Extension of arbitration agreements to third parties under Swiss law

Cross-border Arbitration 2009/10 Extension of arbitration agreements to third parties under Swiss law Thomas Müller, Homburger* www.practicallaw.com...
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Arbitration 2009/10

Extension of arbitration agreements to third parties under Swiss law Thomas Müller, Homburger* www.practicallaw.com/9-385-8457

The legal framework of arbitration in Switzerland, one of the most popular places for international arbitration.





Form requirements.



A landmark decision of the Swiss Federal Supreme Court. The substantive validity of the agreement relating to third parties.





The group of companies doctrine.



The prerequisites for piercing the corporate veil.

Legal framework for arbitration in Switzerland Generally, the political and legal climate in Switzerland is very arbitration-friendly. This is one of the reasons why Switzerland remains one of the most popular places for international arbitration. There are three main pieces of legislation that govern arbitration in Switzerland: Articles 176 et seq. of the Federal Private International Law Act of 18 December 1987 (PILA), governing international arbitrations.



The New York Convention on the Recognition and Enforcement of Foreign Arbitral Awards 1958 (New York Convention), governing the enforcement of awards of arbitral tribunals that have their seat outside Switzerland.





The Inter-cantonal Arbitration Convention 1969 (Concordat), governing domestic arbitrations, that will be replaced in or around 2011 by relevant provisions in the new Federal Code of Civil Procedure.

Arbitration laws often distinguish between international arbitration and domestic arbitration in relation to the applicable set of rules. This also applies in Switzerland. Whether the rules governing international arbitration or those relating to domestic arbitration apply depends on the domicile of the parties. Under Article 176(1) PILA, the provisions relating to international arbitration apply to arbitral tribunals with their seat in Switzerland, provided that, at the time when the arbitration agreement was made, at least one party’s domicile or ordinary residence was not in Switzerland. This applies irrespective of whether the parties chose institutional (for example, International Chamber of Commerce (ICC) Rules or Swiss Rules of International Arbitration) or ad hoc arbitration. The focus of this article is on international arbitration. In arbitration, like in ordinary litigation, issues related to third parties can arise in a variety of situations. For example, in addition to the main parties, interveners may appear and third-party complaints may become part of the arbitration proceedings. Further, in cases of singular and universal successions such as company mergers or inheritance, third-party issues could also arise. However, this article focuses solely on the extension of an arbitration agreement to third parties. As a general rule, an arbitration agreement, as with any other private contract, can only bind the parties that agreed to it. In practice, however, Swiss case law and doctrine provide for certain exceptions to this rule. The subjective scope of an arbitration agreement particularly revolves around the question of which parties are within reach of the arbitration agreement. This raises issues concerning different aspects.

Form requirements The arbitration agreement must be concluded in writing, by telegram, telex, telefax or other means of communication which allows proof of the agreement by text (Article 178 (1), PILA). Accordingly, a third party to which an arbitration agreement is extended could take the position that it never actually agreed in the form required, and that for this reason it is not subject to the arbitration agreement. There has been, and still is, much debate in Switzerland whether the form requirement only applies to the

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“[A]rbitration is a means by which […] disputes can be definitively resolved, pursuant to the parties’ agreement, by independent, nongovernmental decision-makers” (Born, International Commercial Arbitration, p. 1). A valid arbitration agreement forms the basis of any arbitration. Under such an agreement, the parties to a contract agree to have their potential disputes adjudicated by one or more arbitrators. Therefore, in arbitration, an alternative form of dispute resolution, the parties directly bound by the contract choose to waive their, often constitutional, right to bring a dispute before the ordinary state courts. While such a possibility may be desirable for the parties entering into the arbitration agreement, others, such as non-signatory third parties, may not be willing to waive their right to an ordinary court. This leads to the key question of under what circumstances is it possible to extend an arbitration agreement to third parties who have not signed the arbitration agreement? This article examines:

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Arbitration 2009/10

arbitration agreement between the original parties, or whether it also applies to the third party. Legal doctrine and case law have differing views on this issue.

