context.
(iv) Swedish law does not recognise the doctrine of estoppel, even though to some extent the same result in substance may be achieved by the use of concepts such as admission, acquiescence, passivity and the like.
(v) Swedish law still severely limits the right of the seller to rely on force majeure as an excuse for non-performance or late delivery. Great care therefore should be exercised in drafting force majeure clauses. It is generally known that Soviet parties recognise as events of force majeure only such as are so extraordinary that the effect of them cannot be averted by any (reasonable) means at the disposal of the affected party; and even the limited availability of force majeure in Soviet civil law can in certain circumstances not be made use of if, e.g., an affected party fails to take precautions to avoid the event. In such a conceptual framework, strikes may not be recognised as events of force majeure, and the omission of strikes from the force majeure clause might be interpreted as a waiver of the right to invoke them in exculpation of liability. One way of achieving acompromise solution in this respect is to seek to characterise the list of events appearing in the clause as illustrative rather than as an exhaustive definition. On the other hand, Soviet parties have in practice been known to waive their rights to claim penalties and liquidated damages for delays caused by strikes in circumstances where the force majeure clauses, as interpreted under Swedish law, would not have offered relief.
(vi) The term "agreed and liquidated damages" should be preferred to "penalties", and it is important to state whether such a remedy is meant to be exclusive or non-exclusive. Indeed, a seller should attempt to include four standard provisions, providing for (a) exclusivity of warranties, (b) exclusivity of remedies, (c) exclusion of
indirect damages, and (d) termination.
(vii) Provisions on transfer of title normally are less important than a clear definition of the point of delivery. If the INCO-Terms are acceptable, they should be expressly embodied in the text or incorporated by reference.
(viii) The distinction between direct and indirect damages is not crystal clear under Swedish law and those concepts, which are often used extensively, should be defined as exhaustively as possible in the contract. As I just said, indirect damages ought to be excluded. Express limitations on claims for hidden defects also should be provided, for on real estate constructions, there is a potentially dangerous Swedish Supreme Court case (Holming v. Roth, NJA 1946, p. 666).
(ix) Under Swedish law the general contractor is liable, by and large without limitations, for the acts and omissions of his subcontractors; hence, any desirable restrictions on such liability must be explicitly provided for.
(x) A last point that should be mentioned is that Swedish law on guarantee and indemnity undertakings is complex and has unexpected loopholes. Considerable care should be exercised in drafting related provisions.
The points that I have outlined to you are of course no more than glimpses of problems which have emerged over the years as I have examined the typically obscure and difficult contracts between East and West. More often than not, they are as difficult to interpret as they are arduous to negotiate, starting as they mostly do from a position heavily leonine in favour of the buyer. However, in working with American, English, French, German and Swiss counsel, I have invariably found that the basic principles of contract law, broadly speaking, are the same in Sweden as in those jurisdictions. Moreover, the one thing that is certain is that if the contracts are clear, they will be enforced in accordance with their express stipulations. If they are not clear, a fair and reasonable interpretation will be placed upon them, reached in proceedings in which the tribunal is strictly impartial but receptive to all arguments based on truth and reason.
Mindful of these characteristic features of the Swedish legal and judicial system, I have no doubt but that all justiciable modern disputes between East and West, in the words of Lord Russell, "ought to be arbitrated, and can be satisfactorily dealt with by arbitration", and, further, that the Swedish forum and the Swedish procedural and substantive law are adequate for the purpose. Whatever the nature of the dispute is, justice will be rendered, reliably and efficiently. .