Limits to the Extension of Arbitration Clauses

Abstract

In a leading decision of November 13, 2020 (case 4A_124/2020), the Swiss Federal Supreme Court clarified certain important aspects of its case law on the extension of arbitration agreements to non-signatories. In that ruling it admitted an appeal of a non-signatory seeking to annul an arbitral tribunal’s decision upholding jurisdiction over said non-signatory. Homburger represented the successful appellant in the proceedings before the Swiss Federal Supreme Court. The case will be published as a leading case.

Extension of Arbitration Agreements to Non-Signatories – the Swiss Federal Supreme Court refines its line of precedents

According to the case law of the Swiss Federal Supreme Court, an arbitration clause is, in principle, binding only on the parties to the contract. However, the Federal Supreme Court has long affirmed that under certain conditions an arbitration clause can also bind persons who have not signed the contract, such as in the case of the assignment of a claim, in the case of an assumption of debt or an assumption of contract. An extension is also possible where a third party interferes with the execution of a contract. It is then assumed that such third party has agreed to the arbitration clause contained in the contract by implicit action.

In the decision of November 13, 2020, the Federal Supreme Court for the first time had to decide on the extension of an arbitration clause to a third party that was a sub-supplier to one of the parties to the main contract, the claimant in the arbitration proceedings. Under the main contract, the claimant had agreed to design, manufacture and supply a power plant. The appellant, the third party, supplied diesel engines for the power plant to the claimant.

The Federal Supreme Court had to decide whether the third party interfered with the main contract.

According to the Federal Supreme Court, the third party did not so interfere by being present in certain meetings of the parties to the main contract, by attending a test of the diesel engines at the respondent’s plant or by replacing certain engine components in the plant. In addition, since the third party was supplying the engines required for the power plant owed under the main contract, it is not surprising that the guarantee values and performance test procedures for those engines contained in the main contract originated from the third party or were in conformity with the terms of its supply contract with the claimant. Rather, the respondents must have been aware that the third party was not a party to the main contract but a supplier to the claimant for certain components. In its role as sub-supplier, the third party was involved, as expected, in the performance of the main contract by supplying a significant part of the power plant owed by the claimant.

A sub-supplier's involvement in the performance of the main contract is not sufficient to extend the arbitration clause to the sub-supplier.

The Federal Supreme Court thus held that the jurisdiction of the arbitral tribunal to decide the claims brought under the main contract cannot be based on an implied consent of the third party, the appellant, to the arbitration clause in question. The Federal Supreme Court thus upheld the appeal brought by the third party.

The key message from the Federal Supreme Court’s decision is that a sub-supplier only has a limited risk of being drawn into a Swiss-seated arbitration pending between the parties to the main contract. This is the case even if the sub-supplier is involved in the performance of the main contract. Still, where a third party is involved in the performance of a main contract without having a (separate) contractual relationship with one of the parties, there exists a risk of an extension of the arbitration clause in the main contract, and the parties may wish to clarify whether the arbitration clause extends to the third party.

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