Facts
In April 2003, Swedish citizen A, residing in Italy and BVI registered Corporation Y entered into a sale and transfer agreement pertaining to the company X (the "Sale Agreement"). Swedish citizen B, residing in Italy and majority shareholder of Corporation Y acted in the name and on behalf of Corporation Y throughout the transaction discussions. The Sale Agreement provided for arbitration pursuant to the ICC Rules in Switzerland, and a choice of law provision in favor of Swedish law.
In March 2007, A initiated an arbitration proceeding in Sweden against Corporation Y for the payment of the outstanding purchase price agreed in the Sale Agreement. Both Corporation Y and B failed to "accept" (entgegennehmen) the Notice of Arbitration, resulting in the immediate termination of the Swedish arbitration proceeding. Corporation Y was liquidated without A's knowledge at an unspecified time prior to the filing for arbitration.
Thereafter, B filed a negative declaratory action before the judicial authorities in Sweden for the acknowledgement of the non-binding character of the Sale Agreement on B.
Following the extinction of the arbitration proceeding in Sweden, A initiated judicial proceedings in Switzerland against B for the payment of the outstanding purchase price as per the Sale Agreement. A contended that B had purportedly induced Corporation Y's economic disintegration in order to foil any arbitration proceeding brought against this company. Hence, A further contended that B should be held liable for Corporation Y's outstanding liabilities under the Sale Agreement. B objected the jurisdiction of the Swiss judicial authorities relying on the arbitration clause contained in the Sale Agreement.
The cantonal courts sustained B's jurisdictional objection. In a nutshell, they found that although not a signatory of the Sale Agreement, B was bound therewith based on the principle of piercing the corporate veil. Thus, the courts denied jurisdiction.
A sought the annulment of the cantonal decisions before the Swiss Supreme Court.
Decision
The Supreme Court, and previously the cantonal courts, addressed the jurisdictional objection exclusively from the perspective of the Swiss Private International Law Act ("PILA") Article 7. In so doing, the courts followed the well established albeit not undisputed principle whereby a positive conflict of jurisdiction between a judicial authority and an arbitral jurisdiction based, respectively seated in the same jurisdiction (in the instant case: Switzerland), ought to be decided with reference to domestic law and not in application of the New York Convention of June 10, 1958 on the Recognition and Enforcement of Foreign Arbitral Awards Article 2 par. 31.
PILA Article 7 provides, in substance, that Swiss Courts shall deny jurisdiction if an arbitration agreement exists, except in very limited instances2. Therefore, based on PILA Article 7, the Supreme Court had to decide whether:
- an arbitration agreement existed (in that case, as a rule, the lower courts should have denied jurisdiction in favor of arbitration (below (a)), and, if yes,
- conditions for a disregard of the arbitration agreement as provided for by PILA Art. 7 were met so that the lower courts should not have denied jurisdiction (below (b)).
(a) Did The Parties Enter Into An Arbitration Agreement With Respect To An Arbitrable Dispute?
On the issue of the existence of an arbitration agreement binding on both A and B, the Court confirmed its now well established practice whereby, under certain circumstances, the corporate veil may be pierced (Durchgriff) and contractual agreements extended to members of a same group of companies – or indeed to a company's majority shareholder – among others when the use of the corporate structure is constitutive of an abuse of rights. Such practice applies also to arbitration agreements.
The Supreme Court concurred with the lower courts' finding that, in the instant case, the arbitration clause contained in the Sale Agreement was binding on B in application of the piercing the corporate veil principle regardless of whether A had concluded the Sale Agreement with B or Corporation Y.
The Supreme Court, alongside the lower instances, denied any contradiction in B's filing of a negative declaratory action before the judicial authorities in Sweden for the acknowledgment of the non binding character of the Sale Agreement on the one hand, and B's invoking the arbitration agreement to object to the jurisdiction of the Swiss courts on the other hand. The Court indeed pointed out that no party should be expected to invoke the piercing the corporate veil principle to his own detriment. However, the Supreme Court found some contradiction in A's relying on the reversed principle of piercing the corporate veil on the merits to hold B liable for Corporation Y's outstanding liabilities under the Sale Agreement, whilst denying the application of such principle with respect to the arbitration clause stipulated therein.
Therefore, the Supreme Court found that there was an arbitration agreement binding upon B. The question then was whether this arbitration agreement should have been disregarded for one of the reasons set forth in PILA Article 7 (see below (b)).
(b) Is The Arbitration Agreement Null And Void, Inoperative Or Incapable Of Being Performed / Or Is There An Impossibility To Appoint The Arbitral Tribunal For Reasons That Are Obviously Attributable To The Defendant In The Arbitration (PILA Art. 7 lit b and c)?
The Supreme Court concurred with the finding of the lower instances that, as a matter of principle, the extinction of the Swedish arbitration proceeding filed by A exclusively against Corporation Y did not, as such, entail the caducity of the arbitration agreement or in any way hampered the appointment of an arbitration tribunal, because B had not formally been a party to the Swedish arbitration proceeding.
However, the Supreme Court considered, against the lower courts, that A's allegations based on PILA Article 7 lit b and c could not be dismissed outright on this sole basis without any further investigation into the effective role played by B in causing the extinction of the Swedish arbitration proceeding. In doing so, the Supreme Court implied that the piercing the corporate veil principle should be resorted to by courts not only when defining the subjective scope of an arbitration agreement (see above (a)) but also when assessing whether or not such agreement has become extinct or the appointment of the arbitration tribunal impossible due to circumstances imputable to the defendant (PILA Art. 7 lit b and c).
Therefore, the Supreme Court annulled in part the lower courts' decisions and referred the matter back to the lower courts for a full investigation into B's alleged behavior in the Swedish arbitral proceeding from the perspective of PILA Article 7 lit b and c.
Commentary
There is no great innovation in the Supreme Court's finding that the piercing the corporate veil principle could apply to determine the subjective scope of an arbitration agreement in Switzerland, in particular whether the agreement could be extended to non signatories of the arbitration clause. This principle is now well enshrined in arbitration practice in Switzerland, albeit applied with all great caution (see for instance unpublished decision 4P.198/2005 of October 31, 2005, in the matter X. AS Turquie c/ Y. Corp. Etats Unis and Schiedsgericht der Zürcher Handelskammer, ground. 2.1 and references).
Of particular interest, however, is the Supreme Court's reliance on the piercing the corporate veil principle also in order to take into consideration the conduct of the non signatory in another proceeding when determining whether the extended arbitration agreement should be disregarded under PILA Article 7.
Decision 4A_160/2009 of the Swiss Supreme Court in the matter A v B The full text of the decision, which will not be published in the official reports of the Swiss Supreme Court's decisions, is available in its original (German) language at www.bger.ch/fr/index/juridiction/jurisdiction-inherit-template/jurisdiction- recht/jurisdiction-recht-urteile2000.htm
Footnotes
1. See in particular ATF 122 III 139 ground 2; A. J. van den Berg, The New York Arbitration Convention of 1958 : towards a uniform judicial interpretation, 1981, pp. 61-63.
2. PILA Article 7 provides in its parts relevant for the present case, that "If the parties have entered into an arbitration agreement with respect to an arbitrable dispute, any Swiss Court before which such dispute is brought shall deny jurisdiction unless [...] b. the court finds that the arbitration agreement is null and void, inoperative or incapable of being performed; or c. the arbitral tribunal cannot be appointed for reasons that are obviously attributable to the defendant in the arbitration."
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.
