Judgment of the Federal Supreme Court of 5 August 2020
Case Reference : 4A_221/2020

Facts

Two companies (A. AG in Switzerland and B. Inc. in Seychelles) entered into an agreement in 2006 wherein A. AG borrowed approx. EUR 4,000,000. The loan was to be repaid on 31 December 2016 with interest payments accruing annually from 31 December 2008. The interest rate was 3.5% per annum with an additional 2% interest rate applied to sums in arrears. A. AG failed to make timely interest payments, leading B. Inc. to terminate the loan agreement in March 2016 and initiate debt collection proceedings in Switzerland.

Meanwhile, B. Inc. borrowed USD 15,000,000 from I. & Co., a Scottish company. The contract could be terminated at any time by giving three months’ written notice. In 2017, I. & Co assigned part of its claim (USD 6,000,000) against B. Inc. to A. AG. The latter did not terminate the agreement or claim repayment of the monies. Ultimately, I. & Co. was the only party to file a declaration of termination, which it did nearly two years after assigning its claim to A. AG.

This situation can be graphically represented as follows:

During the debt collection proceedings, A. AG declared that it had offset its debt to B. Inc. with the assigned claim. However, both the court of first instance and the court of appeal (the Cantonal Court of Zug) rejected this argument by holding that A. AG had not terminated the assigned loan agreement and that, as a result, the claim had not become due and could not be used to offset the debt.

A. AG. appealed the decision of the Cantonal Court before the Federal Supreme Court.

Issue

The Federal Supreme Court was called upon to decide whether I. & Co.’s termination and A. AG’s set-off declarations were sufficient to settle B. Inc.’s claim by way of set-off.

Decision

AG challenged the decision of the Cantonal Court on three distinct grounds.

1. AG first claimed that the declaration of termination made by I. & Co. was valid and opposable to B. Inc. Even if I. & Co. was not the owner of the claim against B. Inc., it could be implied from the circumstances that I. & Co. was acting as a representative of A. AG., as evidenced in the wording of the termination letter where I. & Co. claimed “the repayment of any sums paid under such agreement”. However, according to the Federal Supreme Court, mere awareness of the assignment was insufficient to consider that B. Inc. should have implied an agency relationship or a termination of the assigned part of the loan.

2. AG further contended that the set-off declaration implicitly terminated the loan agreement. The Federal Supreme Court rejected this view, as the contract required terminations to be drafted in a specific form (“[…] executed in writing and sent by facsimile and hand delivered […]”). These requirements were not met in the case at hand and, indeed, could not be met in case of an “implicit” termination given that – by definition – such termination would not have any form. As the termination was not effective and the claim was not due, the set-off declaration was not valid.

3. Finally, A. AG alleged that the three months’ written notice only applied for the full amount of the loan (USD 15,000,000), and not for a partial loan such as the one in the case at hand. The Federal Supreme Court dismissed this argument with reference to the relevant clause, which stated that “The Loan shall be repaid by the Borrower in full or in part at any time upon receipt of at least three months’ notice from the Lender” (emphasis added). In any case, immediate termination would not have been possible as, under Art. 318 of the Swiss Code of Obligations (SCO) and absent any provision to the contrary, a loan must be repaid within six weeks of the first request by the lender, and is not discharged immediately (Art. 75 SCO).

In conclusion, the Federal Supreme Court dismissed the appeal and affirmed the decision of the Cantonal Court.

Key takeaway

Any party relying on a declaration should ensure that the declarant had ownership of the claim or was a representative of the owner, and that the contractual requirements – if any – are met.

Comments

Swiss law is fairly liberal regarding the form of declarations between parties to an agreement. It rarely requires a specific form for the conclusion or termination of a contract (Art. 11 para. 1 SCO) and routinely accepts that implied expressions of intent may lead to the conclusion of a contract (Art. 1 para. 2 SCO). This is viewed as a means to encourage business and prevent the validity of a contract from being too easily disputed.

However, these general rules cannot be relied upon too heavily, as there is no certainty as to which interpretation the courts will make, and because it takes place months, if not years, later. In case of doubt – such as in the case at hand – confirming the declaration and making sure it meets the contractual requirements in order to ensure the effectiveness of the termination is an easy fix.

