Extension of arbitration clause to non-signatories - Defective arbitration clause

Case information
December 5, 2008
4A_376/2008
Interest to foreign readers: 
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Very interesting
Topics: 
Arbitration clause
Original language: 
Italian
Published: 
27 ASA Bull 745 (2009)
also see 3 SwissIntArbRep 157 (2009)
Arbitrator (s): 

Parties

Appellant: 
Respondent: 

Counsel

Appellant: 
Respondent: 
Introductory note: 

The opinion is quite interesting, as you will see. For one thing, the appeal was granted in part, which does not happen very often and caused it to be reported on the web site of the Global Arbitration Review on April 22nd (see enclosed article). The case involved whether or not a sole arbitrator sitting in Switzerland had jurisdiction on three parties not having formally signed the arbitration clause, in view of an other closely related contract signed the same day. The arbitrator found that he did not and the Federal Tribunal reversed, taking once again a fairly liberal view – rightly in my opinion – as to the possibility of extending an arbitration clause to a non signatory. See § 8 to § 8.6 on pages 13 to 18 if you are interested.

Also, the arbitrator found that a pathological clause referring the parties to “the Arbitration Court of the International Chamber of Commerce of Zurich in Lugano”  ( ! ! ! ), really meant ICC arbitration in Zurich. The Federal Tribunal rightly upheld the arbitrator in this respect and interestingly, the Court referred to the (relatively) new Swiss Rules to justify its reasoning. See § 4 to § 7.4 on pages 6 to 14 for that part of the decision.

Translation: 

4A_376/20081

Judgement of December 5, 2008

 

First Civil Law Court

 

Federal Judge CORBOZ, Presiding,

Federal Judge KLETT (Mrs),

Federal Judge ROTTENBERG LIATOWITSCH (Mrs),

Federal Judge KOLLY,

Federal Judge KISS (Mrs),

Clerk of the Court: GIANINAZZI.

 

A.________,

Appellant,

Represented by Mr Filippo SOLARI

 

v.

 

B.________ Ltd.,

Respondent,

Represented by Mr Werner THELEN

 

 

Facts:

 

A.

A.a On March 12, 2006, A.________ - as Buyer2 - entered into a contract (“the Sales Contract”) with C.________ Ltd., incorporated in England - as Seller3 - and B.________, a Canadian resident, described as Director and Creditor4, pursuant to which C.________ Ltd. as trustee for D.________ and as owner of a 100 % of the shares of Company B.________ Ltd., undertook to transfer the ownership of all the aforesaid shares to A.________.

 

Art. 12 of the Contract contained the following arbitration clause:

“In case of any disputes deriving from the Sales Contract, the parties agree that it should be competence of the Arbitration Court of the International Chamber of Commerce of Zurich in Lugano. The language of arbitration will be Italian. The law applied will be Swiss law.5

 

A.b The same day (or on June 25, 2006, the date being not yet fully ascertained) the company B.________ Ltd., a company governed by the law of the United Arab Emirates – as employer – and A.________, domiciled in Italy – as future Managing Director6 – executed an Employment Contract for the job of Managing Director7 (hereafter “Employment Contract”).

 

Art. 5 of the latter contract contains the following arbitration clause:

“In case of any disputes deriving from the Contract, the parties agree that it should be competence of the Arbitration Court of the International Chamber of Commerce of Zurich in Lugano. The language of arbitration will be Italian. The law applied will be Swiss law.8

 

B.

Claiming that A.________ would have breached the obligations undertaken in the Employment Contract – using funds and equipment of B.________ Ltd. in his own interest and that of his company whilst blocking access by B.________ to the current account of B.________ Ltd. – B.________ Ltd. filed with the Court of Arbitration of the International Chamber of Commerce in Paris (hereafter “ICC Court of Arbitration”) on April 27, 2007 a document entitled “Request for the execution of an arbitral proceeding according to ICC Rules of Arbitration” seeking that A.________ be ordered (i) to render accounts of his activity as to all the commercial transactions undertaken from the execution of the Employment Contract; (ii) to stop his competing activities and (iii) to pay damages.

 

B.a A.________ reacted on June 14, 2007, denying jurisdiction; according to A.________ indeed, the arbitration clause did not justify connecting the matter with the ICC Court of Arbitration. Accordingly he sought (i) a finding on the prima facie existence of an arbitration clause within the meaning of Art. 6 (2) of the ICC Rules; (ii) an extension of the time limit to file the answer until the Court decided the matter within the meaning of Art. 6 (2) ICC and, subsidiarily, anappropriate extension; (iii) the extension of the arbitral proceedings to D.________, C.________ Ltd. and to B.________, signatories of the Sales Contract executed the same day as the Employment Contract and closely connected thereto.