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Based on one view, held mainly by Poudret, it must be examined for each and every party separately whether it had in fact concluded an arbitration agreement in the required form, that is, in writing in the sense of Article 178(1) of the PILA (Poudret, L’extension de la clause d’arbitrage: approches française et suisse, in: Journal du droit international 1995, p. 893 et seq. p. 904). According to Poudret, the intention of any and all parties to enter into an arbitration agreement must be expressed in one or several documents. Poudret also holds that only in exceptional circumstances constituting an abuse of rights, is deviation from the form requirement set out in Article 178(1) of the PILA acceptable. In such cases, Poudret argues that the documents would have to be construed, taking into account all circumstances, to determine whether all parties wished the nonsignatory party to be bound by the arbitration agreement. According to another and more liberal view, held primarily by Blessing, the form requirement set out in Article 178(1) of the PILA only refers to the mere existence of a validly signed arbitration agreement (Blessing, Introduction to Arbitration - Swiss and International Perspectives, Basel 1999, N 504). Blessing holds that the extension of an arbitration agreement to a third party is in fact not a form issue of Article 178(1) of the PILA, but rather of Article 178(2) of the PILA, in relation to the scope of an existing and validly executed arbitration agreement. Therefore, according to Blessing, once an arbitration clause exists, its scope and reach have to be determined according to Article 178(2) of the PILA, as a matter of proper contract construction and interpretation, in order to find out if the arbitration agreement was meant to also include a non-signatory third party.

Landmark decision of the Federal Supreme Court In its landmark decision on 16 October 2003, the Swiss Federal Supreme Court declined Poudret’s formalistic view, and held that its practice is based on a liberal approach to the formal validity of an arbitration agreement (DFT 129 III 727 cons. 5.3.1). In essence, the Federal Supreme Court held that the statutory form requirements of Article 178(1) of the PILA requirement only applies to the arbitration agreement itself, that is, the agreement in which the direct parties to a contract mutually agreed to resolve any disputes by way of arbitration. In line with Blessing, the Federal Supreme Court noted that the question of the subjective scope of an arbitration agreement, that is, the determination of which further parties are bound by the arbitration agreement, is a question of substantive law. While this decision was criticised by legal scholars, the Federal Supreme Court has so far not changed its view. In fact, it is not expected that it will reconsider its practice any time soon, as it clearly took the position that Poudret’s standpoint is formalistic and contrary to the liberal approach favoured by the Federal Supreme Court.

Substantive validity of an arbitration agreement for a third party Under Article 178(2) of the PILA, the arbitration agreement is valid, if it conforms either to the law chosen by the parties, or 10

to the law otherwise governing the dispute, or to Swiss law. No specific hierarchy within these three points of contact exists. In other words, it is sufficient for the arbitration agreement to be valid under any one of the three possible legal regimes mentioned (DFT 129 III 727 cons. 5.3.2, confirmed in DFT of 19 August 2008 (4A.128/2008 = DFT 134 III 565) cons. 3.2.). Under Article 178(2) of the PILA, the contractual validity of an arbitral agreement other than its form is therefore determined by the most favourable law (favor validitatis) (Berger/Kellerhals, Internationale und interne Schiedsgerichtsbarkeit in der Schweiz, Bern 2006, N 521). If Swiss law is applied, the extension of the arbitration agreement to a non-signatory third party is generally affirmed in legal doctrine if such third party, in relation to the conclusion or performance of the main contract, acted in a way in which the opposite side, in good faith, could understand that the third party wished to join and accept the main contract as well as the arbitration agreement (Berger/Kellerhals, op. cit., N 521 et seq.). According to Berger/Kellerhals, an extension of an arbitration agreement is always assumed if the third party, in place of or in addition to a contracting partner, creates the appearance to be part of the main contract, including the arbitration agreement. In the matter that formed the basis of DFT 129 III 727, for example, corporation Z had entered into a work contract with corporations Y and X for the purpose of establishing a development area. This contract included an arbitration clause, and provided for an arbitral tribunal with a seat in Geneva to resolve disputes arising under it. Lebanese substantive law was applicable. Z then initiated arbitration proceedings against corporations Y and X as well as against A, seeking payment of unpaid bills. The arbitral tribunal affirmed the extension of the arbitration agreement to A, who had not signed the work contract. For the arbitral tribunal, the decisive factor was that A deliberately and knowingly interfered, not only in the management of corporations X and Y, but also in the performance of the work contract. Further, according to the arbitral tribunal, it was evident that corporations X and Y were pure vehicles used for A’s personal activities. Given these facts, the arbitral tribunal concluded that because of his actions, A clearly manifested his intention to accede to the main contract as well as the arbitration clause. The Federal Supreme Court in this case could not decide whether the arbitral tribunal was correct, as A in his appeal failed to sufficiently plead this issue. However, in a recent decision (DFT 134 III 565 Cons. 3.2), the Federal Supreme Court noted that under Swiss law, the arbitration clause can in fact be extended to third parties, in cases of substantial interference by the third party in the conclusion or performace of the contract. In another case dealt with by the Federal Supreme Court (DFT of 18 December 2001 (4P.126/2001)), Permstroyinter (a Russian corporation) and MIR (a Turkish corporation) concluded a work contract with an arbitration clause that provided for arbitration in Geneva. MIR subsequently initiated arbitral proceedings against Ural-Tais (Permstroyinter’s successor) as well as Permnefteorgsintez which, undisputedly, at no point in time was a party to the work contract. The Federal Supreme Court considered that under Article 178(2) of the PILA, an arbitration clause is valid and binding, if it complies

