Freezing order ("Arrest") for a claim for "succumbing legal fees" arising out of a Brazilian ICC arbitral award
In Swiss debt enforcement proceedings, a creditor whose claim has been recognized by a court judgement or an arbitral award is entitled to demand the freezing of the debtor's assets located in Switzerland. In case of a foreign award, the court in charge of the freezing order must also – incidentally – decide on the recognition of the foreign award according to the New York Convention.
In this case, the freezing order was based on a Brazilian ICC arbitral award. The losing party was ordered to pay directly to the winning party's law firm Braz Coelho Veras Lessa Bueno the latter's legal fees incurred in the arbitration proceedings. In other words, the compensation for legal fees was not awarded to the winning party itself, but to its lawyers directly, even though the lawyers were not a party to the arbitral proceedings and were, instead, merely representing the winning party in such proceedings.
One of the fundamental principles of arbitration is that arbitral awards may only have binding effect on the parties to the arbitration agreement. Thus, an award will usually not produce any binding effect on or towards third parties. Law firms acting on behalf of their clients in arbitration proceedings are not parties to such arbitration, but instead "third parties" with no direct rights ensuing out of the award itself.
It may therefore seem surprising that a Swiss court accepted to issue a freezing order to secure the claim of such a third party, i.e. the law firm.
This is because every principle suffers from some exceptions…
In the present case, the arbitration was seated in Brazil and subject to Brazilian law. The Brazilian civil procedure code stipulates that the losing party must pay legal fees directly to the winning party's lawyers. The lawyers thus have a direct claim for such fees against the losing party (so-called "honorários sucumbenciais" hereafter "succumbing legal fees"). The relevant provisions of Brazilian procedural law are not directly applicable to arbitration proceedings. However, the practice of succumbing fees is a salient feature of Brazilian court practice and recognized by standing case law of Brazil's highest court. In the case at hand, both parties were represented by Brazilian law firms, and both formulated their requests for relief as to costs in accordance with such practice. Each of the parties requested succumbing legal fees of 20% of the amount in dispute, expressly excluding contractual legal fees. These requests were incorporated in the Terms of Reference which were signed by the lawyers of the parties.
The sole arbitrator apparently interpreted these requests as an agreement of the parties to treat legal fees in the same way as they would be treated in court litigation, i.e. by creating a direct entitlement of the lawyers to any claim for costs. Thus, in the final award, the sole arbitrator referring to the precise wording of the parties' request for succumbing legal fees in the Terms of Reference ordered the losing party to pay the amount of 20% of the value in dispute to the winning party's law firm directly. On this basis, the local court in Basel granted the freezing order securing such claim of the law firm.
It is very positive to see that the court was open to give due consideration to a foreign practice which may at first sight seem odd to a Swiss legal practitioner. This further confirms the general pro-arbitration stance of local Swiss courts when recognizing and enforcing foreign awards.
Key take-aways:
- Foreign judgments or awards can be enforced in Switzerland through freezing orders if the debtor holds assets in the country.
- Pay close attention to drafting the Terms of Reference, as they offer a golden opportunity to address defects in your arbitration agreement or extend its scope. For example, you could use them to establish a direct claim by a party's law firm for legal costs against the award debtor.
- Swiss courts usually adopt a pro-arbitration stance towards recognition and enforcement of arbitral awards.