 

The ICC Court of Arbitration having admitted jurisdiction prima facie, A.________ submitted an answer to the request for arbitration on August 27, 2007, reiterating both the denial of jurisdiction and the request to extend the arbitral proceedings; on the merits, he denied all the claims of the Claimant and counterclaimed for damages undergone as a consequence of the termination (on his part) of the Employment Contract and the Sales Contract, both unavoidable in view of the contractual breaches of the other party.

 

On October 5, 2007, the ICC Secretariat informed the parties that in its session of October 4, 2007, the ICC Court of Arbitration refused to extend the arbitration and decided to submit the dispute to a sole arbitrator. On October 26, 2007 it appointed Mr E.________ as sole arbitrator.

 

B.b On January 8, 2008, in the preparatory meeting for the arbitration, the parties and the arbitrator signed the Terms of Reference.

 

On January 11, 2008, A.________ filed his brief on the procedural exceptions, reiterating once again the challenge to jurisdiction and the request to extend the arbitral proceedings.

 

For its part, B.________ Ltd., on February 11, 2008 confirmed the jurisdiction of the ICC arbitration and opposed the extension of the arbitral proceedings.

 

In an “interlocutory award on jurisdiction and other procedural issues of June 16, 2008” the sole arbitrator rejected the challenge of jurisdiction by A.________ and found that he had jurisdiction to decide the dispute between the parties on the basis of the Employment Contract. He also found inadmissible, and accordingly rejected, the request for an extension of the arbitral proceedings to D.________, C.________ Ltd. and B.________.

 

C.

In a Civil Law appeal of August 20, 2008, based on Art. 190 (2) (a) and (b) PILA9 A.________ sought a stay and the annulment of the award for lack of jurisdiction of the Arbitral Tribunal. Subsidiarily, and should jurisdiction of the Arbitral Tribunal be admitted, he sought the annulment of the award and the extension of the arbitral proceedings to D.________, C.________ Ltd. and B.________.

 

The request for a stay was granted on August 22, 2008.

 

In its answer of September 10, 2008 B.________ Ltd. submitted that the appeal should be rejected.

 

On the same day, the sole arbitrator indicated that he would not submit any comments as the award was exhaustively reasoned. Holding that all the Appellant’s arguments were already considered in the award, he opined anyway that the Federal Tribunal should reject the appeal.

 

Reasons:

 

1.

The Federal Tribunal pronounces ex officio and with full power of review on its own jurisdiction and as to whether the matter is capable of appeal on each ground claimed (Art. 29 (1) LTF10; ATF 133 III 462 at 2, 629 at 2).

 

2.

In International Arbitration, a Civil Law appeal against arbitral awards is allowed under the requirements of Art. 190 – 192 PILA (Art. 77 (1) LTF).

 

2.1 To appeal an award to the Federal Tribunal the arbitration must be international within the meaning of PILA.

 

According to Art. 176 (1) PILA the provisions of the twelfth chapter of PILA (Art. 176 – 194 PILA), dealing with International Arbitration, apply when the seat of the Arbitral Tribunal is in Switzerland and also when at the time of the arbitration agreement, at least one of the parties was not domiciled or had no habitual residence in Switzerland. Additionally, the parties must not have excluded in writing the application of these provisions, or agreed simultaneously to the exclusive application of cantonal provisions with regard to arbitration (Art. 176 (2) PILA).

 

In this case, the seat of the arbitration is in Lugano – the parties and the arbitrator agree on this – and when the arbitration agreement was entered into, none of the parties had its seat or domicile in Switzerland. Since the parties did not opt out in writing of the provisions contained in chapter 12 PILA, they are applicable to the case at hand.

 

2.2 The appeal procedure is governed by Art. 77 LTF, which at (2) specifically rules out Art. 48 (3), 93 (1) (b), 95 – 98, 103 (2), 105 (2), 106 (1) and 107 (2) LTF (to the extent to which it makes it possible for the Federal Tribunal to decide the merits itself).

 

2.3 The award under appeal is divided in two parts.

 

2.3.1 In the first part, the sole arbitrator rejected the challenge to his jurisdiction raised by the Appellant. This is an interlocutory decision within the meaning of Art. 186 (3) PILA, which may be appealed to the Federal Tribunal on the grounds stated at Art. 190 (2) (a) and (b) PILA (Art. 190 (3) PILA).

 

2.3.2 In the second part, the arbitrator found inadmissible and accordingly rejected the request seeking an extension of the proceedings to the parties. This is a partial decision within the meaning of Art. 91 (b) LTF, as it definitively rules out the participation of the parties to the proceedings (ATF 134 III 379 (1.1) at 382), which may be appealed to the Federal Tribunal on the grounds stated at Art. 190 (2) PILA (ATF 130 III 755 at 1.2).

