Switzerland: Can A Third-Party Beneficiary Avail Itself From The Arbitration Clause Contained In The Contract Between The Promissor And The Promissee?

Last Updated: 1 November 2011
Article by Frank Spoorenberg and Isabelle Fellrath

Introduction

With respect to arbitration agreements, the Swiss Supreme Court has constantly applied restrictively the formal requirement of the written consent to arbitrate (Private International Law Act ("PILA"), Art. 1781) whilst favouring an extensive construction of the scope of such consent, sometime2 in derogation to the relativity of contractual obligations3. The Swiss Supreme Court recently reaffirmed this practice. It upheld the extension of an arbitration clause agreed in the context of a complex restructuring scheme, to one of the companies benefitting from such restructuring, notwithstanding this company not being formally a party to and signatory of the set of agreements governing the restructuring4.

Facts

The case arose from the reorganisation of a family-owned group of companies into two separate factions further to a dispute among the family members (the "Partners"). The reorganization was carried out in part through shares and equities reallocation, and in part through share capital increase/reduction. The various transfers occurred either directly at the Partners level, or indirectly at the level of and amongst the companies controlled by them. The reorganization was governed by two main agreements concluded by and between the Partners exclusively, namely a Memorandum of Agreement and Memorandum of Replication (the "Agreements"), both of which contained a similar arbitration clause.

A dispute occurred when one of the Partners, A.X., declined to take part in the implementation of the Agreements following an adverse arbitral ruling in a prior dispute opposing him to the other Partners. In particular, A.X. refused to consent to the increase in the share capital of V.X. BV, one of the companies controlled by the Partners and to release his own shares of V.X. BV, as per the terms of the Agreements. Consequently, the other Partners and V.X. BV filed for arbitration relying on the arbitration clause contained in the Agreements, seeking an arbitral award condemning A.X. to consent to the increase in the share capital of V.X. BV and to release his own shares of that same company. The arbitral tribunal admitted its jurisdiction and V.X. BV's locus standi, and granted the relief sought. A.X. challenged the award before the Swiss Supreme Court, among others on the ground of lack of arbitral jurisdiction (PILA Art. 190(2) let. b).

Decision

The Swiss Supreme Court reserved judgment on the admissibility of the challenge for lack of jurisdiction. It considered that the questions as to whether prayers for relief may be taken in favor of a third-party beneficiary, was not merely a matter of jurisdiction of the arbitral tribunal, but that it pertained to the merit of the case5. Even assuming with A.X. that V.X. BV's involvement in the arbitration proceeding had so fundamentally biased the whole process that it justified the annulment of the final award, the Swiss Supreme Court upheld the arbitral tribunal's view that the Agreements provided V.X. BV with rights which the latter was entitled to enforce (perfect third-party beneficiary contracts as per Swiss Obligations Code ("CO"), Art. 112(2)). Consequently, for the Swiss judges, A.X. could not, in good faith, object to the beneficiary of such contractual commitments enforcing its rights through the same dispute resolution mechanism agreed upon by the main parties to the contract: "[...] one fails to see on which ground the appellant, who signed the agreements containing the arbitration clause, could question the right of the third party beneficiary to claim the prerogative derived from the agreements following the same procedural mechanism as that agreed upon by itself and the other contracting parties to resolve the disputes that may arise therefrom, namely arbitration"6. The Court further recalled its constant practice whereby, in the case of a so-called perfect third party undertaking (CO Art. 112(2)), failing the parties' agreement to the contrary, "the beneficiary [...] is vested, as debtor (or obligee), with a claim to all the right of prevalence and accessory rights related thereto, including the arbitration clause [...]"7. The challenge was thus dismissed and the award confirmed.

Comments

This case resolves only part of the question of the extension of the arbitration clause contained in a third-party beneficiary contract to the beneficiary: this extension should be admitted when the third-party beneficiary invokes (hence expresses its consent to) the arbitration clause.

The wider question of the automatic extension of the arbitration clause, regardless of the third party's express consent thereto, remains, however, controversial: Some authors endorse the theory of the automatic extension as per law8, whilst other consider that the third party's further consent is required9. A third category of scholars altogether questions whether an arbitration clause can be the object of a third party undertaking10. The Swiss Supreme Court left that question undecided at this stage11.

Footnotes

1 For a recent reminder of the prevailing practice, see decision 4A_128/2008, of August 19, 2008; such written form does not require the parties' signature.

2 See for instance decision 4A_128/2008 (subjective scope), and 4A_452/2007, of February 29, 2008 (material scope) and references.

3 Zuberbühler, Non-Signatories and the Consensus to Arbitrate, Bull. ASA, 2008.18 and reference.

4 Decision 4A_44/2011, of April 2011, in the matter X v. B.X, C.X., D.X., and V.X. BV. The full text is available, in French, at www.bger.ch/fr/index/juridiction/jurisdiction-inherit-template/jurisdiction-recht/jurisdiction-recht-urteile2000.htm.

5 Ground 2.3.

6 Ground 2.4.1 medium part (our translation).

7 Ground 2.4.1, last part (our translation).

8 Schwab/Walter, Schiedsgerichtsbarkeit, 7th edn 2005, n° 36 ad chap. 7; Lachmann, Handbuch für die Schiedsgerichtspraxis, 3rd edn 2008, n° 502 p. 141; Rüede/Hadenfeldt, Schweizerisches Schiedsgerichtsrecht, 2nd edn 1993, p. 81; concurring subject to the third party beneficiary having accepted : Poudret/Besson, Comparative Law of International Arbitration, 2nd edn 2007, n° 289; referred in ground 2.4.1.

9 See e.g. Fouchard/Gaillard/Goldman, Traité de l'arbitrage commercial international, n° 498 p. 298; Wenger/Müller, in Internationales Privatrecht, 2nd edn 2007, n° 66 ad art. 178 PILA; concurring Kaufmann-Kohler/Rigozzi, Arbitrage international, 2nd edn 2010, p. 146 note 172; referred in ground 2.4.1.

10 Berger/Kellerhals, International and Domestic Arbitration in Switzerland, 2nd edn 2010, n° 455 and 514; referred in ground 2.4.1.

11 Ground 2.4.1, first part.

For further information on this topic please contact Frank Spoorenberg or Isabelle Fellrath at Tavernier Tschanz by telephone (+41 22 704 3700), fax (+41 22 704 3777) or email (spoorenberg@taverniertschanz.com or fellrath@taverniertschanz.com) .

www.taverniertschanz.com

The content of this article does not constitute legal advice and should not be relied on in that way. Specific advice should be sought about your specific circumstances.

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