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As a consequence, it is clear that under Swiss substantive law participation in the performance of a contract may result in an extension of the arbitration agreement to a third party. However, in order to honour the principle of relativity of contractual obligations, the requirements for such an extension are rather strict (DFT of 19 August 2008 (4A.128/2008 = DFT 134 III 565) cons. 4.1.2).

separate legal personality would constitute an abuse of rights. As Girsberger/Voser rightly note, in such a case, an existing arbitration agreement is not extended to an additional third party, but rather will a party that has executed the arbitration agreement be replaced by another, for example, by a shareholder (Girsberger/ Voser, International Arbitration in Switzerland, Zürich 2008, p. 80). However, as the piercing of the corporate veil doctrine is often mentioned in the context of the extension of an arbitration agreement, there follows a brief summary of the legal doctrine and jurisprudence under Swiss law. According to undisputed doctrine and case law, in case of a piercing of the corporate veil, the extension of an arbitration agreement to a third party is generally accepted as a case of abusive use of rights (DFT 120 II 155 Cons. 6c/cc; Berger/ Kellerhals, op. cit., N 528). However, according to a decision of the Federal Supreme Court (DFT of 29 January 1996, published in ASA Bulletin 3/1996, p. 496 et seq.) and subsequent decisions, it is not totally clear in which cases the separate legal personality is to be considered and in which cases it is not. In its ruling of 29 January 1996, the Federal Supreme Court distinguished between two different categories relating to the piercing of the corporate veil doctrine. 

Group of companies doctrine not applicable In French jurisprudence, the so-called Group of Companies doctrine is sometimes applied. In Switzerland, however, this doctrine has never been explicitly accepted as such, neither in legal writing nor in jurisprudence. According to a decision of the Federal Supreme Court of 29 January 1996 (DFT of 29 January 1996 published in ASA Bulletin 3/1996, p. 496 et seq. (cons. 7, p. 506)), an extension of an arbitration agreement must not be assumed lightly, and only under very specific circumstances. According to the Federal Supreme Court, such exceptional circumstances could be assumed where a party created a legal appearance that would justify the protection of reliance of the other party. Therefore, most authors (Berger/Kellerhals, op. cit., N 531) conclude that under Swiss law, extension of the arbitration agreement to affiliated companies should and can be assessed exclusively according to the general principles of contract law, in cases of interference by non-contracting parties in the conclusion and/or performance of the contract, or according to the rules relating to piercing of the corporate veil.

Piercing the corporate veil Prima facie, another form of extension of an arbitration agreement to a non-signatory third party exists in situations where application of piercing of the corporate veil doctrine is justified. Generally, such application is justified in Swiss law when a reliance on the



In case of quasi-piercing of corporate veil situations, the separate legal entity is not disregarded and the contractual obligation is not transferred from one party to another. In contrast, the legal obligations are cumulated, that is, both (for example, parent and subsidiary company) may be held responsible. According to the earlier decisions of the Federal Supreme Court, situations in which, for example, assets of the parent and subsidiary companies are mixed up, are considered to only be of a quasi-piercing the corporate veil nature. Additionally, situations of undercapitalisation would also fall in this category. By contrast in cases of real piercing of the corporate veil, the separate legal entity is disregarded because of a manifest abuse of rights.

According to the Federal Supreme Court, only if a real piercing of the corporate veil situation exists can the arbitration agreement be extended, because in such a case the effects of the contract are shifted from the subsidiary to the parent company, or from a company to its individual shareholder(s). In a more recent decision (DFT of 14 March 2003 (5C.279|2002), cons. 5.1, confirmed in DFT of 28 February 2008 (5A.587|2007) cons. 2) the Federal Supreme Court arguably adapted its position in relation to undercapitalisation and mixing up assets. It held that this did not constitute a quasi-piercing of the corporate veil, but rather was a typical form of piercing of the corporate veil allowing to shift contractual obligations to third parties. Therefore, one could argue that the Federal Supreme Court gave up its practice about the distinction between quasi and real piercing of the corporate veil. However, it must be noted that this decision, unlike the decision of 1996, did not involve a dispute about the extension of an arbitration agreement, but rather an insolvency matter. Further, this decision was subsequently not

