Decision 4A_124/2020 of 13 November 2020, in German.
Arbitration Newsletter Switzerland: Extension of Arbitration Agreement to Non-Signatory based on Implied Consent – ICC Award set aside
On 9 December 2020, 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 set aside a partial award on jurisdiction in which the arbitral tribunal had extended an arbitration agreement to a non-signatory by application of the implied consent doctrine.
The Decision was rendered by all five members of the First Civil Chamber on 13 November 2020 and will be included in the Supreme Court’s publication of leading cases.
After the Bangladeshi government decided to allow privately-owned power plants in 2009, several contracts for the construction and delivery of a diesel power plant were concluded between a South Korean company as supplier (“Supplier“) and a group of companies from Singapore and Bangladesh as purchaser (“Purchasers“). Amongst other matters, the Supplier and the Purchasers entered into a contract in July 2010 regarding planning, procurement, manufacturing and delivery of a diesel power plant (“Contract“).
The Supplier then subcontracted the delivery of several diesel engine motor units to another South Korean company (“Subcontractor“).
After delivery and instalment of these diesel engine motor units by the Subcontractor, the Purchasers informed the Supplier about technical problems in July 2011. Subsequently, the parties failed to resolve their differences in this respect and the Purchasers refused to make any further payments.
In March 2018, the Supplier initiated arbitration proceedings against the Purchasers. The arbitration clause in the Contract stipulated arbitration under the ICC Rules before a three member arbitral tribunal seated in Geneva. The Contract specified Swiss law as its governing law.
In the arbitration, the Purchasers requested that the Subcontractor should be joined to the arbitration as an additional party. As the Subcontractor disputed the jurisdiction of the arbitral tribunal, the latter bifurcated the proceedings and decided this issue first in a partial final award on jurisdiction in January 2020 (“Partial Award“), wherein it affirmed its jurisdiction regarding claims raised by the Purchasers against the Subcontractor based on the Contract.
The arbitral tribunal held that the Subcontractor had participated in the conclusion and performance of the Contract to such an extent that the contracting parties could in good faith have assumed that the Subcontractor intended to be bound by the arbitration clause in the Contract. In coming to this conclusion, the arbitral tribunal considered different circumstances, such as the Subcontractor’s participation in meetings with the Purchaser, its active involvement in test runs, the participation of its employees in the attempt to solve the technical issues with the diesel engine motor units and its direct communication with the Purchaser. While these circumstances would individually not be sufficient to trigger an extension of the arbitration clause, they would, according to the tribunal, allow such conclusion if considered in the aggregate.
The Subcontractor subsequently filed an action with the Supreme Court requesting the annulment of the Partial Award.
The Supreme Court indeed annulled the finding on jurisdiction and referred the case back to the arbitral tribunal for a new decision on jurisdiction.
2. Considerations of the Supreme Court
At the outset, the Supreme Court recalls that the question of the subjective scope of the arbitration agreement, i.e. who is bound by it, is a question of jurisdiction.
The interpretation of an arbitration agreement follows the principles generally applicable to the interpretation of private declarations of intent. Accordingly, the actual intent of the parties is primarily decisive. Only if the actual intent cannot be determined, the interpretation is to be conducted in accordance with the principle of good faith, i.e. the presumed will is determined as it could and had to be understood in good faith by the respective recipient of the declaration. However, a waiver of recourse of state courts cannot be assumed lightly, which is why a restrictive interpretation of alleged arbitration agreements is required in case of doubt.
In the present case, the arbitral tribunal decided to extend the arbitration clause to the Subcontractor based on an interpretation in accordance with the principle of good faith and not on the basis of actual concurring declarations of intent by the parties. Being a question of law (and not of facts) such normative interpretation can be freely assessed by the Supreme Court.
According to the principle of relativity of contractual obligations, an arbitration clause in a contract binds in principle only the contracting parties (doctrine of privity of contract). However, the Supreme Court reminds us that it has since long held that, under certain conditions, an arbitration clause may also bind persons who have not signed the contract and are not mentioned therein, such as in the case of an assignment of a claim, in the case of a (simple or cumulative) debt or contract assumption. In addition, a third party who interferes in the performance of a contract containing an arbitration clause is deemed to have consented to the arbitration clause by implied action.
