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 4 March 2022

Case Reference: 4A_488/2021

Facts

The case concerned a public company listed on the stock exchange. A conflict had arisen among the shareholders, which led to the non-re-election of three out of six directors. A new chairman of the board was appointed, as well as a new CEO (who was not a board member). Later on, a member of the board resigned, leaving henceforth two members on the board: the chairman and another director.

An employment and mandate agreement had been drafted by the company and the chairman. This agreement had been signed by the second director and the newly appointed CEO on behalf of the company. To this end, a power of attorney had been specifically granted to the new CEO by the chairman and the second director. The agreement provided for two types of remuneration: a fixed monthly salary under the employment contract and a fixed annual fee as a member of the board of directors. In addition, a termination notice period of six months was provided for.

A few months later, a new board of directors was elected. It had decided to freeze the remuneration of the chairman and to dismiss him with immediate effect. The latter filed a claim in court for more than CHF 500,000 to cover salary remuneration, administrative fees, participation in profit-sharing plan, unused PTO, reimbursement of expenses and compensation for unjust dismissal.

The lower courts held that the employment and mandate agreement was void. Given that the board of directors consisted of only two members and that one of them was caught in a conflict of interests (i.e. the chairman), the board could not grant a power of attorney to the CEO. Since the chairman had to be aware that he was orchestrating the signing of a contract contrary to the law and the company’s articles of association[1], he was acting in bad faith and could therefore not rely on the void contract.

Issue

The issue was whether the employment and mandate agreement had been validly concluded or whether it was null and void due to the prohibition of concluding a contract with oneself. In the case of the latter, the question of a fictional application of the employment contract due to the services rendered (de facto contract theory) also arose.

Decision

I. Is the contract void because of the prohibition of self-contracting? (para. 5)

The Federal Supreme Court explained that a contract concluded with oneself corresponds to a situation whereby the same person is a party to the legal act in two different capacities: on the one hand on his or her own behalf, and on the other hand as the representative of another person. This situation, like dual representation, entails a risk of conflict of interest. For this reason, a contract concluded with oneself is not permissible and therefore invalid, subject to two exceptions: (i) the nature of the transaction itself precludes any risk of harm to the principal (this is particularly the case where the agreement is concluded on market terms); and (ii) the principal has consented in advance or ratified the agreement.

These principles also apply to the legal representation of a legal person by its bodies. The legal person is presumed to tacitly exclude the power of representation for any act that may create a conflict of interest between its own interests and those of its representative. The consent or ratification to such an act must originate from a body occupying the same rank as the body having signed the act or higher.

In the case at hand, it was found that the parties involved had devised a scheme to circumvent the rules prohibiting self-contracting by granting the CEO a power of attorney authorizing it to sign the employment agreement with the chairman. The Court also found that because of its subordinate position, the CEO did not meet the requirement of an independent body of the same rank and was, therefore, not qualified to approve or ratify the conclusion of the employment agreement. Furthermore, it had not been proven that the remuneration terms of the employment agreement were actually in line with the market.

Thus, the contract was deemed void on the grounds of the prohibition of self-contracting.

II. Should the contract, despite its invalidity, still be applied in a fictitious way because of the work performed? (para. 6)

Under labor law, when a pseudo-employee has entered into an employment contract which is subsequently found to be null and void, the employee may claim the application of a de facto contractual relationship in order to be remunerated for the work it has performed, unless it knew that the contract was null and void (Art. 320 para. 3 of the Swiss Code of Obligations [SCO]).

The Federal Supreme Court held that it could be inferred from the circumstances of the present case (i.e. granting a subordinate manager special power to sign an employment and mandate agreement on behalf of the company) that the chairman was aware that such a contract may not be valid, and had accepted such an outcome in the event that it be proven true.

Since the chairman was aware of the deficiency in the contract, he could not rely on Art. 320 para. 3 SCO and the existence of a de facto contractual relationship.

Key takeaway

In the event that a company is in a delicate situation due to a dispute among shareholders that has led to a nonfunctional board of directors, it is advisable to wait until the dispute has been settled and the composition of the board of directors has been reconstituted, before entering into contracts with members of the board. It is further advisable for companies to implement rules, bylaws or internal regulations explicitly dealing with conflicts of interests.

Comments

This judgment highlights two sets of rules under the general law of obligations:

I. Contracts concluded with oneself

The principle of the prohibition of self-contracting is well established under Swiss law. The risk of such contracts for a company is well known, since the people who run a company can take advantage of their position in order to obtain undue benefits. In this view, it is less a question of a prohibition on self-dealing than of a prohibition on using the company to obtain an undue personal advantage.

As there are several ways of bypassing this prohibition, scholars have proposed to extend the prohibition to situations in which a director – who has a conflict of interest – empowers another person to sign a contract in which the former has a personal interest. This mechanism does not formally violate the prohibition against contracting with oneself, but it pursues the same goal by allowing the director involved to grant itself a personal advantage through the influence, or even the pressure, that he or she exerts on another person.

Such test had been carried out by the Federal Supreme Court in the case at hand, leading to the conclusion that the chairman managed to get the contract signed by another person, but to his own advantage. The circumstances of the case appear to be decisive, in particular the fact that the CEO was given a unique and specific power to co-sign the agreement with the chairman.