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with the substantive requirements of Swiss contract law. In this context, says the Federal Supreme Court, the real intention of the parties involved must first be ascertained. If this is not possible, then the principle of good faith contract interpretation will apply. In the case under review, Permnefteorgsintez had signed documents that concerned the transfer of rights and obligations in connection with the performance of the work contract, as well as the financing of a building to be constructed according to the work contract. In addition, Permnefteorgsintez and Ural-Tais had both represented to owe MIR money for services performed under the work contract. Finally, representatives of Permnefteorgsintez had specifically recognised the existence of the claim as well as the joint and several liability (together with Ural-Tais). On appeal, the Federal Supreme Court upheld the opinion of the arbitral tribunal that Permnefteogsintez’s actions are to be considered as implicit consent to enter into an own commitment to make payments under the work contract. This commitment can be qualified as an assumption of debt. Further, the Federal Supreme Court noted that the arbitral tribunal rightly assumed that Permnefteorgsintez expressed its accession to the arbitration clause, as the documents that confirmed the liability of Permnefteorgsintez explicitly referred to the work contract.

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published in the official bulletin of the Federal Supreme Court decisions. Therefore, it remains unclear whether the Federal Supreme Court would still distinguish between real and quasipiercing of the corporate veil.

Conclusions As a general rule under Swiss law, an arbitration agreement as any other contract, can only bind the parties that originally agreed to it. In practice, however, Swiss case law and doctrine provide for certain exceptions from this rule: 

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In case of participation in the conclusion and/or performance of the contract, extension of the arbitration agreement to a third party may be possible. However, to honour the principle of relativity of contractual obligations, the requirements for such an extension are rather strict. Unlike in French jurisprudence, the so-called Group of Companies doctrine has never been accepted nor played any role in Switzerland.

Contributor details Thomas Müller Homburger T +41 43 222 10 00 F +41 43 222 15 00 E [email protected] W www.homburger.ch Areas of practice/expertise. Thomas Müller joined Homburger as an associate in 1983 and became a partner in 1989. Thomas is Head of Homburger’s Litigation and Arbitration Team. He studied law at the University of Zurich, where he graduated in 1974 and received a doctorate in 1982. He also holds an LLM degree from the University of California in Los Angeles. His practice focuses on litigation and arbitration as well as on attachment of assets and enforcement of judgments, including international legal assistance in civil and criminal matters. Other areas of work include corporate law, particularly joint ventures, international trade and contract law as well as employment law.

In case of a piercing of the corporate veil, the extension of an arbitration agreement to a third party is accepted as under the doctrine of abusive use of rights.

*The author wishes to thank René Leuenberger for his valuable assistance in preparing this article.

Thomas has published several articles on litigation and arbitration matters, including a commentary to Article 6 of the Lugano Convention. He is a co-editor/co-author of the Homburger commentary on the Swiss Statute on Jurisdiction.

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Homburger is a leading Swiss business law firm. Since its establishment in 1957, Homburger has advised and represented Swiss and international corporate clients and individual entrepreneurs on key aspects of business law. We offer our clients expert legal advice, support them in business negotiations, represent them before arbitral tribunals and in court, and protect their interests in civil and administrative proceedings. Homburger AG Weinbergstrasse 56 |58 CH - 8006 Zurich P.O. Box 194|CH - 8042 Zurich Phone + 41 43 222 10 00 Fax + 41 43 222 15 00 lawyers @ homburger.ch www.homburger.ch

Homburger is organized into six practice teams and four working groups, integrating the skills and experience of more than 100 lawyers and tax experts focusing on specific areas. Our practice teams are Litigation | Arbitration, Corporate | M&A, Financial Services, Tax, IP| IT, and Competition. The working groups cover the areas Employment Law, Insolvency | Restructuring, Private Clients, and White Collar Crime | Corporate Compliance. The Homburger Litigation |Arbitration practice group has a team of 22 dedicated professionals who offer a comprehensive range of legal services in connection with international commercial arbitration and ADR in Switzerland and elsewhere (party representation; acting as arbitrator; mediation). In addition, the Homburger Litigation|Arbitration practice team provides the following services – Commercial litigation and related proceedings before Swiss courts (commercial and employment related litigation, including preliminary relief; enforcement; attachment proceedings) – International dispute resolution strategy and planning – Investigation of corporate irregularities, including white collar crime and representation in criminal proceedings – Insolvency matters and related litigation, including directors’ liability – Representation in civil and criminal judicial assistance proceedings – Expert advice and testimony on Swiss law Contacts: – Thomas Müller Tel: +41 43 222 15 06 [email protected]

– Balz Gross Tel: +41 43 222 16 39 [email protected]

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