The Supreme Court applied this standard to the facts of the case at hand and came to the conclusion that the involvement of the Subcontractor in the Contract was not sufficient for implied consent to the arbitration clause.
In the Contract, the Subcontractor was mentioned explicitly as seller or deliverer of a part of the power plant, namely the diesel engines.
The Purchasers must have been aware that the Subcontractor was not a party to the Contract, but only a subcontractor of the Supplier for certain components of the ordered power plant.
The Subcontractor’s involvement in the performance of the Contract was caused by its role as subcontractor to the Supplier and could be expected. In the view of the Supreme Court, such involvement was not sufficient to extend the arbitration agreement to the Subcontractor.
In the light of the importance of the components delivered by the Subcontractor, it does not appear unusual for representatives of the Subcontractor to attend a test of the diesel engines on site subsequent to the conclusion of the Contract. It is also obvious that in the context of large projects such as the one here in question, not only the warranty rules but also the payment terms of the contract with the Subcontractor were harmonized with those of the Contract. These circumstances as well as the fact that representatives of the Subcontractor were also present at the first meeting with the Purchasers in summer of 2009 cannot be construed as an interference in the Contract that would allow an extension of its arbitration agreement to the Subcontractor. Likewise, the fact that the Subcontractor replaced various engine components in the power plant does not qualify as an implied consent to the arbitration clause. The measures taken by the Subcontractor to rectify problems with the delivered diesel engines were taken in its role as subcontractor responsible for the engines. It was part of its role as a subcontractor to carry out such warranty work directly at the end customer’s premises.
Thus, the facts of the present case are fundamentally different from those underlying the case BGE 129 III 727: in that decision, the third party to whom the arbitration agreement in question was extended was not contractually involved in the execution of the main contract, but rather influenced the management of two participating companies with respect to the management of a construction project realized on a property (indirectly) held by the third party and with a building permit issued to it, and also interfered in other ways in the execution of the work contract in question.
Against the background of the allocation of contractual roles in the context of the present infrastructure project, the communication could not be understood as interference by the Subcontractor in the sense of wanting to become party to the Contract or to the arbitration agreement contained therein.
The Subcontractor’s behaviour could not be understood in good faith as a clear expression of its intention to agree to the arbitration clause and thus to waive state jurisdiction vis-à-vis the Purchasers. On the contrary, in view of the contractual arrangements made for the construction of the power plant, the Purchasers must have been aware that the Subcontractor, as a subcontractor, was not a party to the Contract and was also not bound by the arbitration clause contained therein.
The arbitral tribunal’s power to assess the claims filed under the Contract therefore could not be based on the implied consent of the Subcontractor to become party the arbitration clause in question.
However, whether the arbitral jurisdiction might derive from a transfer of the obligations in question of the Supplier to the Subcontractor pursuant to Article 17 of the Contract (“Assignment”), as claimed by the Purchasers, was not and could not be assessed by the Supreme Court due to the lack of factual findings in the Partial Award. The arbitral tribunal had left this issue open due to its wrongly affirmed decision on jurisdiction.
Consequently, the Supreme Court set aside the Partial Award and referred the matter back to the arbitral tribunal for a clarification of said open issue and for a new decision on jurisdiction.
The Decision is straightforward and sets a welcome cornerstone to the criteria relevant for the extension of an arbitration agreement to a non-signatory. Absent specific circumstances a subcontractor in a project remains in this role and provides his services based on the contractual and jurisdictional terms he agreed with his contract partner only.
Specific circumstances that would have allowed for an extension of the arbitration agreement, as those present in case BGE 129 III 727, were absent in the case at hand.
Earlier commentators on the Decision have already made the valid point that the review exercised by the Supreme Court was possible only because the arbitral tribunal based its extension of the arbitration agreement to the Subcontractor on a legal interpretation. Had it done so by factual findings only, the Supreme Court could not have second-guessed such findings.
Finally, the Subcontractor is not yet off the hook: as the arbitral tribunal has not yet followed a second line of argument, namely the alleged transfer of the obligations by assignment, it will have to do so now.
2021-01-22-Arbitration-Newsletter-Switzerland_Extension-of-Arbitration-Agreement.pdf (pdf 198 KB)