Post by alanbond on Apr 5, 2020 23:03:19 GMT 4
On 9 May 2019, the Swiss Federal Supreme Court (the "Supreme Court") published on its website a new decision in the field of international arbitration (the "Decision")1 wherein it addressed the question whether, under the Convention on the Recognition and Enforcement of Foreign Arbitral Awards 1958 ("New York Convention"), an arbitration agreement can also bind a person who was not a signatory to the arbitration agreement.
The Supreme Court held that the New York Convention does not preclude the extension of the arbitration agreement to a non-signatory as long as the requirement for signature is fulfilled by the original parties of the arbitration agreement.
The Decision was rendered by all five members of the First Civil Chamber on 17 April 2019 and will be included in the Supreme Court's publication of leading cases ("publizierte Leitentscheide").
1. Facts
On 6 May 2016, the Slovenian company A initiated state court proceedings before the Commercial Court of a Swiss Canton (the "Commercial Court") against the Swiss company B S.A., wherein it requested payment of CHF 614'040 plus interest. B S.A. objected to the jurisdiction of the Commercial Court, contending that the parties to the proceedings were bound by an arbitration agreement providing for arbitration in Slovenia under Slovenian law.
The arbitration agreement to which B S.A. referred to was included in a distribution agreement concluded between A and another party named as "distributor" (hereinafter "Distribution Agreement"). The Distribution Agreement was signed by the Slovenian company A and "for and behalf of the 'Distributor' B X AG" by Mr. C, who was then and still is a member of the board of directors of B S.A. as well as B-X/Y AG, a company belonging to the same group of companies as B S.A.2
It was disputed between the parties to the state court litigation as to with whom A had concluded the Distribution Agreement (i.e. whether B-X/Y AG or B S.A.). It was, however, not in dispute that A and B S.A. had been in a business relationship since 2006.
By a judgment dated 5 November 2018, the Commercial Court dismissed A's action and referred the parties to arbitration applying Article II(3) New York Convention. The Commercial Court held that it was not necessary to decide whether B S.A. was an original party to the Distribution Agreement. Given B S.A.'s performance under the agreement over a number of years, its consent to be bound to the Distribution Agreement incorporating the arbitration agreement could be implied. However, B S.A. would not have fulfilled the form requirements of Article II(2) New York Convention as it had not signed the Distribution Agreement. But then, again, given that A had accepted B S.A.'s performance under the Distribution Agreement, and had even actively participated in it, A's contention that the New York Convention's form requirement would not have been fulfilled appeared to be contradictory and contrary to the principle of good faith and, as such, not deserving of legal protection.
A filed an appeal3 against the judgment with the Supreme Court and requested that it be annulled and the matter sent back to the Commercial Court.
The Supreme Court dismissed A's appeal, even though it disagreed with the reasoning of the Commercial Court.
2. Considerations
The Supreme Court begins its analysis by noting that the formal validity of the arbitration agreement in question, which provided for the jurisdiction of an arbitral tribunal seated in Slovenia, was to be examined pursuant to Article II(2) New York Convention.
It then pointed to Article II(3) New York Convention which stipulates that the court of a contracting state, when seized of an action in a matter in respect of which the parties have made an agreement within the meaning of this article, shall, at the request of one of the parties, refer the parties to arbitration, unless it finds that the said agreement is null and void, inoperative or incapable of being performed.
Addressing the Commercial Court's finding that A would have acted in contradiction of its previous conduct (venire contra factum proprium) by invoking the alleged formal invalidity of the arbitration agreement, the Supreme Court first held that this principle also applies in the field of application of the New York Convention. It then, however, found that A had not acted contradictorily in that sense: in accordance with the principle of autonomy of an arbitration clause (the doctrine of separability), the fate of an arbitration agreement is independent from that of the main contract. Hence, performance under the main contract, which can be validly concluded without observing any requirements of form, does not automatically result in the allegation of the formal invalidity being abusive. For that reason, A had not acted contradictorily by invoking the formal invalidity of the arbitration agreement after having performed the main contract, and, accordingly, such behavior did not qualify as an abuse of law.
The Supreme Court then addressed the main question: who is bound by the arbitration agreement?