However, this is an after-the-fact analysis. It is questionable whether the company could not enter a contract with the chairman until all the other members of the board had been appointed. This situation could have extended over a longer period of time and the company had to continue to be managed in the meantime. There is little doubt that a prolonged blockage situation would have had negative consequences for the company as well as for the various stakeholders. One may ask whether it would have been advisable to balance (purely internal) quorum requirements against the company’s legitimate interest in having an effective governing body.

Furthermore, the Federal Supreme Court had been quick to dismiss the question of whether the remuneration conditions were in line with the market. However, one may wonder whether this criterion should not have been the most important in this particular case, where formally, the contract had not been concluded by the chairman himself. In any event, it is surprising that the employee (in this case, the chairman) should have to bear the consequences of the absence of proof of a remuneration in line with the market. Given the difficulties in providing evidence on directors’ remuneration – fact acknowledged by the Federal Supreme Court itself –, it seems to us that the evidentiary requirements in this respect should not be too high, so as not to unduly penalize the employee.

II. De facto contractual relationship in case of an invalid contract

The legal text (Art. 320 para. 3 SCO “[w]here an employee performs work in good faith for the employer under a contract which is subsequently found to be invalid, both parties must discharge their obligations under the employment relationship as if the contract had been valid until such time as one party terminates the relationship on grounds of the invalidity of the contract”) provides for a de facto contractual relationship in the case where an employment agreement turns out to be null and void, in order to prevent the worker from providing unpaid work. The exception of bad faith is intended to punish the person who has entered into a contract for which he or she was aware of the fact it was not valid. It is an extremely harsh penalty given that the contractual partner is enriched by the work of the other party without having to pay any salary.

From this point of view, the requirement that the (limited) validity of the employment contract be subject to the good faith of the employee is objectionable in itself: the question that should be answered here instead is whether or not the employee deserved to be paid for the service he or she had provided (cf. Hartmann Stephan, Rückabwiclung und “faktisches Vertragsverhältnis” bei ungültigen Arbeitsverträgen – Bemerkungen zu BGE 132 III 242 ff., in ZBJV 2007, p. 277 ff., in particular p. 286 f.). The good faith of the employee is not relevant to answer this question. Besides, it is interesting to note that the Federal Supreme Court had already recognized that the requirement of good faith may lead to unfair results, which is why it had advocated for a restrictive interpretation of the notion of good faith in this context (cf. ATF 132 III 242).

Regardless of the question of good faith, the conclusion reached by the Federal Supreme Court in this judgment does not seem entirely convincing. In particular, by denying the existence of a de facto employment contract, the Federal Supreme Court has opened the door to other pressing questions which remain unanswered. Indeed, as the Federal Supreme Court indicated, due to the absence of a valid contract the involved parties could assert claims for unjust enrichment against each other. Specifically, the company is enriched by the work performed by the chairman, while the chairman is enriched by the salary paid by the company. To the extent that these two claims are of equal value, they would be extinguished by set-off. This outcome would thus lead to a situation comparable to a de facto contract.

However, the same would not be true if the chairman’s work were to be considered a case of “forced enrichment” (“aufgedrängte Bereicherung”, cf. Hahn Anne-Catherine, in Furrer Andreas/Schnyder Anton K., Handkommentar zum Schweizer Privatrecht, Zurich 2016, Art. 64 SCO N 8). Since the company could not validly accept the work performed due to the lack of quorum of its board of directors, this work was in a way “forced” on the company. If this analysis were to be retained, the chairman alone would be deemed enriched, and therefore only he would be required to return the salary received. Conversely, the company would not be required to compensate him, or, if so, only according to the rules of business management. Then, could the chairman possibly assert a salary claim on the basis of an agency without authority relationship under Art. 419 et seq. SCO? It is difficult to answer this question without knowing the precise circumstances surrounding the chairman’s work. Moreover, the very possibility to assert such a claim under agency principles is a matter for debate among legal scholars (cf. Héritier Lachat Anne/Chappuis Christine, in Thévenoz Luc/Werro Franz, Commentaire romand du Code des obligations I, Basel 2021, Art. 422 SCO N 17).

One key consideration remains: is it fair for a person who has worked, knowing that the employment agreement is null and void, to not be entitled to remuneration? A negative answer does not seem to be reconcilable with the system of the law of obligations. Either a person has provided a service to another and the latter is thereby enriched, whether the contract is null or valid, or the person has caused damage to another and must be liable under the rules of tort. Derogations from this fundamental principle should only be admitted to a limited extent.

The Federal Supreme Court seems – at least in an intuitive sense – to agree with the above reasoning, since it felt obliged to specify that in the case at hand the rules on unjust enrichment were not invoked by the chairman and that “financial benefits” had nevertheless been paid to him in exchange for his activity, which justifies, to a certain extent, not awarding him any additional amount. Such considerations could be interpreted as an implicit recognition of the status quo.

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[1] See in particular Article 17 of the company’s articles of association: “Composition […] The board of directors of the company shall consist of three or more members”.