When does an arbitration agreement bind a non-signatory? Comment on a decision by the Swiss Bundesgericht from June 6 2016[1]
In this decision, the Swiss Supreme Court had to deal with a fundamental question, which touches upon the idea of consent as the core principle for arbitral proceedings: When does an arbitration agreement bind a non-signatory? This comment will address the requirement, under which the court allowed for a third-party application of the agreement, and will deal with the implications such an application has on the concept of consent.
I. Summary of the facts
In 1980, two Aktiengesellschaften (A.G.) – companies limited by shares under Swiss law – D and E concluded a framework contract for the operation of a wastewater treatment facility. The contract included the following Art. 2.4: “D and E guarantee to each other that their named subsidiaries and the agents of their subsidiaries will fulfill all the parties’ obligations under this contract.”[2] It also included an arbitration clause, in which Basel was chosen as the seat of arbitration. The parties chose Swiss arbitral and substantive law. In 1995, D sold its chemicals division to A, another A.G. For this demerger D and A concluded an umbrella agreement that included two provisions, which are relevant to this dispute. The first read that A would assume “all assets and liabilities pertaining to the chemical business of D.” The second read: “Assumption of Guarantees. A. undertakes to assume as per the Closing Date all guarantees, letters of comfort and undertakings of similar nature of A. Affiliates.” In 1996, D and E merged into the B A.G. In 2014, B initiated arbitration against A for claims in connection with the shutdown of the wastewater treatment facility. A argued that the arbitral tribunal did not have jurisdiction, because A was not bound by the arbitration agreement. In an interim decision, the tribunal rejected those arguments and confirmed its jurisdiction. This interim decision was the matter in dispute before the Bundesgericht.
II. Decision
The Bundesgericht had to decide whether A and B were bound by the arbitration agreement that was only signed by D and E – which had merged into B. It applied the national arbitration law of the ZPO[3] as opposed to its international arbitration law, because of the domestic character of the dispute and the express choice of the parties. The court started by acknowledging that, generally, only signatories to an arbitration agreement are bound by it because of privity of contracts. It then cited some exceptions from that rule, namely assignments of claims, assumptions of debts and obligations, and transfers of contracts. The Bundesgericht applied the doctrine of business takeover as found in OR[4] Art. 181. Pursuant to that rule, a party who takes over a business assumes as the previous owner’s obligations in respect of the business once the obligee is informed of the takeover. The previous owner, however, is still jointly liable for the obligations for three years. According to the court, the arbitration agreement is transferred as an ancillary right to the obligations in accordance with OR Art. 178 para. 1.
Next, the court interpreted Art. 2.4 of the framework agreement. The arbitral tribunal had held that this provision included at least a “quasi-guarantee” by which the parent companies – D and E – guaranteed that each subsidiary of theirs would fulfil its obligation. A argued that the provision was only a non-binding “Patronatserklärung”, or letter of comfort. However, the Bundesgericht agreed with the arbitral tribunal: the wording of the provision (“guarantee to each other”) and position in the contract allowed the conclusion that Art. 2.4 actually created a binding obligation. A also argued that the tribunal did not qualify the agreement more precisely but only called it a “quasi-guarantee”. But the court held that the specificities of the obligations are a matter of the substance of the claim. For the matter of jurisdiction, it is only relevant that there is in fact an obligation that was transferred.
The court turned on to address the question whether the tribunal had correctly found that the chemical branch was taken over by A, as required by OR Art. 181 para. 1. The defendant challenged this finding as obviously contrary to the record and therefore arbitrary. The court held that the defendant had not shown that the findings were in fact clearly wrong. The arbitral tribunal had held that the obligation, and with it the arbitration agreement as an ancillary right, was transferred to A on the basis of the first provision of the umbrella agreement. A argued that this was a false interpretation of the umbrella agreement as it contradicted the second provision of the umbrella agreement, Art. 9.1. The Bundesgericht agreed with the tribunal: Art. 9.1. did in fact only address the transfer of guarantees of subsidiaries, but the tribunal had not relied on Art. 9.1 for the transfer, but on first provision. They did not contradict each other.
The Bundesgericht agreed with the tribunal’s interpretation of both the framework agreement as well as the umbrella agreement. Consequently, it concluded that both the obligation and the arbitration agreement as ancillary rights had been transferred to A. A was therefore bound by the agreement and the tribunal had jurisdiction. The interim decision was upheld.
