Judgment of the Federal Supreme Court of 25 july 2024
Case Reference : 4A_207/2023

Facts

B. SA (the “Company”) is a real estate company wholly owned by C. (the “Sole Shareholder”). The Company owned a building (“the Building”) that had been fully managed by F. SA (“the Manager”) since 2001. In early 2019, following a decision of the Company, the Manager mandated A. Sàrl (“the General Contractor”) to do some repair work on the electrical installations of the Building in the underground car park. On the 20th of March 2019, the General Contractor drew up an estimate of the costs, amounting to CHF 29’583.55. The Manager orally accepted this estimate, and the repairs started in May 2019.

In July 2019, E. bought from the Sole Shareholder all the shares of the Company and became its sole administrator. However, he never visited the Building and was not informed at any point that construction work was happening on it.

The General Contractor finished the repair work in December 2019 and sent three invoices to the Company for a total amount of CHF 41’684. The Company did not dispute the invoices, but did not pay any of them.

After the Court of first instance ruled in favor of the General Contractor and ordered the establishment of a building contractor’s lien on the Building, the Cantonal court dismissed the General Contractor’s claim on the grounds that the Company had not been validly represented by the Manager. According to the court, there were no internal powers of representation granted by the Company to the Manager (Art. 32 para. 1 SCO), nor was the General Contractor allowed to infer powers of representation from the Manager’s behavior (Art. 33 para. 3 CO).

The Manager appealed to the Federal Supreme court.

Issue

The Federal Supreme Court had to determine whether the Manager, acting as agent, validly concluded the contract with the General Contractor in a binding manner for the Company.

Decision

By interpretation of the parties’ intent, the Federal Supreme Court ruled that the Company was bound by the Manager’s acts, acting as a representative (Art. 32 para. 1 SCO), and therefore upheld the appeal.

More specifically, the Federal Supreme Court held that the Company had tacitly granted the Manager internal powers to conclude the contract and supervise the electrical work in the underground car park. These powers arose from an internal apparent power of attorney (Anscheinsvollmacht; procuration apparente), since the Company should have known that the electrical work had been ordered by the Manager, which could have believed in good faith that it was authorized to act.

To conclude that an internal apparent power of attorney existed, the Federal Supreme Court considered as relevant that the decision to renovate the underground car park was taken by the Company, which had clearly been informed that work was necessary to bring the car park up to standard. This decision had necessarily been communicated to the Manager, which had contacted the General Contractor at that time to obtain a quote for electrical work.

In addition, the fact that the Sole Shareholder lived in the building at the time of the renovation work was also relevant, since he could not have been unaware of the work being carried out in the underground car park. On this point, the Federal Supreme Court made it clear that the issue here was not whether the Company was bound to a third party by an act of management of the Sole Shareholder, but what the Company knew or should have known, given that knowledge of the Sole Shareholder was clearly attributable to it. In doing so, it rejected the cantonal court’s view, which held that the knowledge of the Sole Shareholder was irrelevant, since he did not have the status of an organ and did not validly represent the Company (Art. 718 para. 1 SCO).

Taking all these circumstances into account, the Federal Supreme Court ruled that the Manager could understand, according to the rules of good faith, that it was authorized to award the electrical work to the General Contractor who had been entrusted with all the building’s electrical work for nearly twenty years. Furthermore, there was no indication that the internal powers of the General Contractor had been revoked or restricted. In particular, the sale of the share capital from C. to E. during the renovation work and the lack of knowledge of the new shareholder (i.e. E.) and sole director did not alter the scope of the powers conferred to the Manager.

Key takeaway

This decision provides a concrete example of the circumstances to be taken into account when inferring apparent internal power of attorney in favor of a representative. It highlights namely the importance that should be attached to the decisions taken by the principal and to the principal’s specific knowledge, even if through a sole shareholder.

Comments

The decision is interesting for two main reasons.