 

2.4 Both decisions may accordingly be appealed to the Federal Tribunal (Art. 191 (1) LTF), as the parties did not agree on the jurisdiction of the Court at the seat of the arbitration (Art. 191 (2) LTF), neither did they opt out of the appeal (Art. 192 LTF).

 

2.5 Filed timely (Art. 100 (1) LTF) by a party loosing in front of the lower court (Art. 76 (1) (a) LTF) against a decision in a Civil matter with an amount in dispute in excess of CHF 30’000.- (Art. 74 (1) (b) LTF), the matter is capable of appeal.

 

3.

3.1 The Civil Law appeal pursuant to Art. 77 LTF only provides for the annulment of the decision (Art. 77 (2) LTF ruling out Art. 107 (2) LTF). When the dispute concerns jurisdiction, the Federal Tribunal may exceptionally issue a finding of jurisdiction or lack of jurisdiction of the Arbitral Tribunal (ATF 127 III 279 at 1b; 117 II 94 at 4).

 

3.2 Based on Art. 77 (3) LTF, the Federal Tribunal reviews only the grounds for appeal which are raised and developed in the appeal. The requirements for reasons in that provision correspond to those at Art. 106 (2) LTF when a violation of fundamental rights or of cantonal provisions is claimed and accordingly to those of the former public law appeal for violation of constitutional rights according to Art. 90 (1) (b) OG11 (ATF 133 III 638 at 2). Accordingly, the LTF made no changes in this respect (ATF 134 III 186 at 5).

 

3.3 The Federal Tribunal bases its legal reasoning on the facts found by the Arbitral Tribunal (Art. 105 (1) LTF). It may not rectify or supplement the facts ex officio, even when they were found in violation of the law or in a manifestly inaccurate way (see Art. 77 (2) ruling out Art. 105 (2) LTF).

 

4.

The dispute primarily relates to the interpretation of the arbitration clause underwritten by the parties, which states:

“In case of any disputes deriving from the Contract, the parties agree that it should be competence of the Arbitration Court of the International Chamber of Commerce of Zurich in Lugano. The language of arbitration will be Italian. The law applied will be Swiss law.12

In substance, in the award under appeal, after pointing out that the pathological clause needs to be interpreted according to the rules of Swiss law and accordingly on the basis of the principle of trust, the arbitrator was unable to ascertain the true intent of the parties and found that it could be reasonably understood either as stated by the Claimant, namely in favour of the jurisdiction of the International Chamber of Commerce of Paris, or as suggested by the Respondent, namely in favour of the Zurich Chamber of Commerce. Applying by analogy a Zurich decision with regard to a clause derogating from normal jurisdiction for the purposes of Art. 17 of the Lugano Convention, the arbitrator decided that, in similar circumstances, it should be found in favour of the jurisdiction of the arbitral institution chosen by the Claimant. This means that with the filing of the Request for arbitration with the International Chamber of Commerce in Paris, the Claimant put an end to the ambiguity of the clause, definitively determining which would be the institution having jurisdiction to administer the arbitration. Hence the rejection of the jurisdictional challenge raised by the Respondent.

 

5.

In the appeal, the Respondent, as Appellant, claims that the sole arbitrator would have been wrong to assume jurisdiction (Art. 190 (2) (b) PILA).

 

5.1 He opines that an objective interpretation of the arbitration clause governed by Art. 178 PILA should have led the arbitrator to recognise the intent of the parties to submit the arbitration to the Zurich Chamber of Commerce.

 

The term “International” – according to the Appellant – is a mere adjective, which cannot be considered more important in determining the intent of the parties than the geographical mention of Zurich, which “being so precise becomes more significant, recognisable and shared than a reference to the ICC in Paris, completely unexpected and surprising because not stated”. The Appellant underlines that case law quoted in the award concerned clauses in which a place had merely been added to the institution of an International Chamber of Commerce, with such place having to be understood as the seat of the arbitration. In the case at hand, however, the seat of the arbitration is undisputedly in Lugano. In such a case, finding in favour of the jurisdiction of the ICC was tantamount to disregarding the clear indication of Zurich, which obviously was not the seat of the arbitration but the authority charged with administering the arbitration. According to the Appellant, the Federal Tribunal decided in that sense in the decision ATF 129 III 675 (at 2.4 page 682) stating that when a clause designates a nonexistent Tribunal in Zurich, it refers to the Chamber of Commerce in that city.