The five members of the First Civil Chamber began by pointing out that the question as to who is bound by an arbitration agreement is a question of interpretation. Irrespective of whether or not requirements of form apply, arbitration agreements may and must be interpreted. Hence, it is therefore necessary to assess by way of interpretation who is bound by the agreement.
It then held that the subjective scope4 of the arbitration agreement is a question of jurisdiction. Therefore, the arbitral tribunal has to examine which persons are bound by the arbitration agreement within the framework of the examination of its jurisdiction.
The Supreme Court then outlined the basic principles in this regard: according to the principle of the relativity of contractual obligations, an arbitration clause in a contract is generally only binding on the contracting parties. However, the Supreme Court has since long affirmed that an arbitration clause can, under certain conditions, also bind persons who have not signed the contract and are not mentioned in it, e.g. in cases of assignment of a claim, the assumption of debt or the transfer of a contract. Also, where a third party participates in the performance of a contract containing an arbitration clause, it is assumed that it has agreed to the arbitration clause by conduct.
According to the Supreme Court, these principles for the extension of an arbitration agreement to third parties also apply in the realm of the New York Convention in cases where only the original parties to the arbitration agreement have complied with the form requirements. Article II(2) New York Convention would require only that the arbitration agreement has been signed by the (original) parties at the time of the conclusion of the contract. Therefore, in case of e.g. a transfer of a contract to a third party, the third party is not obliged to fulfil any further form requirements with regard to the binding nature of the arbitration clause contained therein.
This would be in line with previous case law of the Supreme Court, according to which the form requirement of article 178(1) PILA5 applies only to the declarations of intent of the (original) parties to the arbitration agreement, while the applicable substantive law determines whether or not a third party is bound by the arbitration agreement. The Supreme Court then concluded that the distinction between the formal and substantive validity of the extension of an arbitration agreement to a third party under the application of the New York Convention does not deviate therefrom.
The Supreme Court then applied the law to the facts: since B S.A. had participated in the performance of the Distribution Agreement, it was therefore deemed to have agreed to the arbitration agreement contained therein. This conduct resulted in B S.A. being bound to the arbitration agreement. Since A had failed to establish that such a binding effect of the arbitration agreement would not have occurred under the substantive law applicable to the arbitration agreement (Slovenian law), the arbitration agreement was binding on A and B S.A.
Accordingly, the Supreme Court concluded that the Commercial Court had correctly declined jurisdiction applying Article II(3) New York Convention. For that reason, A's appeal was dismissed
3. Considerations
The Decision provides a helpful clarification.
With regard to international arbitrations in Switzerland under the auspices of chapter 12 PILA, the Supreme Court has already established in 20036 that form requirements under article 178(1) PILA need to be met only by the original parties to the arbitration agreement and not by third parties joining or being joined at a later stage. The Supreme Court has now also confirmed its position in this respect under article II(2) of the New York Convention.
This clarification is to be welcomed. A consultation of the 2016 UNCITRAL Guide on the New York Convention (p. 53 et seq.) reveals that a number of states follow a stricter policy in this respect, i.e. an extension under article II(2) of the New York Convention is not possible to a third party which has not signed the relevant arbitration agreement. As just established, the Supreme Court takes a more liberal approach in this respect and therewith confirms, once again, its arbitration friendly position
Footnotes
1 Decision 4A_646/2018 of 17 April 2019, in German
2 The decision was published in an anonymized form only. Unfortunately, the abbreviations chosen by the Supreme Court to ensure such anonymization make it difficult to follow the description of facts. Note the very subtle difference, which is crucial for the case at hand: Mr. C, member of the board of directors of B S.A. and B-X/Y AG, signed the Distribution Agreement for and behalf of "B X AG" (a company name different from B S.A. and B-X/Y AG).
3 It is in fact a genuine appeal and not an action for annulment: As the appellant attacks a judgment of a Swiss state court, and not an award of an arbitral tribunal, the legal remedy is an appeal, with the consequence that the Supreme Court can review the decision for any attacked, wrong application of federal law (unlike in actions for annulment).
4 I.e. who is bound by the arbitration agreement, also called the "personal scope" of the arbitration agreement.
5 The provision stipulating the requirements of form for arbitration agreements in Chapter 12 of the Private International Law Act ("PILA"), the Swiss lex arbitri.
6 BGE 129 III 727, consid. 5.3.1.
The Supreme Court held that the New York Convention does not preclude the extension of the arbitration agreement to a non-signatory as long as the requirement for signature is fulfilled by the original parties of the arbitration agreement.
The Decision was rendered by all five members of the First Civil Chamber on 17 April 2019 and will be included in the Supreme Court's publication of leading cases ("publizierte Leitentscheide").
1. Facts
On 6 May 2016, the Slovenian company A initiated state court proceedings before the Commercial Court of a Swiss Canton (the "Commercial Court") against the Swiss company B S.A., wherein it requested payment of CHF 614'040 plus interest. B S.A. objected to the jurisdiction of the Commercial Court, contending that the parties to the proceedings were bound by an arbitration agreement providing for arbitration in Slovenia under Slovenian law.
The arbitration agreement to which B S.A. referred to was included in a distribution agreement concluded between A and another party named as "distributor" (hereinafter "Distribution Agreement"). The Distribution Agreement was signed by the Slovenian company A and "for and behalf of the 'Distributor' B X AG" by Mr. C, who was then and still is a member of the board of directors of B S.A. as well as B-X/Y AG, a company belonging to the same group of companies as B S.A.2
It was disputed between the parties to the state court litigation as to with whom A had concluded the Distribution Agreement (i.e. whether B-X/Y AG or B S.A.). It was, however, not in dispute that A and B S.A. had been in a business relationship since 2006.
By a judgment dated 5 November 2018, the Commercial Court dismissed A's action and referred the parties to arbitration applying Article II(3) New York Convention. The Commercial Court held that it was not necessary to decide whether B S.A. was an original party to the Distribution Agreement. Given B S.A.'s performance under the agreement over a number of years, its consent to be bound to the Distribution Agreement incorporating the arbitration agreement could be implied. However, B S.A. would not have fulfilled the form requirements of Article II(2) New York Convention as it had not signed the Distribution Agreement. But then, again, given that A had accepted B S.A.'s performance under the Distribution Agreement, and had even actively participated in it, A's contention that the New York Convention's form requirement would not have been fulfilled appeared to be contradictory and contrary to the principle of good faith and, as such, not deserving of legal protection.
A filed an appeal3 against the judgment with the Supreme Court and requested that it be annulled and the matter sent back to the Commercial Court.
The Supreme Court dismissed A's appeal, even though it disagreed with the reasoning of the Commercial Court.
2. Considerations
The Supreme Court begins its analysis by noting that the formal validity of the arbitration agreement in question, which provided for the jurisdiction of an arbitral tribunal seated in Slovenia, was to be examined pursuant to Article II(2) New York Convention.
It then pointed to Article II(3) New York Convention which stipulates that the court of a contracting state, when seized of an action in a matter in respect of which the parties have made an agreement within the meaning of this article, shall, at the request of one of the parties, refer the parties to arbitration, unless it finds that the said agreement is null and void, inoperative or incapable of being performed.
Addressing the Commercial Court's finding that A would have acted in contradiction of its previous conduct (venire contra factum proprium) by invoking the alleged formal invalidity of the arbitration agreement, the Supreme Court first held that this principle also applies in the field of application of the New York Convention. It then, however, found that A had not acted contradictorily in that sense: in accordance with the principle of autonomy of an arbitration clause (the doctrine of separability), the fate of an arbitration agreement is independent from that of the main contract. Hence, performance under the main contract, which can be validly concluded without observing any requirements of form, does not automatically result in the allegation of the formal invalidity being abusive. For that reason, A had not acted contradictorily by invoking the formal invalidity of the arbitration agreement after having performed the main contract, and, accordingly, such behavior did not qualify as an abuse of law.
The Supreme Court then addressed the main question: who is bound by the arbitration agreement?
The five members of the First Civil Chamber began by pointing out that the question as to who is bound by an arbitration agreement is a question of interpretation. Irrespective of whether or not requirements of form apply, arbitration agreements may and must be interpreted. Hence, it is therefore necessary to assess by way of interpretation who is bound by the agreement.