First, the Federal Supreme Court recalls its case law on the granting of a tacit internal power of attorney (Art. 32 para. 1 CO), which can arise either from tolerance or from appearance:

• There is an internal power of attorney by tolerance (Duldungsvollmacht) when the principal knows that a person has acted on its behalf vis-à-vis a third party without having been authorized to do so, but has not objected to this unsolicited act of representation.
• There is an apparent internal power of attorney (Anscheinsvollmacht) when, on the one hand, the principal is unaware that a person has acted as its representative vis-à-vis a third party, but should have been aware of this if it had exercised the care that could be expected in the circumstances. On the other hand, there is such power of attorney when the representative could, in accordance with the rules of good faith, interpret the principal’s behavior as granting powers, as decided in the case under review.

Second, the case provides an opportunity for the Federal Supreme Court to rule on whether the Sole Shareholder’s knowledge can be attributed to the Company. While the cantonal court held irrelevant that the Sole Shareholder lived in the Building, since the Sole Shareholder did not validly represent the Company (Art. 718 SCO), the Federal Supreme Court held that knowledge of the Sole Shareholder was clearly attributable to the Company in order to retain an apparent internal power of attorney.

By doing so, the Federal Supreme Court followed the prevailing legal opinion according to which the knowledge of the represented party should be taken into account if it can be assumed that it consented to the act of representation. Under this view, if the principal knows or should have known that the representative with general power of attorney is about to conclude a specific act of representation, the principal should, if he or she does not consent to it, oppose the act of representation by revoking the powers of the representative.

Other sources presenting the case

Oliver Dreyer, ius.focus 2024 n° 246.

Judgment of the Federal Supreme Court of February 2020
Case Reference : 4A_341/2021

Facts

On September 2, 2014, two companies had entered into a real estate sale agreement (“the Sale Agreement”), whereby under the terms of the Sale Agreement, the Seller had agreed to transfer the ownership of two parcels of land to the Buyer in exchange for the payment of the sale price. In addition, the Seller would undertake to pay all costs of soil decontamination, if any such practice were to be ordered by the competent authorities in subsequent years.

When concluding the Sale Agreement, the Seller was represented by C., who was given an ad hoc power of attorney for this purpose. In fact, C. was not registered in the commercial register as having signatory power on behalf of the Seller.

As early as October 2016, the presence of soil contaminants was detected in the two parcels of land. Upon receiving confirmation by a testing laboratory that the soil in the parcels contained arsenic, a meeting was held on January 19, 2017 between C., the architectural firm overseeing the site, the testing laboratory, and representatives of the Buyer. Following this meeting, one of the architect representatives appointed by the Buyer (“the Architect”) sent a letter to C. asking him to return it after having signed it. This letter stipulated that the Seller had agreed not to intervene in the decontamination process, but accepted to cover the costs of the whole operation. On January 30, 2017, C. signed the letter and returned it to the Architect.

Subsequently, a specialized company proceeded to decontaminate the site. As the work progressed, the company sent its invoices to the Seller. After receiving the first invoice, the Seller argued that it had never ordered the decontamination work and refused to pay said invoice.

In order to discuss the emerging dispute, a meeting was held on May 2, 2017 in the presence of the Architect, C. and I., the latter being a development manager in a company related to the Seller.

After receiving further invoices and reminders from the Architect, the Seller argued that neither C. nor I. had made any commitment in its name to pay for the decontamination costs. According to the Seller, the commitment it had made in the context of the Sale Agreement was only valid in the event of remediation of the site (“assainissement”) and not in the event of a simple decontamination procedure (“dépollution”). Furthermore, the work undertaken did not constitute a remediation. The Seller also added that it could only validly commit itself via the collective signature of two persons duly authorized according to the commercial register and that no specific power of attorney had been established to authorize C. to individually represent the Seller in relation to the costs of the decontamination process.

In view of the Seller’s refusal to pay the invoices related to the decontamination of the site, the Buyer initiated civil proceedings. The claim was rejected by the First and Second Instance Courts. The Buyer, therefore, lodged an appeal with the Federal Supreme Court.