 

5.2 The Respondent points out, as he did in front of the arbitrator, that the parties always and solely considered the jurisdiction of the International Chamber of Commerce in Paris. The first draft of the Employment Contract indeed contained the following clause:

“With regard to possible controversies relating to the Employment Contract, the parties agree to the jurisdiction of the Arbitral Tribunal of the International Chamber of Commerce in Paris. Local jurisdiction is with the Bolzano branch and the language of the proceedings is Italian.”

Subsequently, according to the Respondent, the city of Bolzano was substituted with Zurich and the place of arbitration was Lugano.

 

6.

When jurisdiction is denied, the Federal Tribunal freely reviews the legal issues, including the preliminary ones, which determine jurisdiction or the lack of jurisdiction of the Arbitral Tribunal. This does not make the Federal Tribunal a court of appeal; in particular, the Federal Tribunal does not have to look into the decision under appeal for such legal reasonings as may justify granting the appeal on the ground of Art. 190 (2) (b) PILA. It behoves the Appellant to present pertinent legal arguments as established by Art. 42 (2) LTF (ATF 134 III 565 at 3.1 with references).

 

7.

In the litigious arbitration clause, the parties agreed to submit the dispute to the “Arbitration Court of the International Chamber of Commerce of Zurich, in Lugano”.

 

However, that arbitral institution does not exist.

 

7.1 According to case law, the impossibility to constitute the arbitral tribunal as agreed by the parties does not necessarily imply the nullity of the arbitration agreement to the extent that a clear intent of the parties to submit the dispute to a private arbitral tribunal emerges therefrom (ATF 130 III 66 at 3.1 page 71). If this is the case, the so called Utilitätsgedanken13 requires an interpretation of the clause in a way that it subsists (ATF 130 III 66 at 3.2 page 71 and following; Wenger/Müller in: Basler Kommentar, 2nd ed., 2007, n. 56 ad Art. 178 PILA; Berger/Kellerhals, Internationale und interne Schiedsgerichtsbarkeit in der Schweiz, 2006, n. 283 page 98).

 

An arbitration clause containing imprecise, incomplete, contradictory or erroneous indications as to the arbitral tribunal – a so called pathological clause (ATF 130 III 66 at 3.1 page 70; on this, in particular, Girsberger/Mràz, Missglückte (“pathologische”) Schiedsvereinbarungen: Risiken und Nebenwirkungen, in: Internationales Zivilprozess- und Verfahrensrecht III, 2003, pages 129-165 and Scalbert/Marville, Les clauses compromissoires pathologiques, in: Revue de l’arbitrage, 1988, pages 117-135) – does not cause the arbitration agreement to be invalid, to the extent that interpretation makes it possible to determine which was the arbitral tribunal the parties intended (ATF 130 III 66 at 3.2 page 71 and following.; 129 III 675 at 2.3 page 681).

 

7.2 In this case, the litigious clause contains a clear and unequivocal intent of the parties to avoid submitting their dispute to the state courts and to submit to an arbitral tribunal with seat in Lugano, which would have conducted the proceedings in Italian under Swiss law (see at 4). It is also clear that the parties intended an institutional arbitration, taking place under a predefined set of rules and under the surveillance of an arbitral authority, as opposed to an ad hoc arbitration, in which the parties themselves determine the modalities of the arbitration.

 

7.3 The disagreement relates to the authority administering and supervising the arbitration: the Appellant claims that it would be the Zurich Chamber of Commerce and the Respondent claims that it should be the Arbitration Court of the International Chamber of Commerce in Paris.

 

7.3.1 As accurately found by the arbitrator, in an international arbitration governed by PILA, and considering the clear intent of the parties to apply Swiss law, the arbitration clause must be interpreted according to the Swiss rules relating to the interpretation of contracts (ATF 130 III 66 at 3.2 page 71; 129 III 675 at 2.3 page 680).

 

The contents of a contract are determined primarily through subjective interpretation, namely by seeking the true and reciprocal intent of the parties, instead of relying on the inaccurate denominations or words they may use, mistakenly or in order to disguise the true nature of the contract (Art. 18 (1) CO14). Whenever, as in the case at hand, there are no factual certainties as to the real and reciprocal intent of the parties or when the court finds that one party did not understand the other’s intent, their (presumed) intent must be determined interpreting their statements according to the principle of trust (so called objective interpretation), namely with the meaning that each contractive party could and should reasonably attribute to the statements of intent of the other under the specific circumstances (ATF 133 III 675 at 3.3 page 681 and following). Not only the text and the context of the statements must be considered for that purpose, but also the circumstances which preceded or accompanied the stipulation of the contract, but not the behaviour subsequently adopted by the parties (ATF 133 III 61 at 2.2.1 page 67). Finally, it must be recalled that the principle of trust allows the attribution to a party of the objective meaning of its statement or its behaviour, even though this may not correspond to its intimate will (ATF 133 III 61 at 2.2.1 page 67, 675 at 3.3 page 681).

