Swiss Supreme Court Extends Arbitration Agreement to Third Party

​Arbitration Agreement extended to parent company on the principle of good faith.

The Swiss Supreme Court discussed the extension of arbitration agreement to third parties in the recent decision of X.________ v. Y.________ Engineering and Y.________ S.p.A., 4A_450/2013^[1] rendered on April 7, 2014. The decision set aside the award rendered by an ICC International Court of Arbitration tribunal under Article 190(2)(b) of the Swiss Private International Law Act^[2] on the ground that the Tribunal had erroneously denied jurisdiction over one of the parties.

The appellant in this case is a foreign company involved in the production of aluminium foil and packaging for food products. The respondents, herein, need more explaining. Respondent no. 1, Y.________ Engineering (hereinafter referred to as “Y-1”) was held by Y.______ Group S.p.A. (hereinafter referred to as “Y-2”). Y-2 is a subsidiary of Z.________ S.p.A. (hereinafter referred to as “Z”).

Respondent no. 2, Y.______S.p.A (hereinafter referred to as “Y-3”) is also a subsidiary of Z.

X and Y-1 entered into three contracts – General Agreement, Contract for Supply of Equipment and Contract for Service – for the purpose of delivering an aluminium foil plant. The total value of all the contracts was Euro 73 million and the date of delivery of the plant was November 29, 2004. The contracts were signed by the Chief Financial Officer of Y-2 on the basis of a power of attorney issued by the President of Y-1 who was also the Executive Director of Y-3. All the contracts provided for an ICC arbitration clause for the resolution of disputes.

A number of documents were prepared during this period which recorded that:

• X wished to complete the project with a Department of Y-2, and not Y-1.
• A member of the Department of Y-2 was made the new in-charge of the project.
• The head of Department of Y-2 was assigned the full responsibility for completion of the project. The appointment was approved by Y-2 in writing and was intimated to X by Y-1.
• Y-2 agreed to provide X with an irrevocable guarantee in relation to its obligations under the Contract of Service.
• The Department of Y-2 which was given full responsibility for the completion of the project was transferred to Y-3.

The contract, however, fell through in February, 2006 and Y-1 invoked the arbitration clause and sought damages of Euro 9,652,264.67 with interest. X subsequently submitted a counter-claim against Y-1 and Y-3 claiming damages of Euro 53,166,884.26. Y-3 agreed to take part in the arbitral proceedings while maintaining an objection to the jurisdiction of the arbitral tribunal.

The arbitral tribunal issued the final award on July 31, 2013 wherein it upheld by a 2-1 majority the jurisdictional challenge raised by Y-3 and thus rejected all the counter-claims brought by X against Y-3 on the grounds that Y-3 was not party to the original 2001 Contracts.

X challenged the award to the extent that the Tribunal had denied jurisdiction over Y-3 and sought a positive finding to that effect.

The general principles of contractual law entails that the arbitration agreement binds only the contracting parties. However there are certain exceptions to this rule which were discussed by the Court in this case but not directly applied:

• Assignment of claim, transfer of a contractual relationship, or the joint or simple assumption of a debt
• Involvement of a third party in the performance of the contract which contains the arbitration agreement may constitute adherence to the arbitration agreement if it can be inferred from such performance that it is willing to be bound by it.
• Contractual obligations may also extend to the parent company where the scope of activity of the subsidiary and the parent company overlap.

The Supreme Court examined the evidence put before the Arbitral Tribunal to decide the challenge raised by the Appellant: whether the arbitration agreement concluded between X and Y-1 could bind Y-2. The arbitral tribunal’s conclusion that Y-2, acting as a mere representing Y-1, could not be bound by the arbitration clause was rejected.  The Court held that the arbitral tribunal had jurisdiction over Y-2 on the basis of the principle of good faith as Y-2 had created a legitimate expectation in the mind of X, through its behaviours, statements and actions, that it was bound by the Agreements and by extension the arbitration clause. Thus, the appellant in good faith had the right to act against Y-2 since there was a transfer of responsibility and an assumption of debt. Furthermore, if Y-2, as the parent company, did not want X to rely on the “appearance of adherence to the contracts that they had led it to believe, they should have so stated clearly.”

However, the Court did not confirm whether or not the jurisdiction of the arbitral tribunal extended to Y-3 who had acquired the concerned department from Y-2 and against whom the Appellant had filed the counter-claim. The arbitral tribunal had not decided this issue as they had concluded that their jurisdiction does not extend to Y-2. In light of the same, the Court remitted the matter back to the Tribunal to decide interalia whether it had jurisdiction over Y-3 and the merit of the Appellant’s counter-claim in light of the Court’s conclusion that the arbitration agreement extended to Y-2.

The decision of the Swiss Supreme Court has brought about a change in established practice with respect to the extension of arbitration agreements to third parties. The principle of good faith, where applicable, shall now require parties to expressly state that they are not a party to a contract (and by extension its dispute resolution clause) where their actions may give cause for a contrary interpretation.

By : Adv. Niharika Dhall
info@lawsenate.com