Issue

The main issue to be decided by the Federal Supreme Court was whether the Seller had validly agreed – through its representatives – to bear the costs of the decontamination process.

Decision

The Federal Supreme Court recalled the conditions under which an agent can conclude a contract in the name of a principal.

Under Swiss law, when an agent who enters into a contract claims to act on behalf of a principal, the principal is bound in three cases: i) if the principal has conferred the necessary power on the agent (internal power of attorney, Art. 32 para. 1 of the Swiss Code of Obligations [SCO]); ii) in the absence of an internal power of attorney conferred on the agent by the principal, where the third party could infer the existence of such power from the behavior of the principal (apparent power of attorney, Art. 33 para. 3 SCO); and iii) also in the absence of an internal power of attorney conferred on the agent by the principal, where the latter has ratified the contract (Art. 38 para. 1 CO).

The principal is normally bound – in the first scenario, governed by Art. 32 para. 1 SCO – when the agent has declared that he or she is acting on behalf of the principal and has the internal power of representation. Art. 32 para. 1 SCO thus essentially protects the interests of the principal. However – in the second scenario, governed by Art. 33 para. 3 SCO – in the absence of an internal power of attorney, the contracting third party is exceptionally protected when the principal has (expressly or tacitly) brought to his or her attention an (external) power of attorney which goes beyond the power which he or she has actually conferred on the agent (internal power of attorney) and, relying on this communication, the third party has believed in good faith in the existence of the agent’s power. It is no longer a question of protecting the interests of the principal, but of protecting the interests of the third party contracting with him or her, and hence the security of the transaction. In this case, representation is subject to two conditions: i) the principal must have informed the third party of an external power of attorney that goes beyond the internal power of attorney (this communication may be tacit) and ii) the third party must be acting in good faith (according to Art. 3 para. 2 of the Swiss Civil Code (SCC), the third party cannot rely on his/her own good faith if he or she has failed to exercise the diligence required by the circumstances).

In the present case, it was not disputed that no internal power of attorney had been granted to C. to agree that the Buyer shall bear the decontamination costs. Therefore, the Seller could not be validly bound under the rule of Art. 32 para. 1 SCO (first scenario). The Federal Supreme Court had therefore to determine whether the Seller could nevertheless be bound by an external power of attorney and the good faith of the Buyer (second scenario). However, as the previous courts had also observed, the good faith of the Buyer was clearly lacking here, for the following reasons:

1) the Buyer, who was a real estate professional, knew that C.’s power of attorney was limited in time and that it was also limited to the conclusion of the Sale Agreement; 2) according to the commercial register C. was not authorized to represent the Seller; 3) if the Buyer wanted to change the remediation costs-clause of the Sale Agreement, it had to ensure that C. had a special power of attorney to do so; and 4) that the Sale Agreement stipulated that the coverage of the remediation costs by the Seller based on a decision of a competent authority, and that such a decision had not been undertaken in this case.

Thus, since the Buyer could not rely on its good faith, it could not be admitted that the Seller had been validly represented by C.

Key takeaway

This decision adds to Federal Supreme Court’s case law rendered in representation matters. It once again highlights the risks for parties who do not pay (enough) attention to the circumstances in ensuring that a business party is duly bound by the actions of third parties. It would be wise for parties who interact with corporations to bear in mind the following lesson: always check the powers of attorney of the people you are dealing with, and, when in doubt, carry out a thorough investigation.

Comments

The conclusion reached by the Federal Supreme Court (and the First and Second Instance Courts before it) is convincing. The general rule of representation is that the principal is only bound by the acts of an agent if he or she has validly conferred an (internal) power of attorney on the agent. In the absence of such an internal power of attorney, the principal shall only exceptionally be bound by an external power of attorney (i.e. the appearance of a power of attorney), which he or she contributed to creating by their actions or inactivity.