 

7.3.2 The circumstances preceding the agreement of the disputed clause were described by the arbitrator in the chapter devoted to the thesis of the Claimant, Respondent here, which have been reproduced in part in the answer to the appeal. As already stated, the Respondent claimed in particular that the original text of the arbitration clause, written by its lawyer, had the following wording:

“With regard to possible controversies relating to the Employment Contract, the parties agree to the jurisdiction of the Arbitral Tribunal of the International Chamber of Commerce in Paris. Local jurisdiction is with the Bolzano branch and the language of the proceedings is Italian.”

According to the Respondent, the Appellant could have reacted to that first draft stating that he would prefer a tribunal outside of Italy, for instance in Lugano, where the language is Italian and that he wanted to specify that Swiss law would be applicable (“a Court outside Italy would be preferable, for instance Lugano where the court language is Italian, Swiss law will apply”). Hence the substitution of the Bolzano branch with that of Zurich and the mention of Lugano as the place of arbitration.

 

The Appellant does not express a view on these statements. According to him, anyway, the reference to Zurich and the mention of Lugano as place of arbitration clearly indicate that the parties meant to entrust the Zurich Chamber of Commerce with administering and supervising the arbitration, which would have taken place in Lugano.

 

7.3.3 In practice, following the Appellant’s reasoning, the parties would have substituted the International Chamber of Commerce in Paris with the International Chamber of Commerce of Zurich and the town of Bolzano with that of Lugano.

 

Considering case law as set forth in ATF 129 III 676 (at 2.3 – 2.4 page 681 and following), mentioned in the appeal, according to which the reference to a non-existing arbitral institution in Zurich (“Swiss Arbitration Court, Zurich”, “International Trade Arbitration Organisation in Zurich” or “International Trade Arbitration in Zurich”) as is the International Chamber of Commerce in Zurich, must be understood as a reference to the Chamber of Commerce in that city and its rules of International Arbitration (see Wenger/Müller, op.cit., n. 56 ad Art. 178 PILA; Berger/Kellerhals, op.cit., n. 281 page 97 and following.; Girsberger/Mràz, op. cit., pages 149-150) and this would suggest that the appeal may be granted.

 

However, the case law referred to is prior to 2004. This is an important element that the Appellant failed to consider. In order to promote institutional arbitration in Switzerland and to harmonise the rules existing as to international commercial disputes, the Chambers of Commerce and Industry of Basel, Bern, Geneva, Lausanne, Lugano and Zurich did indeed unit and on January 1st, 2004 they adopted a set of common rules, none as the Swiss Rules of International Arbitration, substituting the previous rules of international arbitration of each Chamber.

 

In order to ensure administration of the arbitrations according to the Swiss Rules, the Chambers appointed an Arbitration Committee composed of specialists of international arbitration, which appoints among its members the person(s) assisting the Chambers in administrating and supervising the arbitral proceedings (see Introduction to the Rules, in: www.swissarbitration.ch; Hochstrasser/Lessing in: Basler Kommentar, 2nd ed., 2007, Einleitung zum zwölften Kapitel: Grundlagen, n. 256 and following).

 

Considering that the Employment Contract, in which the litigious arbitration clause was inserted, was entered into in 2006, two years after the Swiss Rules were adopted, it must be held that the parties – and particularly the Appellant, who was at the origin of the change to the original agreement - were informed of that evolution. Had their intent been to submit their disputes to an arbitration administered according to the Swiss Rules, they would very likely have substituted Court of Arbitration with Arbitration Committee, they would have disregarded the adjective international and above all they would have avoided a reference to the Zurich Chamber of Commerce as the authority responsible for the administration and the supervision of the arbitration to take place in Lugano; the arbitration with a seat in Lugano would indeed have been governed in any event by the Swiss Rules and subject to the supervision of the Arbitration Committee.

 

7.3.4 Taking this into account, the wording of the litigious clause manifestly favours an arbitration governed by the ICC Rules. The attribution of the administration and the supervision of the arbitration to take place in Lugano to the Court of Arbitration of the International Chamber of Commerce has no ambiguity and the ICC Court of Arbitration is the authority in charge of administering and supervising the arbitral proceedings taking place under the ICC Rules of January 1st, 1998 (www.iccwbo.org/court: Berger/Kellerhals, op. cit., n 27 pages 9-10; see reference too).