III. The dogmatic approach
The application of an arbitration agreement to a non-signatory is a common issue in arbitral proceedings. Various legal doctrines have been used to give effect to arbitration agreements as to non-signatories.[5] The Bundesgericht applied a sub-category of the doctrine of transfer in Swiss law: the business takeover. Swiss law usually adheres to the widely-accepted principle[6] that an obligation can only be completely assumed by a new obligor, if the obligee agrees to it.[7] OR Art. 181 para. 1 provides an exception to that rule, as it allows the transfer without the obligees approval. But since the old obligor remains liable for three years, the obligee is sufficiently protected. According to the court, an arbitration agreement is transferred with the obligation by virtue of OR Art. 181 para. 3 and Art. 178 para. 1. OR Art. 178 para. 1 ensures that the obligee’s ancillary rights bind the new obligor after the transfer.[8] By designating the arbitration agreement as an ancillary right, the court agreed with the prevailing opinion in Swiss scholarly literature.[9]
This dogmatic approach to the transfer of the arbitration agreement is more comparable to an assignment than to a regular transfer of obligation. In assignment, the natural party to an arbitration is substituted without the approval of the other party, which is not the case for a regular transfer. The policy reason for binding assignees to an arbitration agreement is to prevent assignors from circumventing arbitration agreements by assigning the underlying claim.[10] This does not apply here, as the old obligor remains liable and could therefore still be sued under the agreement. But OR Art. 178 is based on the concept of an unchanged obligation,[11] hence it requires that the new obligor must take the obligation as is, in spite of the old obligor’s remaining liability. Thus, the court did not consider the transfer of the arbitration agreement separate from the obligation. It implicitly applied the following two-pronged test: First, was there was an obligation that was subject to an arbitration agreement? Second, was this obligation effectively transferred?
It tackled the first prong of the test by interpreting Art. 2.4 of the framework agreement. Here, it determined whether this provision actually created an obligation or merely constituted a letter of comfort. Given the wording of the provision, the court’s conclusion is the correct one. The court also correctly decided that it is unnecessary to consider the details of the obligation to determine jurisdiction. The obligation is the “vessel” that transports the arbitration agreement as an ancillary right to the newly bound party. Therefore, its mere existence is decisive for the jurisdictional questions. Naturally, a transferred obligation can only bind a new party to an arbitration agreement, if that agreement actually covers it. The court did not address this, but since arbitration agreements are interpreted broadly,[12] this is not a problem.
For the second prong of the test, the court needed to determine whether the requirement for a successful transfer of obligations under OR Art. 181 para. 1 were fulfilled. Here, the Bundesgericht accepted to the fact-finding of the arbitral tribunal, which it considered not obviously contrary to the record. It also interpreted the umbrella agreement to see whether it constituted a takeover contract. Its interpretation of the relevant provisions by the court was convincing.
IV. The dogma of consent
The binding effect of an arbitration agreement in non-signatories seems to be at odds with what is considered to be the most fundamental principle of arbitration: arbitration is based on the consent of the parties to the arbitration.[13] How can A be bound by an arbitration agreement, if it never expressly agreed to it? This case deals with an assumption of claim without involvement of the debtor, which is effectively the counterpart to an assignment. For assignments, scholars argue that assignees are presumptively bound by an arbitration agreement over the assigned claim.[14] Where the parties to the assignment agreement make a different arrangement, the presumption could be rebutted.[15] So, what if A and D had included an “anti—arbitration” agreement in their umbrella agreement, declaring that all claims should be assumed without related arbitration agreements? In this scenario, A had decidedly not consented to participate in arbitration. According to this opinion, A would not be bound by the arbitration agreement.
In Swiss law, such an agreement would directly contradict the function OR Art. 181 para. 3 and Art. 178 para. 1 of guaranteeing that the obligee is not negatively affected by the transfer[16]. In relying on this provision, the court did not base the transfer of the arbitration agreement on a presumed consent. Instead it implied that an arbitration agreement is inseparable from the main obligation in matters of transfer.[17] Does this contradict the separability doctrine[18]? The original purpose of this doctrine is to ensure the survival of an arbitration agreement in case of the invalidity of the main contract.[19] The doctrine does not contradict the notion that there is an inherent connection between an arbitration agreement and the main contract. Such a connection is easily proven: An arbitration agreement, which does not refer to a defined legal relationship such as a contract, is no arbitration agreement at all.[20] So as to preserve the usefulness of an arbitration agreement, any (potential) dispute, which at one point is subject to an arbitration clause, should remain so until the agreement is revoked.
Applying comparable German rules on business takeover the Kammergericht even decided that a new business owner is bound by an arbitration agreement, even if the takeover is only factual and not contractual.[21] The general rule should be that every time an obligation or claim is transferred without the other party’s consent, the new party must be bound by a related arbitration agreement. An “anti-arbitration” agreement would be a contract at the expense of a third party, specifically the other party to the arbitration agreement. Agency aside, nobody has the power to dispose of another person’s rights. Doctrines of assignment and, to a lesser degree, transfer give people the right to dispose over their position as party to a contract. But other aspects of the contract are not up to disposition by third parties. For example, A and D could not have agreed to repeal Art. 2.4. of the framework agreement as a whole. Likewise, A and D could not dispose of E’s right to have the claim settled in arbitration.