In the present case, however, no action or inaction can be reproached to the principal: indeed, the Seller had never communicated to the Buyer special powers of attorney in favor of C., neither expressly nor tacitly by way of an (hypothetical) ambiguous behavior. A diligent person cannot be bound by the acts of a purported agent who has no power of attorney.

The initial reaction of the Buyer may be understandable: upon discovering the pollution of the site, it naturally wanted to contact the Seller through its main contact person, C. This first instinctive reaction, as natural as it may be, is however not entirely excusable. The rules of corporate representation in Switzerland are well known, especially by parties acting in a professional capacity. The commercial register, with the list of authorized representatives of a company, is easily accessible online. If there were any doubts about C.’s powers of representation it would have been easy for the Buyer to obtain clarification directly from the Seller. One can only conclude that the Buyer had shown a certain amount of carelessness in relying solely on the impression created by an outdated power of attorney.

In the absence of a contractual claim against the Seller, one might wonder whether the Buyer could not try to sue C. for wrongfully acting as a representative under Art. 39 SCO. Indeed, this provision gives to the third party a claim for damages against the person who pretended to act as an agent, i.e. the falsus procurator. However, this claim is subject to a good faith test: if the third party knew or should have known that the falsus procurator lacked the proper authority, then the third party will not be able to claim damages. Alas, in the present case it would be difficult for the Buyer to rely on its good faith, as it would have been easy for it to verify C.’s powers of representation by consulting the commercial register or to confirm a possible ad hoc power of attorney. Even if case law has considerably limited the scope of the good faith requirement, recognizing that it is only a factor in reducing – and not excluding – compensation (ATF 116 II 689), it is likely that the Buyer’s conduct would be assessed severely by a judge and would lead to a significant reduction of potential damages.

A second option would be for the Buyer to sue the Seller on the basis of pre-contractual liability for associates (so called culpa in contrahendo in connection with Art. 101 SCO, cf. Chappuis Christine, in Thévenoz Luc/Werro Franz, Commentaire romand du Code des obligations I, Art. 39 SCO N 2). However, since the judgment did not provide sufficient information about C.’s relationship with the Seller, it’s very hard to assess the outcome of this approach.

Judgment of the Federal Supreme Court of 10 July 2020
Case Reference : 4A_562/2019

Facts

A general contractor (the Principal) subcontracted a part of the construction work it has been entrusted with to another company (the Third Party).

When the Third Party’s director signed the contract for work and services, he added a handwritten statement (the Handwritten Statement) stating that an employee of the Principal called F. (Employee F.) was authorized to sign for the Principal, i.e. for its employer (original text [in German]: “Hr. F. ist unterschriftberechtigt für den Bauherrn + GU [which stands for Generalunternehmer]”, translation: “Sir F. is authorized to sign for the building contractor + the general contractor”). The Principal, who had already signed the contract, received a copy of the contract countersigned by the Third Party with the Handwritten Statement and did not object nor react the Handwritten Statement.

Employee F. monitored and coordinated the construction work, and acted as primary contact of the Principal to the Third Party. The Principal did not object that the construction work be managed by Employee F. Later on, Employee F. declared that he was unsure as to whether he had the authority to sign on behalf of the Principal.

Once the construction work had been carried out by the Third Party, Employee F. signed off on the work and sent the final statement to the Third Party for signature (with the amount due by the Principal to the Third Party). On the same day Employee F. sent the final statement to the Third Party, the Principal terminated the agreement with Employee F. (which was not disclosed to the Third Party). A couple of months later, the Principal claimed that Employee F. had not been authorized to legally act and submit documents on its behalf. When the Third Party sent the invoice to the Principal, the latter only paid half of the amount requested.

The Third Party claimed payment of the outstanding amount by the Principal. Both the court of first instance and the cantonal court of appeal in the canton of Valais ruled in favor of the Third Party. The Principal appealed to the Federal Supreme Court.