 

There is indeed a mistake in the reference to the seat of the ICC, which is not in Zurich but in Paris. As was also pointed out in the appeal, the clauses in which the International Chamber of Commerce is mentioned with a Swiss city, although the Chamber has its sole headquarters in Paris, are regularly interpreted as a choice of an arbitration under ICC Rules with seat in Switzerland (ATF 129 III 675 at 2.3 page 681; Wenger/Müller in: Basler Kommentar, 2nd ed., 2007, n. 56 ad Art. 178 PILA).

 

The Appellant is right to observe that this is generally for clauses in which only one Swiss city is mentioned, as opposed to two as in the case at hand. The erroneous reference to Zurich may however be easily explained by taking into account that the ICC National Committee for Switzerland is in Zurich (in that meaning also the example quoted in Scalbert/Marville) and that one of the tasks of the National Committee is that of proposing – pursuant to an invitation from the Court of Arbitration in Paris – an arbitrator in the country chosen by the parties as the place of arbitration (Art. 9 (3) ICC Rules and n. 35 of the award under appeal). Whilst not having jurisdiction to administer the arbitration, the ICC National Committee in Zurich has accordingly a significant role. This also explains the use by the Respondent – in the first part of the proceedings – of the words “Zurich branch”, which could have created confusion and which the Arbitration Court suggested should be abandoned.

 

7.4 Interpreted according to the principle of trust, the litigious clause – with which the parties undertook to submit possible disputes to the “Arbitration Court of the International Chamber of Commerce of Zurich in Lugano” – must accordingly be understood as meaning that the institution called upon to administer the arbitration taking place in Lugano is the ICC Court of Arbitration in Paris.

 

Accordingly, the sole arbitrator’s decision to assume jurisdiction must be confirmed, albeit for reasons other than those developed in the award under appeal.

 

On this issue, the appeal is accordingly rejected.

 

8.

Should the jurisdiction of the Arbitral Tribunal be admitted, the Appellant seeks the annulment of the award and the extension of the arbitral proceedings to D.________, C.________ Ltd. and to B.________ as signatories of the Sales Contract executed on the same day as the Employment Contract and so closely bound to the latter that it is impossible to decide the claims that are the object of the arbitration without taking into account what wars agreed in the Sales Contract.

 

8.1 In the decision under appeal, the arbitrator established that there was indeed a connection between the two contracts but that it would not be sufficient to extend the arbitral proceedings to the parties to the Sales Contract, which are not parties to the Employment Contract. On the other hand, no one argued that this would be a case in which the Respondents would be necessary and indispensable parties. The arbitrator pointed out that arbitration is a private process based on the consent of the parties to the arbitration agreement. The intervention of third parties in a pending arbitral proceeding cannot, as a matter of principle, take place without the consent of all the interested parties. At least the ICC Rules do not encompass that possibility. In other words, unless the parties and the third parties the involvement of which is sought do agree spontaneously, an arbitral proceeding governed by ICC Rules may not be extended and the request to that effect made by the Respondent appealing here must accordingly be rejected. The only possibility to obtain the participation of third parties in the present proceedings, said the arbitrator, is to initiate arbitral proceedings against them based on the ICC Rules and to ask the ICC Court of Arbitration to join the two proceedings pursuant to Art. 4 (6) of the ICC Rules. In any event, the arbitrator “anticipated” that such a request would not be granted because the parties to the two contracts (Employment Contract and Sales Contract) are different. He also clearly stated that he would have no jurisdiction to decide such an issue, which falls within the exclusive jurisdiction of the ICC Court of Arbitration.

 

For the reasons just set forth, the Arbitrator concluded that the request to extend the proceedings to D.________, C.________ Ltd. and B.________ “is not admissible and accordingly rejected”.

 

8.2 In the appeal submitted to the Federal Tribunal, the Appellant criticises the Arbitrator for failing to consider appropriately the arguments submitted to justify the extension of the arbitration to D.________, C.________ Ltd. and B.________ notwithstanding the fact that they did not underwrite the Employment Contract in which the arbitration clause was contained.

 

The Appellant argues that between the two contracts there is not only a connection, as stated by the Arbitrator, but that they are the expression of the same intent and must be considered as a whole. The parties to the one are also the parties to the other, hence the possibility to extend the scope of the arbitration clause contained in the Employment Contract also to the parties which underwrote the Sales Contract, which also contained an arbitration clause of practically the same wording (award n. 78 and 79).

 

8.3 The matter is capable of appeal. When called upon to decide its jurisdiction to entertain the dispute, the Arbitral Tribunal must indeed examine the subjective scope of the arbitration clause; it must determine which are the parties bound by such agreement and assess, if pertinent, the possibility to apply it also to third parties, which did not underwrite it and are not mentioned there. Such an issue falls within the ground for appeal at Art. 190 (2) (b) PILA (ATF 134 III 565 at 3.2; 129 III 727 at 5.2.1 page 333; see also Berti/Schnyder in: Basler Kommentar, n. 47 and 49 ad Art. 190 PILA).