It then held that the subjective scope4 of the arbitration agreement is a question of jurisdiction. Therefore, the arbitral tribunal has to examine which persons are bound by the arbitration agreement within the framework of the examination of its jurisdiction.
The Supreme Court then outlined the basic principles in this regard: according to the principle of the relativity of contractual obligations, an arbitration clause in a contract is generally only binding on the contracting parties. However, the Supreme Court has since long affirmed that an arbitration clause can, under certain conditions, also bind persons who have not signed the contract and are not mentioned in it, e.g. in cases of assignment of a claim, the assumption of debt or the transfer of a contract. Also, where a third party participates in the performance of a contract containing an arbitration clause, it is assumed that it has agreed to the arbitration clause by conduct.
According to the Supreme Court, these principles for the extension of an arbitration agreement to third parties also apply in the realm of the New York Convention in cases where only the original parties to the arbitration agreement have complied with the form requirements. Article II(2) New York Convention would require only that the arbitration agreement has been signed by the (original) parties at the time of the conclusion of the contract. Therefore, in case of e.g. a transfer of a contract to a third party, the third party is not obliged to fulfil any further form requirements with regard to the binding nature of the arbitration clause contained therein.
This would be in line with previous case law of the Supreme Court, according to which the form requirement of article 178(1) PILA5 applies only to the declarations of intent of the (original) parties to the arbitration agreement, while the applicable substantive law determines whether or not a third party is bound by the arbitration agreement. The Supreme Court then concluded that the distinction between the formal and substantive validity of the extension of an arbitration agreement to a third party under the application of the New York Convention does not deviate therefrom.
The Supreme Court then applied the law to the facts: since B S.A. had participated in the performance of the Distribution Agreement, it was therefore deemed to have agreed to the arbitration agreement contained therein. This conduct resulted in B S.A. being bound to the arbitration agreement. Since A had failed to establish that such a binding effect of the arbitration agreement would not have occurred under the substantive law applicable to the arbitration agreement (Slovenian law), the arbitration agreement was binding on A and B S.A.
Accordingly, the Supreme Court concluded that the Commercial Court had correctly declined jurisdiction applying Article II(3) New York Convention. For that reason, A's appeal was dismissed
3. Considerations
The Decision provides a helpful clarification.
With regard to international arbitrations in Switzerland under the auspices of chapter 12 PILA, the Supreme Court has already established in 20036 that form requirements under article 178(1) PILA need to be met only by the original parties to the arbitration agreement and not by third parties joining or being joined at a later stage. The Supreme Court has now also confirmed its position in this respect under article II(2) of the New York Convention.
This clarification is to be welcomed. A consultation of the 2016 UNCITRAL Guide on the New York Convention (p. 53 et seq.) reveals that a number of states follow a stricter policy in this respect, i.e. an extension under article II(2) of the New York Convention is not possible to a third party which has not signed the relevant arbitration agreement. As just established, the Supreme Court takes a more liberal approach in this respect and therewith confirms, once again, its arbitration friendly position
Footnotes
1 Decision 4A_646/2018 of 17 April 2019, in German
2 The decision was published in an anonymized form only. Unfortunately, the abbreviations chosen by the Supreme Court to ensure such anonymization make it difficult to follow the description of facts. Note the very subtle difference, which is crucial for the case at hand: Mr. C, member of the board of directors of B S.A. and B-X/Y AG, signed the Distribution Agreement for and behalf of "B X AG" (a company name different from B S.A. and B-X/Y AG).
3 It is in fact a genuine appeal and not an action for annulment: As the appellant attacks a judgment of a Swiss state court, and not an award of an arbitral tribunal, the legal remedy is an appeal, with the consequence that the Supreme Court can review the decision for any attacked, wrong application of federal law (unlike in actions for annulment).
4 I.e. who is bound by the arbitration agreement, also called the "personal scope" of the arbitration agreement.
5 The provision stipulating the requirements of form for arbitration agreements in Chapter 12 of the Private International Law Act ("PILA"), the Swiss lex arbitri.
6 BGE 129 III 727, consid. 5.3.1.