The Principal argued that at the time it had signed the contract, the Handwritten Statement made by the Third Party stating that Employee F. was authorized to sign for the Principal had not yet been added. As a result, the Principal had not granted Employee F. the authority to act on its behalf. The Principal also invoked a breach of Art. 33 para. 3 of the Swiss Code of Obligations [SCO], stating that the Third Party had acted in bad faith by not informing the Principal of the Handwritten Statement which had been added to the contract.

Issue

The Federal Supreme Court had to determine whether the Principal was bound by the acts of Employee F. towards the Third Party since it would have given the impression that it had granted to Employee F. the authority to act on its behalf.

Decision

The Federal Supreme Court set the legal framework on agency rules (Art. 32 ff. SCO) by recalling the three situations in which a person (the represented person) may be bound by the rights and obligations arising from a contract made on its behalf by another person (the agent):

• If the represented person had granted the agent the required authority to act on its behalf (“internal relationship”) ( 32 para. 1 SCO which provides that “[t]he rights and obligations arising from a contract made by an agent in the name of another person accrue to the person represented, and not to the agent”);
• In the absence of authority conferred by the represented person to the agent, if the third party could infer the existence of such authority from the behavior of the represented person (“external relationship”) ( 33 para. 3 SCO which provides that “[w]here a principal grants such authority to a third party and informs the latter thereof, the scope of the authority conferred on the third party is determined according to the wording of the communication made to him”);
• In the absence of authority conferred by the represented person to the agent, if the represented person has ratified the contract ( 38 para. 1 SCO which provides that “[w]here a person without authority enters into a contract on behalf of a third party, rights and obligations do not accrue to the latter unless he ratifies the contract”).

In the first case (see 1) above), the Federal Supreme Court underlined that Art. 32 para. 1 SCO requires a power of attorney conferred by the represented person to the agent (so-called internal power of attorney). From that perspective, the Handwritten Statement could not have been regarded as an internal communication of authority that would have been made by the Principal to Employee F. Therefore, the question of whether or not the contract had been signed by the Principal’s director before or after the addition of the Handwritten Statement was deemed irrelevant. Moreover, given that Employee F. was unsure as to whether he had the authority to sign on behalf of the Principal, the Federal Supreme Court considered that Employee F. had not been granted the required authority to act on behalf of the Principal, and therefore excluded the application of Art. 32 para. 1 SCO.

With regards to the second case (see 2) above), the Federal Supreme Court recalled that, even in the absence of authority conferred to the agent, the represented person may nevertheless be bound if it has communicated to the third party the existence of a power of attorney in favor of the agent (see Art. 33 para. 3 SCO, so-called external power of attorney). The Federal Supreme Court pointed out that such communication may be implied and may be inferred from the behavior of the represented person if such behavior leads the third party to think that the person has granted authority to another person. What is decisive is whether the behavior of the represented person can objectively be understood in good faith as being a communication to the third party of powers, irrespective of the subjective perception or willingness of the represented person. Art. 33 para. 3 SCO further requires the third party’s good faith (which is legally presumed to exist pursuant to Art. 3 para. 2 of the Swiss Civil Code [SCC]).

In this case, due to the Principal’s lack of reaction to the Handwritten Statement (i.e. the Principal did not challenge the statement of the Third Party according to which Employee F. had the power to act for the Principal) and the day-to-day management by Employee F., the Federal Supreme Court considered that the Third Party could validly believe that the Principal had granted a power of attorney in favor of Employee F. It also held that the Principal failed to prove that the Third Party had acted in bad faith. The fact that the Principal had terminated the agreement with Employee F. on the same date that Employee F. had sent the final account to the Third Party was dismissed (given that the Third Party had not been informed about this).

In conclusion, the Federal Supreme Court found that, in accordance with Art. 33 para. 3 SCO, the Principal was bound by the Handwritten Statement added in the contract by the director of the Third Party and that, as a result, it was obliged to settle the final invoice corresponding to the amount that Employee F. had notified to the Third Party.