 

8.4 Swiss case law – the law applicable in this case – already recognised the possibility to extend the arbitration clause to persons which did not sign it, although written form is one of the requirements for the validity of the clause stated at Art. 178 PILA. This may be the case when a claim is assigned, taken over or when a contractual relationship is transferred. It has already been admitted that in specific circumstances, a certain behaviour may substitute compliance with a formal requirement on the basis of the rules of good faith. For instance, when a third party becomes involved in the performance of the contract which contains the arbitration clause in such a way that an intent to submit to the arbitration agreement, expressed by its behaviour, may be deducted from its behaviour (ATF 134 III 565 at 3.2 with references).

 

8.5 Before setting forth the arguments in the appeal to support the extension of the arbitration to D.________, C.________ Ltd. and B.________ it is worth pointing out the role of the various legal entities and individuals involved, also taking into account the wording of the two contracts in dispute, which, even though they were not reproduced verbatim in the award under appeal, were manifestly among the facts held by the Arbitrator and on which he relied in his decision (also see ATF 128 III 50 at 3b page 63).

 

The Employment Contract was underwritten by:

-        A.________, “hereafter referred to as Managing Director”

-        B.________ Ltd., “represented by the unique partner D.________, […] represented by C.________ Ltd. through its Managing Directors Mrs F.________ and Mr G.________, hereafter referred to as the Company”.15

 

The Sales Contract was underwritten by:

-        A.________, “hereafter referred to as Buyer”

-        B.________, “hereafter referred to as Director and Creditor [of B.________ Ltd.]”

-        C.________ Ltd. “as Trustees of D.________, represented by its Directors, Mrs F.________ and Mr G.________, hereafter referred to as Seller”.16

 

Already by quoting the contracting parties and their representatives who signed the contracts, it may not be argued that the third parties of which the Appellant seeks the involvement in the arbitral proceedings would be completely alien to the Employment Contract.

 

8.5.1 Referring punctually to the contents of the award under appeal, the Appellant argues that both contracts, concluded the same day, were the expression of a single intent, that of transferring the ownership of a 100 % of the shares of B.________ Ltd. from C.________ Ltd. – which held them as Trustee for D.________ - to A.________ , against payment of the debt which B.________ Ltd. still had towards B.________ and D.________ (award n. 63 and 64).

 

The Employment Contract (EC) – so the Appellant explains – was a transitory solution until the finalisation of the Sales Contract (SC). Art. 1 EC indeed prohibited the Appellant from entering into business deals in its own interest or in the interest of third parties in the field in which B.________ Ltd. is active until the aforesaid debt would be settled, unless such business deals would carry a benefit for B.________ Ltd. (award n. 57). In case of breach of the prohibition to compete at Art. 1 EC or if three monthly instalments would fail to be paid, as stated at Art. 4 SC, Art. 2 (4) EC also gave D.________ the right to request the appointment of a Board of directors (including B.________) entrusted with assisting the Appellant in the management of the Company (award n. 58). Furthermore, should the Appellant act with gross negligence in the management of the Company, Art. 2 (6) EC gave D.________ the right to immediately terminate the Employment Contract for cause (award n. 58).

 

Moreover, the Appellant points out some provisions contained in the Sales Contract which are in part symmetrical and in part complementary to the Employment Contract. Art. 4 SC indeed states that the Buyer, i.e. the Appellant, takes over the debt of Company (B.________ Ltd.) towards B.________ and D.________ (award n. 69) and Art. 5 SC conditions the delivery of the shares to the full payment of the debt (award n. 70).

 

Art. 7 SC furthermore states that upon executing the SC, the selling party, i.e. C.________ Ltd., will cause B.________ Ltd. to appoint the purchaser, i.e. the Appellant, as Managing Director with full powers and that B.________ would be relieved from his duties as Managing Director (award n. 72). Art. 8 SC finally mentions the right for D.________ to access all accounting information related to the commercial activity of B.________ Ltd. (award n. 73).

 

8.5.2 Taking the above into account, it must be conceded to the Appellant that the obligations undertaken in both contracts cannot be distinguished considering how closely they interact reciprocally.

 

The Appellant is right to claim that everything must be understood as a general commitment by the Appellant to fulfil the obligations of B.________ Ltd. towards the creditors/sellers of the Company before it could assume actual control. The Employment Contract is meant to that end; based on the pre-existing relationship, it makes it indeed possible for the sellers/creditors to maintain control on the activity of the Company and on the fate of the income derived from such activity until full payment of the debt.