Other sources discussing the case

IusNet Droit Bancaire, Cas de la semaine n°48/2020 : remboursement d’un prêt par compensation de créance

Judgment of the Federal Supreme Court of 2 November 2020
Case Reference : 4A_151/2020

Facts

The dispute concerned a loan. On an undisclosed date, the lender transferred an amount of EUR 500,000 to the borrower. By a later agreement executed on 30 June 2006, the parties confirmed that this transaction constituted a formal loan. Under the terms of the agreement, the borrower undertook to repay the EUR 500,000 with interest by 30 June 2006; he also formally declared himself debtor to that sum under Swiss insolvency law (which constituted an acknowledgment of debt within the meaning of Art. 82 of the Federal Debt Enforcement and Bankruptcy Act [DEBA]). The loan agreement further contained conflicting dispute resolution clauses: first, a general jurisdiction clause under which all disputes under the contract should be brought before the courts of Lugano (Switzerland), and, second, an arbitration clause stating that specific disputes on the interpretation and application of the contract should be brought before a single arbitrator (the said clause states [in Italian]: “sull’interpretazione e sull’applicazione della presente convenzione”).

On 23 March 2005, the parties concluded a second loan agreement, drafted under the same terms, for the additional sum of EUR 250,000 with a maturity date of 1 March 2007.

Around a year later, on 29 March 2006, the borrower acknowledged his total debt of EUR 750,000 (a) by signing an account statement in favor of the lender, and (b) by constituting, through a further agreement executed with the lender, a collateral on his above-mentioned debt by pledging several shares he owned in a company.

With the borrower having failed to repay the amount of the loan by the contractually agreed maturity dates, the lender sued the borrower before the courts in Lugano for the sum of EUR 750,000. Among other arguments, the borrower disputed the jurisdiction of the courts by claiming that the dispute fell within the scope of the arbitration clause.

Issue

What is the material scope of an arbitration clause limiting the arbitrator’s competence to disputes over the interpretation and application of the relevant contract? Does this substantive scope cover legal proceedings initiated in order to request the performance of the contract?

Decision

Under Swiss law, interpretation of contractual clauses – including arbitration clauses – rests upon an examination of the true and common intention of the parties, which prevails over the objective method of contract interpretation based on a plain meaning of the text (Art. 18 of the Swiss Code of Obligations [SCO]). On that basis, the FSC found that the arbitration clause was meant by the parties to only cover disputes centered on the interpretation and application of the loan contracts. The lender’s claim in repayment of the loan, which sought performance of the borrower’s repayment obligation under the contract, was not such a dispute and therefore fell outside of the scope of the arbitration clause. Based on this reasoning, the FSC rejected the borrower’s challenge to the jurisdiction of the Swiss courts and affirmed their jurisdiction over the matter.

Another interesting issue which was resolved by the FSC in this decision is mentioned below.

Under Art. 257 of the Swiss Civil Procedure Code (SCPC), claimants in civil proceedings may file their suits under expedited summary proceedings when their claims concern so-call “clear cases” (cas clairs). Clear cases are those disputes in which (a) the facts are either undisputed by the parties or directly documented by proof, and in which (b) the legal situation is clear enough to be immediately resolved by the judge.

In the case at hand, the lender filed suit before the lower court in Lugano under expedited proceedings, arguing that the borrower’s multiple written acknowledgements of the full amount of the loan directly provided the legal grounds for his claim in reimbursement (under Art. 82 DEBA), which in his view led to a clear case. The borrower disputed this point before the FSC. He alleged that the agreements and declarations that he signed in relation to his debt did not reflect the actual dealings between the parties, which he portrayed as complex and tainted by several acts of misrepresentation on the part of the lender. Ultimately, the FSC sided with the lender and found that the documentation at hand was sufficient to clearly establish the claim in payment and thus capable of being adjudicated under expedited proceedings as a clear case.

Key takeaway

This case illustrates the risks of careless contract drafting resulting in conflicting dispute resolution clauses. In this case, the FSC held that legal proceedings for the enforcement of contractual obligations fell outside the scope of the arbitration clause limited to the interpretation and application of the contract.

Comments

The FSC’s decision appears sound when confronted with the specific facts of the case at hand, in which the lender’s claim in payment was unambiguously supported by the terms of the parties’ agreements. One may, however, question whether the Supreme Court’s decision may still be valid in situations in which the enforcement of a contract would require the interpretation of its terms.

This dispute illustrates the risks for parties in drafting so-called “hybrid dispute resolution clauses” by which the parties decide to split the jurisdictional powers between courts and arbitral tribunals depending on the nature of the disputes that may arise between them. Indeed, such clauses may cause difficulties in case of overlap between the respective jurisdictional powers of arbitral tribunals and/or state courts. Parties to commercial contracts may avoid these risks by opting for a single forum to decide all disputes arising under their agreement.