Key takeaway

As a general rule, an act of representation (a relationship of agency) is not valid in the absence of authority conferred by the represented person (the principal) to the agent. Swiss law, however, provides for an exception to this principle when the behavior of the principal leads the other party to think that the principal has granted authority to another person (such as an employee) to act on its behalf (Art. 33 para. 3 SCO). Art. 33 para. 3 SCO provides in this respect that “[w]here a principal grants such authority to a third party and informs the latter thereof, the scope of the authority conferred on the third party is determined according to the wording of the communication made to him”. Art. 33 para. 3 SCO consequently presupposes that the principal communicates this to the third party, whereby “the scope of the authority conferred on the third party is determined according to the wording of the communication made to him”. Based on its wording, this provision presupposes a communication made to the third party. What is interesting in this judgment handed down by the Swiss Federal Supreme Court is that the power of representation was admitted on the basis of a communication that was not made to the third party but rather by the third party (i.e. the Handwritten Statement). The good faith of the Third Party in believing that the Employee F. had the power to act for the Principal was upheld because of the Handwritten Statement that was added on the contract by the Third Party at the time of signing of the contract. This constitutes a very broad application of Art. 33 para. 3 SCO.

In the context of commercial contracts, especially between corporate entities, many individuals may intervene in the process (whether during negotiations or for the purpose of performing the contractual obligations). Therefore, companies must stay alert and pay careful attention to the content of the contractual documentation and to the management of contracts – particularly in the process of signing the contract. This case law serves as a lesson of contractual diligence during the conclusion of a contract. By not reacting to a handwritten statement made by the other party on the signature page of the contract, the company was held liable for the acts of one of its employees to which it had not given a power of representation. Companies must consequently be aware of the risks of giving the impression that they would have granted a power of attorney to one of their employees.

In terms of contractual risk management, a response to a handwritten statement added to a contract when signing the contract implies a diligent contract management process. As the number of contracts in business transactions continue to grow, companies can no longer shove a contract signed in a drawer: it is imperative to manage and avoid risks (such as the risk of an unwanted power of representation) by identifying and keeping an eye on any potential last-minute amendment to a contract. In an era of growing automation of (AI-based) contract management and even contract conclusion mechanisms, one can wonder whether a totally automatic (i.e. without any human oversight) contract management system, in which the contract in question in this case would have been automatically digitally registered and stored by the Principal, would have identified the potential legal risk resulting from the addition of the Handwritten Statement that was made by the Third Party.

Comments

This judgement is a case book illustration of the reasoning that the Swiss Federal Supreme Court adopts in order to analyze whether there is a relationship of agency: is the represented person bound by the acts of the agent as a result of an internal power of attorney (Art. 32 para. 1 SCO)? If not and alternatively, is it bound as a result of an external “apparent” power of attorney (Art. 33 para. 3 SCO)? Or lastly because of a ratification of the contract by the represented person (Art. 38 para. 1 SCO)?

Quite interestingly, this case gives a concrete example of an agency which does not result from an active and direct “communication” of the powers that would have been made by the represented person. In this case, the agency results rather from the silence and thus from a lack of response from the represented person to the addition of a handwritten statement made by the third party at the time of signing the contract. Although silence does not generally mean acceptance, the detailed reasoning of the Federal Supreme Court reveals in this case the necessity for the represented person (i.e. the Principal) to respond in order to avoid giving the impression of a relationship of agency.

The case also outlines the key distinction between the internal power of attorney pursuant to Art. 32 para. 1 SCO and the so-called external power of attorney pursuant to Art. 33 para. 3 SCO. While the former generally derives from a unilateral communication of authority by the represented person to the agent, the latter, on the contrary, depends on the behavior of the represented person (in this case the Principal) which leads the third party (in this case the Third Party) to believe, in good faith, that a power of attorney was granted by the represented person to the agent.