 

In that context, a breach of the obligations undertaken in the Employment Contract necessarily has some repercussions on the Sales Contract and conversely. Based on what is stated in the award, B.________ Ltd. claims that the Appellant breached the prohibition to compete and that he would have acted illegitimately as though he had been the sole Managing Director, although he would never have been given that quality (award n. 11). For its part, A.________ complains indeed that he was never appointed as Managing Director, in breach of what was contractually agreed (award n. 16).

 

8.5.3 As to the request to extend the arbitration to D.________, B.________ and C.________ Ltd., the following is observed. It is true that D.________ is not formally a party to the Employment Contract which contains the arbitration clause and that he acts only as representative of B.________ Ltd., but the power to terminate the contract immediately (Art. 4 EC), typically an employer’s prerogative, and that of obtaining access to the accounting concerning the commercial activity of B.________ Ltd. (Art. 8 SC) lead to treating it similarly under the present circumstances. The same applies to B.________, to whom the right to take back the position of Managing Director next to A.________ and H.________ was granted in case the payment of the debt stated at Art. 4 SC would be three month late (Art. 2 (4) and 5 EC).

 

The same may be said for C.________ Ltd., which is not only in the matter as seller in the Sales Contract, considering that at Art. 7 SC it undertook to act in such a way that B.________ Ltd. – within the framework of the Employment Contract – would appoint the purchaser, i.e. the Appellant, as Managing Director with full powers and that B.________ would be relieved of his duties as Managing Director.

 

8.6 Considering the intense involvement of D.________, B.________ and C.________ Ltd. in the preparation of the Employment Contract and the role that they reserved for themselves in connection with the performance of that contract, it must be concluded that they acted in a way that binds them to the arbitration agreement contained in the contract, the contents of which is incidentally identical to that which is in the Sales Contract.

 

The request for an extension of the arbitration made by the Appellant deserves accordingly to be granted.

 

9.

This means that the appeal must be granted in part, to the extent that it challenged the decision to refuse the extension of the proceedings to D.________, B.________ and C.________ Ltd.

 

This being an appeal on the Arbitrator’s jurisdiction, the Federal Tribunal may, Art. 77 (2) LTF notwithstanding, modify the award under appeal on this point (see what was stated above at 3.1).

 

As a consequence of the disposition of the matter, the request for a stay becomes moot.

 

In view of the outcome of the appeal, the judicial costs shall be borne by both parties, one half each, with set off (Art. 66 (1) and 68 (1) LTF).

 

Therefore, the Federal Tribunal pronounces:

 

1.     The appeal is granted in part. Consequently, item 2 of the award of the Interlocutory Award of June 16, 2008 is modified as follows:

“2. The Respondent’s request to extend this arbitration proceeding to D.________, C.________ Ltd. and to Mr B.________ is granted.”

 

2.     Each party shall bear half of the judicial costs set at CHF 8’000.-.

 

3.     The decision shall be notified to the representatives of the parties and to the ICC International Court of Arbitration through the sole arbitrator, Mr E.________ in Geneva.

 

Lausanne, December 5, 2008

 

In the name of the First Civil Law Court of the Swiss Federal Tribunal

 

 

The presiding Judge:                                                            The Clerk:

 

 

CORBOZ                                                                             GIANINAZZI

 
  • 1. Translator’s note: Quote as A.________, v. B.________ Ltd., 4A_376/2008. The original of the decision is in Italian. The text is available on the website of the Federal Tribunal www.bger.ch.
  • 2. Translator’s note: In English in the Italian text.
  • 3. Translator’s note: In English in the Italian text.
  • 4. Translator’s note: In English in the Italian text.
  • 5. Translator’s note: In English in the Italian text.
  • 6. Translator’s note: In English in the Italian text.
  • 7. Translator’s note: In English in the Italian text.
  • 8. Translator’s note: In English in the Italian text.
  • 9. Translator’s note: PILA is the most frequently used English abbreviation for the Federal Statute on Private International Law of December 18, 1987.
  • 10. Translator’s note: LTF is the Italian abbreviation for the Federal Statute of June 17, 2005 organising the Federal Tribunal, RS. 173.110.
  • 11. Translator’s note: This is the Italian abbreviation for the previous Federal Law Organising Federal Courts, which was substituted by the LTF of June 17, 2005.
  • 12. Translator’s note: In English in the Italian text.
  • 13. Translator’s note: In German in the original text. It means the principle that all terms of a contract should be given effect.
  • 14. Translator’s note: The CO is the Italian abbreviation for the Swiss contract law, the Code of Obligations.
  • 15. Translator’s note: In English in the original text.
  • 16. Translator’s note: In English in the original text.