This shows that consent to arbitrate cannot play a role in any case of succession of claims or obligations, where the other party to the legal relationship does not have to approve. The binding effect much rather comes from the fact that the new party does not have the right to dispose over the agreement.
V. Conclusion
The Bundesgericht was confronted with an uncommon situation for the application of arbitration agreements to non-signatories, but solved it convincingly. The decision allows the reader to gain insight into the dogmatic structure of such applications and invites the reader to ponder their implications: in all cases of succession, where the other party to the obligation does not need to approve, the absence of the power to dispose explains the binding effect of the arbitration agreement to the new party better than consent.
Maximilian Schlueter
The author is a Class of 2017 LL.M. student in the International Business Regulation, Litigation and Arbitration program at the New York University School of Law. He graduated in law from the University of Bayreuth (Germany) in 2014 and completed his First State Examination in the same year. He finished his doctoral studies at the same university in January 2017.
[1] Bundesgericht [BG] [Federal Supreme Court of Switzerland], Jun. 6, 2016, http://relevancy.bger.ch/php/aza/http/index.php?lang=de&type=show_document&highlight_docid=aza://06-06-2016-4A_82-2016 (Ch.).
[2] „D und E garantieren sich gegenseitig, dass ihre genannten Tochtergesellschaften und deren Vertreter sämtliche ihnen in diesem Vertrag zugedachten Pflichten erfüllen,“ translation by the author.
[3] Zivilprozessordnung [ZPO] [Code of Civil Procedure], (Ch.).
[4] Obligationenrecht [OR] [Law on Obligations], (Ch.).
[5] These include among others theories of agency, alter ego status (or veil piercing), “group of companies,” estoppel, guarantor relations, third party beneficiary rights, succession, assignment, assumption and other doctrinal bases, Gary Born, International Commercial Arbitration 1405 (2nd ed. 2014).
[6] See e.g., Art. 9.2.3 of the UNIDROIT Principles on International Commercial Contracts.
[7] See OR Art. 176 para. 2.
[8] Cf. Peter Reetz & Christof Burri, CHK – Handkommentar zum Schweizer Privatrecht – Obligationenrecht, Allgemeine Bestimmungen Art. 178 ¶ 1 (Andreas Furrer & Anton K. Schnyder eds., 2nd ed. 2012); Eugen Spirig, Zürcher Kommentar – Art. 175-183 OR. Die Abtretung von Forderungen und die Schuldübernahme Art. 178 ¶ 8 (Peter Gauch ed., 3rd ed., 1993).
[9] See e.g. Peter Reetz & Christof Burri, supra note 8, at Art. 178 ¶ 4; Eugen Spirig, supra note 8, at Art. 178 ¶ 46.
[10] Cf. Konstadinos Massuras, Die Dogmatische Struktur der Mehrparteienschiedsgerichtsbarkeit 119-120 (1998).
[11] Eugen Spürig, supra note 8, at Art. 178 ¶ 2.
[12] See Pierre A. Karrer & Peter A. Straub, Practitioner’s Handbook on International Commercial Arbitration ¶ 12.20-12.21 (Frank-Bernd Weigand ed., 2nd ed., 2009) for Switzerland; cf. Gary Born, supra note 5, at 1325 in general.
[13] E.g. Nigel Blackaby et al., Redfern and Hunter on International Arbitration, ¶ 2.01 (6th ed. 2015); but see Gary Born, supra note 5, at 1417, for references to nonconsensual theories for binding non-signatories.
[14] Cf. Gary Born, supra note 5, at 1467.
[15] Id.
[16] See Eugen Spirig, supra note at 8, at Art. 178 ¶ 3.
[17] This is comparable with the approaches of other courts in civil law jurisdictions on matters of assignment, see Bernard Hanotiau, Consent to Arbitration: Do We Share a Common Vision?, 27 Arb. Int’l 541-42 (2011).
[18] For Swiss law cf. Zivilprozessordnung [ZPO] [Code of Civil procedure], Art. 357 para. 2 [Ch.].
[19] See Nigel Blackaby et al., supra note 13, at ¶ 2.101.
[20] Cf. Nigel Blackaby et al., supra note 13, at ¶ 2.25-2.28.
[21] Kammergericht [Court of Appeal in Berlin], Aug. 13, 2015, 20 Sch 9/14, http://www.gerichtsentscheidungen.berlin-brandenburg.de/, paras. 46-53 (Ger.).