Fundamentally, a tribunal’s jurisdiction to make an award is founded on the consent of the parties. This basic concept is often blurred where complex commercial arrangements involve a contractual structure which has many participants, highlighting the potentially changeable consensual character of arbitration.
A case in point is the April 2019 decision of the Swiss Federal Supreme Court, (case No. 4A 646/2018, in German) concerning a distribution agreement between a Slovenian company and Swiss company, where the dispute centred around whether the distribution agreement containing an arbitration clause had been validly concluded between the parties or only between the claimant and a third party, where that third party was a group company of the respondent. The Court confirmed that an arbitration clause could validly bind a party which had not signed the main contract under the provisions of the New York Convention on the basis that the third party continuously intervened in the performance of the contract containing the arbitration clause, thereby accepting the arbitration clause by implied consent. See the review of this case here.
See also, “Non-Parties to Arbitration – The View On Claiming “Through Or Under”, where various cases are highlighted which illustrate how courts around the world have grappled with and at times adopted the alter-ego doctrine, agency, implied consent and estoppel to find that a party was bound by an arbitration agreement despite not being an actual signatory to the contract at issue.
The issue recently surfaced in Decision 4A_124/2020, a dispute concerning the construction and operation of power plants where the main contractor – who had subcontracted the supply of various engines to a subcontractor – sought to include the subcontractor in a dispute between it and the employer. The decision should provide a degree of comfort to subcontractors that they will in principle not be deemed to have given implied consent to an arbitration clause in the main contract simply by virtue of having performed their obligations under the subcontract.
Facts & Arguments
The Purchaser (the main contractor for the construction and delivery of a plant valued at approx. US$24m) entered into several contracts with a Supplier who, in turn, subcontracted the delivery of various diesel engines for the plant (valued at approx. USD$12m) to a subcontractor. The engines were delivered to the Purchasers and installed by the subcontractor. Disputes arose in relation to technical problems with the engines, after which all three entered into negotiations to resolve the issues. The negotiations failed and the Purchaser refused to make further payments to the Supplier. The Supplier subsequently commenced ICC proceedings against the Purchaser for payment. The arbitration clause in the main contract between the Purchaser and Supplier was identical to the arbitration clause in the subcontract between the Supplier and the Subcontractor.
The Purchasers requested the Tribunal to join the Subcontractor as a party to the arbitration proceedings, submitting evidence that the Subcontractor was actively involved in the conclusion and execution of the main contract, including: participating in numerous meetings with the Purchasers, including in a meeting before the conclusion of the main contract; several joint emails on behalf of both the Supplier and the Subcontractor; active involvement in the engine test runs; engineers employed by the Subcontractor attended the site and tried to solve the technical issues; and that the Subcontractor directly communicated with the Purchasers about the issues connected to the engines.
This evidence could be seen, the Purchasers argued, as evidence of implied consent to the arbitration clause, based on the principle of good faith.
In its decision on jurisdiction, the ICC tribunal examined whether an extension of the arbitration agreement could result from the Subcontractor’s involvement in the conclusion and execution of the Contract. In other words, whether such involvement could be seen as evidence of implied consent to the arbitration clause, based on the principle of good faith.
The ICC tribunal found that the evidence submitted by the Purchaser, taken separately, would not be sufficient to extend the arbitration agreement to the Subcontractor, but that as a whole, they led to the conclusion that the Subcontractor did indeed participate in the conclusion and performance of the Main Contract to such an extent that the contracting parties could in good faith have assumed that the Subcontractor intended to be bound by the arbitration agreement.
In reaching its decision, the tribunal did not find that there was actual agreement between the Parties that the Subcontractor should be bound by the arbitration agreement, but rather that an extension of the arbitration agreement was justified based on an interpretation of the Subcontractor’s conduct in accordance with the principle of good faith.
The Subcontractor sought to annul (set aside) the jurisdiction decision, arguing that it had not consented to the arbitration agreement.
The Swiss Supreme Court
- Underlined the importance of the doctrine of privity of contract, but recalled its case law according to which an arbitration clause can be extended to a non-signatory if its active involvement in the performance of the contract can be understood as implied consent to be bound by the arbitration clause.
- Considered that the roles of the respective Parties were contractually defined: the Subcontractor sold the diesel engines to the Supplier, but the latter was the only one to have entered into a contractual relationship with the Purchasers. The responsibilities of the Supplier and the Subcontractor did not mix, because the Subcontractor’s responsibilities were limited to the issues connected to the diesel engines. Therefore, the Purchasers had to be aware that the Subcontractor was not a party to the Contract.
- Found that, whilst the circumstances described by the ICC tribunal did demonstrate a degree of involvement by the Subcontractor in the performance of the Main Contract, it was not convinced that this involvement was sufficient to constitute implied consent to be bound by the arbitration agreement in that contract.
The Swiss Court finds that while a subcontractor was demonstrably involved in the performance of a main contract, it was insufficient to constitute implied consent to be bound by the arbitration agreement.
See also the following reviews of this case: