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 5 June 2024
Case Reference : 4A_342/2023

Facts

This matter, which arose from the non-payment for electrical work related to a real estate development project, can be summarized as follows:

In 2011, two promoters joined forces to build a chalet and a wellness center on two plots of land. The first promoter (the “Promoter 1”) was the owner of these two properties and the holder of the real estate development account used to pay the companies involved in the construction. He was also the sole shareholder, director and employee of a public limited company (the “Promoter 1’s Company”) referred to in the minutes of the meetings concerning the construction.

The second promoter, a Belgian national (the “Promoter 2” and, together with the “Promoter 1”, the “Promoters”), subsequently became the owner of the two plots of land in question after purchasing them from the Promoter 1 in 2012 and 2014 respectively, once the construction work had been completed. From 2010 onwards, either directly or through a limited liability company of which he was the sole shareholder and manager (the “Promoter 2’s Company”), he made payments into the real estate development account that was used to pay the companies working on the construction site. The Promoters agreed that the Promoter 2’s Company would be a 50% partner with the Promoter 1 in the real estate development and would provide all of its business contacts and technical expertise to the project.

The electrical works for the buildings constructed on the two plots of land were contracted by the Promoter 1 to Company A (the “Contractor”). The Promoter 2 knew the manager and employees of the Contractor, as the latter had previously performed electrical work on his apartment. Both the Promoters took part in discussions with the Contractor regarding the scope of the work to be carried out during which the Promoter 2 conveyed his preferences. No written contract was drafted for the electrical work; only an oral work agreement existed.

Electrical work started at the end of June 2011. During the construction process, the Promoter 2 provided specific instructions and requests regarding the execution of the work, which were taken into account by the Contractor. The Promoter 2, alone, chose the lighting fixtures for the chalet; while the lighting fixtures for the wellness center were chosen jointly by the Promoters. The Promoter 2 was not mentioned in any of the documentation relating to the development of the property, and the Promoters never disclosed any connection between themselves to third parties, at least not to the Contractor nor its employees. Payment delays were acknowledged by the Promoter 1, who also requested extensions for payment deadlines. There is no evidence that the Promoter 2 granted the Promoter 1 a power of attorney.

The Contractor issued its two final invoices dated November 30, 2013 to the architect. The Promoter 1 indicated that the portion of the work relating to the Promoter 2’s apartment should be billed directly to the Promoter 2. The Promoter 2 paid the corresponding amount directly. However, the remaining invoices from the Contractor remained unpaid. According to the Contractor, the Promoter 1 told the Contractor on several occasions that he would settle the balance once he had received payment from the Promoter 2. As of December 30, 2013, the outstanding balance on the Contractor’s invoices amounted to CHF 219,218, plus interest. The Contractor was not informed of the property sales that took place in 2012 and 2014.

The Contractor initiated legal proceedings for payment against the Promoter 1 and the Promoter 1’s Company as well as the Promoter 2. During the course of the proceedings, the Promoter 1’s Company was declared bankrupt, resulting in the severance of the case with respect to that entity. The Contractor argued that it had carried out the work for the Promoters, who, it claimed, constituted a simple partnership. The Court of first instance ruled in favor of the Contractor and ordered the Promoters, jointly and severally, to pay the outstanding invoices with interest.

The Promoter 2 appealed the judgment handed down by the first instance court. The Promoter 1 filed a joint appeal. The Valais Cantonal court overturned the decision of the first instance court and released the Promoter 2 from all liability, holding only the Promoter 1 liable to pay the Contractor the sum of CHF 219,218 plus interest. Applying the principle of transparency and subjective interpretation, the Cantonal court found that the Promoter 1 was the Contractor’s contracting party. Furthermore, based on an objective interpretation, the court concluded that the Contractor could not, in good faith, have believed that the Promoters formed a simple partnership and were jointly its contracting parties.

The Contractor subsequently filed a civil appeal with the Federal Supreme Court seeking to have both Promoters held jointly and severally liable for the amount of CHF 219,218 plus interest.

The Federal Supreme Court dismissed the appeal.

Issue

Under procedural law, the Federal Supreme Court first had to assess whether the Contractor had a protectable interest in the annulment or the modification of the cantonal decision (see art. 76 para. 1 lit. b of the Federal Supreme Court Act [FSCA]), since the cantonal decision had already confirmed the Promoter 1’s obligation to pay the outstanding balance of the Contractor’s invoices.

On the merits, the Federal Supreme Court had to determine whether the Promoter 2 was liable for the outstanding balance of the Contractor’s invoices and whether the Promoters could be held jointly and severally liable under the legal provisions governing simple partnership agreements (see art. 544 para. 3 of the Swiss Code of Obligations [SCO]).

Decision

In analyzing the admissibility of the appeal, the Federal Supreme Court recalled the rules on joint and several liability (art. 143 et seq. SCO) and on joinder of proceedings (art. 70 et seq. of the Swiss Civil Code of Procedure [SCCP]).

Joint and several liability is a matter of substantive law (art. 143 et seq. SCO) and must be distinguished from joinder of proceedings, which can be either voluntary (art. 71 SCCP) or mandatory (art. 70 SCCP), and falls under procedural law. Members of a simple partnership (art. 530 et seq. SCO) form a civil law community with regards to the assets (art. 544 para. 1 SCO) and are required to act jointly in all claims related to the assets of the simple partnership (active joinder). The partners are jointly and severally liable for partnership debts (art. 544 para. 3 SCO) and the creditor may choose to initiate a procedure against one, several or all partners. When a creditor takes action against several or all partners, i.e. against joint debtors, they are treated as voluntary joint defendants (passive joinder). Claims against voluntary joint defendants are independent of each other (even if they are joined under the same claim), meaning the court issues as many judgments as there are codefendants. It follows that, in order to secure his right to a joint and several condemnation, the plaintiff may have a legitimate interest in taking action against the release of one or more of the voluntary codefendants since only those who are convicted are jointly and severally liable. In this case, the Federal Supreme Court found that the Contractor had a valid interest in challenging the release of the Promoter 2 (see art. 76 para. 1 lit. b FSCA), since he had lost his case against the Promoter 2 in the second instance court and his right to the joint and several conviction of the Promoters. The Federal Supreme Court therefore rejected the plea of inadmissibility raised by the Promoter 2.

Turning to the merits of the case, the Federal Supreme Court first recalled the general principles for interpreting expressions of intention, which determine whether a contract has been concluded, who were the parties to the contract, and what were its terms (art. 18 para. 1 and art. 19 para. 1 SCO). The interpretation process follows two stages. First, the court must determine the parties’ true and common intention (art. 18 para. 1 SCO), which corresponds to the subjective will of the parties. This interpretation is a matter of fact. As a court of law, the Federal Supreme Court is in principle bound by the lower court’s factual findings (art. 105 para. 1 FSCA), unless they are arbitrary (see art. 9 of the Federal Constitution of the Swiss Confederation) or established in violation of the law (art. 105 para. 2 FSCA). In assessing subjective intent, the court considers the parties’ statements and conduct, the circumstances before, during and after the conclusion of the contract, as well as their behavior following the conclusion of the contract.

If the true and common intention of the parties cannot be established or no agreement is found, the court proceeds to an objective interpretation. This involves examining the parties’ statements and behaviors in accordance with the principle of trust (principe de la confiance; Vertrauensprinzip) to determine what a reasonable person would have understood under the circumstances (art. 1 para. 1 SCO in conjunction with art. 2 para. 1 of the Swiss Civil Code [SCC]). This interpretation is a question of law. In its analysis, the court considers the statements and behaviors of the parties, as well as the circumstances preceding and surrounding the conclusion of the contract. The court does not take into consideration circumstances following the conclusion of the contract as they were unknown to the parties at that time. Consequently, when the court considers post-contractual circumstantial evidence, such as the parties’ subsequent conduct, the court determines the parties’ true and common intention, a finding that is a matter of fact and not of law, and is, in principle, binding on the Federal Supreme Court (art. 105 FSCA).

The Federal Supreme Court then examined whether the Promoters had formed a simple partnership, as claimed by the Contractor, or another type of partnership. It recalled the general principles applicable to simple partnerships. According to art. 530 para. 1 SCO, a simple partnership is a contract by which two or more persons agree to combine their efforts or resources to achieve a common goal. Such an agreement is subject to the general rules governing the conclusion of contracts. It is characterized by two key elements: (i) the contribution that each partner must provide for the benefit of the company (e.g. money, materials, claims or labor; see art. 531 para. 1 SCO); and (ii) the common purpose (animus societatis). The legal existence of a simple partnership does not depend on how the parties themselves define the relationship, and no formal requirements apply to its creation.

The Federal Supreme Court further clarified the distinction between internal and external relations within a simple partnership. With regard to relations between partners (i.e. internal relations), art. 543 para. 3 SCO protects the partner entrusted with the management authority of the simple partnership in the trust placed in them by their partners who authorized them to represent the simple partnership vis-à-vis third parties. When it comes to relations with third parties (i.e. external relations), art. 544 para. 3 SCO makes the partners jointly and severally liable for the commitments they have made vis-à-vis third parties, either jointly or through a representative. The joint and several liability provided for in art. 544 para. 3 SCO arises not only where a simple partnership is proven to exist, but also where a third party, acting in good faith, reasonably relies on the appearances of such a partnership based on the principle of effective appearance (principe de l’apparence efficace; Rechtsschein). However, such reliance is only protected if the conduct of the alleged partners clearly indicates participation in such a partnership.

The Federal Supreme Court then drew a distinction between a simple partnership and a silent partnership (société tacite; stille Gesellschaft), which is a special form of business association. A silent partnership is characterized by the participation of one or more individuals – the silent partner(s) – in financial or legal activities of another person – the general partner – without being visible to third parties. While a communal element exists internally, it is intentionally concealed in external dealings.

Internally, the silent partner and the general partner are bound by the animus societatis, the will to combine their efforts or resources to achieve a common goal. Externally, however, the silent partnership does not exist. The general partner is the sole owner of the real rights to the company’s assets, including ownership of the silent partner’s contributions, and they conduct business in their own name and on their own behalf. The silent partner does not represent the partnership and explicitly chooses not to be bound by it. Consequently, art. 543 paras. 2 and 3 SCO is not applicable, and the silent partner is not liable for the business’s debts to third parties under art. 544 para. 3 SCO. Only the general partner bears such liability. According to established case law, a third party entering a business transaction with a silent partner cannot hold the latter liable for debts, even if the silent partner was involved in the negotiations that led to the conclusion of the contract so long as the third party is aware that the silent partner intends to remain in the background. However, this changes if the silent partner presents themselves externally as a partner and actively engages with the third party.

The Federal Supreme Court then considered whether, on the basis of binding circumstantial evidence, the Promoters should be deemed to have concluded a simple partnership or a silent partnership. It recognized that the Promoters were internally bound by a simple partnership agreement for a real estate development project involving the construction of a chalet and wellness center. The two plots of land had been acquired for this project. The Promoter 2’s Company, which was solely controlled by the Promoter 2, was a 50% partner of the Promoter 1 in the real estate development project and provided it with its business contacts and technical expertise. The Promoter 2 and the Promoter 2’s Company made significant payments to a bank account held in the Promoter 1’s name.

However, the Federal Supreme Court pointed out that the internal existence of a simple partnership does not automatically imply its recognition by third parties. In this case, the Federal Supreme Court held that the existence of a partnership between the Promoters had not been demonstrated externally, particularly not to the Contractor. The Promoters failed to establish the existence of a simple partnership in a way that the Contractor would have had to accept under the principle of good faith or the principle of effective appearance. The Promoter 1 was the sole owner of the plots of land and the sole holder of the development account at the time the contract with the Contractor was concluded. The work was commissioned by the Promoter 1. The name of the Promoter 2 was never mentioned in any of the documentation related to the project, nor in any of the site reports. Furthermore, the Promoter 1 repeatedly told the Contractor that he would settle the invoices once he had been paid by the Promoter 2 and instructed that the electrical work on the Promoter 2’s apartment should be invoiced directly to him. That work was, in fact, paid directly by the Promoter 2, which supports the argument that the two contracts were separate. In addition, the subsequent sale of the properties to the Promoter 2 in 2012 and 2014 respectively was never disclosed to the Contractor. At no point in time did the Promoters disclose any partnership relationship to third parties, at least not to the Contractor’s directors nor its employees. The Contractor knew that the Promoter 2, being a wealthy foreign national, was prohibited from acting as a promoter in this case under the Federal Act on the Acquisition of Immovable Property in Switzerland by Foreign Non-Residents (ANRA) until he had obtained a residence permit in Switzerland. According to the Federal Supreme Court, the fact that the Promoter 2 had given instructions to the Contractor during the course of the work did not change the legal nature of their relationship. In fact, the requests and other interventions by the Promoter 2 occurred largely after the oral conclusion of the work contract between the Contractor and the Promoter 1. There was no evidence to suggest that the Promoters had agreed to modify or assign that initial contract.

Thus, the Federal Supreme Court concluded that the relationship between the Promoter 1 and the Promoter 2 constituted a silent partnership, with the Promoter 1 acting as a general partner and the Promoter 2 as a silent partner. Since art. 544 para. 3 SCO does not apply to such partnerships, the Federal Supreme Court dismissed the appeal by substitution of reasons.

Key Takeaway

First, this decision is a reminder of the principles of joint and several liability as well as the principles of joinder. Members of a simple partnership form a legal entity (art. 544 para. 1 SCO), and must sue together as mandatory partners (art. 70 SCCP) for the assets and claims of the simple partnership. With regard to liabilities, however, the partners are jointly and severally liable as simple partners (art. 71 SCCP) for the partnership’s debts (art. 143 et seq. SCO). While joint and several liability is governed by substantive law, joinder is a procedural concept that ultimately depends on substantive law.

Second, this decision illustrates the distinction between the subjective and the objective methods of contract interpretation. When interpreting a contract, the court first seeks to determine the true and common intention of the parties (art. 18 para. 1 SCO), taking into account the statements and behaviors of the parties as well as the circumstances before, during and after the conclusion of the contract. This assessment is a point of fact. Failing that, the court applies objective interpretation based on the parties’ statements and behaviors, as well as the circumstances before and during the conclusion of the contract, but not afterwards. This is a point of law.

Third, this decision underscores the boundaries between a simple partnership and a silent partnership. While the partners in a silent and simple partnership share the animus societatis in their internal relations, the partnerships differ significantly in the way in which they act towards third parties. In their relations with third parties, the partners in a simple partnership are jointly and severally liable for the partnership’s debts. A silent partnership, on the other hand, is purely internal and its existence is not visible to third parties. Only the general partner is visible to third parties, and art. 543 paras. 2 and 3 SCO do not apply. The general partner alone is liable for the partnership’s debts, and art. 544 para. 3 SCO does not apply – unless the silent partner goes beyond their reserve and openly engages with the third party as a partner. In this case, the conduct of the silent partner effectively transforms the silent partnership into a simple partnership, and the third party is protected by the trust in the appearance thus created. The silent partner is then jointly and severally liable for the debts of the partnership (art. 544 para. 3 SCO).

Comment

The Federal Supreme Court’s decision not to recognize the joint and several liability of the Promoter 2 vis-à-vis the Contractor is convincing. It upholds the good faith principle (art. 2 para. 1 SCC), as the circumstantial evidence did not support the conclusion that the Promoter 2 had acted outside of his role and improperly evaded the joint and several liability that would have applied, had a simple partnership been recognized vis-à-vis third parties.

More generally, this case is a reminder that simple and silent partnership agreements are governed by the general rules on the conclusion of contracts and, consequently, by the general rules of contract interpretation. Neither type of partnership agreement is subject to specific formal requirements; accordingly, they may be concluded orally or inferred from conclusive acts.

This case also highlights the fact that a silent partnership is a special form of company and is not explicitly regulated in the SCO. The rules governing simple partnerships apply by analogy to silent partnerships, subject to certain reservations, some of which are essential. Simple partnerships and silent partnerships are both characterized by a contribution from the partners and a common purpose. However, the specific characteristics of the silent partnership require a different set of rules than those applicable to the simple partnership in its dealings with third parties, in order to take into account the inherently secret nature of this type of partnership.

Unlike simple partnerships, silent partnerships do not exist in the eyes of third parties. The general partner acts in their own name and on their own behalf when dealing with third parties. The relations between partners in a silent partnership are therefore res inter alios acta from the point of view of third parties, since they have no apparent and, a fortiori, no legal existence vis-à-vis third parties. The silent partner is therefore not jointly and severally liable with the general partner for the partnership’s debts. However, a silent partner who manifestly oversteps their background role cannot invoke the protection of the silent partnership against third parties in order to avoid joint and several (and unlimited) liability. In such a case, the third party’s trust is protected by the appearance thus created, and the silent partner who loses this capacity becomes jointly and severally (and without limitation) liable to the third party (art. 544 para. 3 SCO). This corrective mechanism is a concrete expression of the prohibition of abuse of rights (art. 2 para. 2 SCC).

Last but not least, it is interesting to note that the Federal Supreme Court recalled, by way of obiter dictum, that the Contractor could have requested the registration of a statutory mortgage in his favor (art. 837 para. 1 no. 3 and 839 et seq. SCC), which he did not do. The statutory mortgage for craftsmen and contractors is a real estate lien that secures payment for services rendered by allowing the craftsman or his subcontractors to register a mortgage on the property where the work was performed. In this regard, it should be noted that the statutory mortgage must not only be requested, but also registered within a four-month (forfeiture) period from the completion of the work (art. 839 para. 2 SCC). In this case, the date of completion of the work was not specified in the judgment, but the final invoices were dated November 30, 2013. It was not until February 2014 that the Contractor became aware of issues concerning the outstanding balance of his invoices. Assuming that the work had been completed shortly before the final invoices were issued, it is reasonable to conclude, as the Federal Supreme Court notes in its obiter dictum, that the Contractor could have applied for registration of this mortgage within the four-month deadline through a request for provisional or even super-provisional measures. This would likely have prompted the court to immediately order to register the provisional legal mortgage with the Land Registry. Such action could have spared the Contractor a lengthy and costly process to enforce his rights. This omission is aggravated by the absence of a written work contract, which would have made it easier to identify the contracting party – and thus the debtor of the unpaid invoices.

Other sources presenting the case

Université de Neuchâtel, immodroit.ch, Jurisprudence ad TF 4A_342/2023 du 5 juin 2024, « Société simple; solidarité et consorité; société simple et consorité; interprétation des manifestations de volonté; rapports internes et externes en société simple et en société tacite; art. 18, 19, 143 ss, 530 ss CO; 70 ss CPC ».

Judgment of the Federal Supreme Court of 24 September 2024

Case Reference : 4A_202/2024, 4A_212/2024

Facts

B. (the “Plaintiff”) is a company specializing in human resources, management, strategy and planning. It operates under multiple brands, including “Construction21”.

On December 11, 2020, the Plaintiff and A. (the “Defendant”), Chairman of the Board of Directors of the newly founded Arkadium company, together (the “Parties”), jointly notified the clients of Construction21 that Arkadium would assume responsibility for all employees and ongoing recruitment processes previously managed by Construction21.

A week later, on December 18, 2020, the Parties entered into a share purchase agreement that included a non-competition clause. This clause prohibited the Defendant and all affiliated entities from using the name components “Prime”, “GetTemp”, “Construction”, “Care” and “21” to compete with the Plaintiff. A contractual penalty of CHF 100,000. per breach was stipulated.

On January 11, 2021, the Defendant sent a letter to all Construction21’s experts (workers that are to be placed in construction industry companies) informing them that Arkadium had taken over Construction21’s operational activities as well as all current employment contracts. The letter featured “CONSTRUCTION21” logo in the header and included the Plaintiff’s name next to the defendant’s signature.

Claiming this communication violated the non-competition clause, the Plaintiff filed a claim in the Court of first instance seeking CHF 100,000 as a penalty. The initial claim was dismissed. However, on appeal, the Cantonal Court partially granted the Plaintiff’s claim and awarded CHF 10,000. Both Parties appealed to the Federal Supreme Court: the Defendant sought either complete dismissal or a reduction to CHF 1,000, while the Plaintiff sought full payment of the CHF 100,000.

Issue

Two issues had to be addressed by the Federal Supreme Court:

1. Whether the Defendant’s letter to the experts constitutes a breach of the non-competition clause; and
2. If so, what were the legal consequences of said breach.

Decision

The Federal Supreme Court found the language in the Defendant’s letter , specifically its reference to a “retroactive takeover of Construction21’s operational business”[1] problematic regarding the non-competition clause. The earlier letter to clients mentioned a “retroactive takeover of placement processes of Construction21 candidates”,[2] and there was no legitimate reason to change that phrasing in the second letter regardless of the fact that the two statements are equally correct.

The Federal Supreme Court interpreted the wording change as an attempt by the Defendant and Arkadium to distance themselves distinguish themselves from both the Plaintiff and Construction21, thereby violating the non-competition clause. Mentioning the takeover of Construction21’s business twice in the letter was unnecessary, and it would have been enough to simply inform the candidates that they would now need to contact Arkadium due to organizational changes. In that context, the Defendant was also not allowed to use the “CONSTRUCTION21” logo in the letterhead or to place the name of the Plaintiff below his signature.

A further breach of the non-competition clause was found in the letter, when Arkadium stated that “as a leading headhunter in the construction & property sector, [Arkadium] acts as a source of information for the experts” and “Arkadium specializes in the construction and property sector and focuses exclusively on the following sectors: architecture, civil engineering, construction logistics, building services engineering, energy sector, property, asset and real estate management, lean construction and digitalization”. Both these statements were clearly advertisement (the Defendant did not deny it) and using them alongside the Construction21 trademark only shed more light on the breach of the non-competition clause.

The Federal Supreme Court then had to analyze the consequences of said breach. Under Swiss law, and according to art. 163 paras. 1 and 3 of the Swiss Code of Obligations (SCO), parties may freely stipulate the amount of a penalty, however, the courts are authorized to reduce it if it is manifestly excessive. Importantly, the penalty remains payable even if no if no financial loss has occurred (art. 161 para. 1 SCO). If the judge considers that a reduction is necessary, restraint must be shown as to not infringe too much on contractual freedom. Such a reduction is justified in particular if there is a blatant disproportion between the amount agreed upon and the loss suffered from the contractual breach.

Such a blatant disproportion existed in the case at hand, according to the Federal Supreme Court. It considered the violations of the non-competition clause to be extremely minor, and took into account the fact that the Plaintiff did not suffer any quantifiable loss from them. On that basis, it upheld the lower court’s decision to reduce the penalty from CHF 100,000 to CHF 10,000.

Key Takeaway

Interpretation and scope of the non-competition clause in a share purchase agreement

Art. 18 para. 1 SCO establishes that the contract must be interpreted according to the real and common intention of the parties rather than being limited to the wording used. This principle, which is essential in contract law, can be broken down into two stages: subjective interpretation and objective interpretation.

Application and reduction of the penalty clause (art. 163 SCO)

While penalty clauses are permitted, art. 163 para. 3 SCO allows the court to reduce an excessive penalty clause when there is a clear imbalance between the agreed sum and the actual harm.

When a court reduces a penalty clause, restraint is required in order to respect the principle of contractual fidelity and freedom of contract (art. 163 para. 1 SCO).

In this judgment, the Federal Supreme Court upheld the reduction of the penalty clause.

Comment

The Federal Supreme Court’s decisions 4A_202/2024, 4A_212/2024 concern a non-competition clause contained in a share purchase agreement concluded between two companies.

The parties were bound by a contract (business-to-business contract). They never challenged its conclusion (art. 1 seq. SCO) or its validity (art. 11 seq. of the Swiss Civil Code (SCC), arts. 11-16 SCO, arts. 19-20 SCO, art. 21 and arts. 23-24 SCO). Instead, the parties were disputing the interpretation and enforcement of a specific contractual clause and the proportionality of the associated penalties.

The primary issue was whether the defendant had actually breached the non-competition clause in the contract.

In addition, the contract contained a penalty clause applicable in case of such a breach, which could be reduced if the amount was deemed excessive. While the Federal Supreme Court confirmed that the clause had been breached, it ruled that the contractual penalty was excessive and upheld its reduction under art. 163 para. 3 CO.

This commentary will analyze three core themes:

1. Freedom of contract and the general principles of contract law (arts. 19 and 20 SCO).
2. Contractual interpretation and the will of the parties (art. 18 para. 1 SCO).
3. The application and judicial reduction of the penalty clause (art. 163 paras. 1 and 3 SCO).

1. General principles of contract law: freedom of contract

A. Foundations and scope of freedom of contract

Although this Federal Supreme Court’s decision does not call into question the validity of the contractual clause, it is nonetheless important to recall the legal framework that such a clause must respect before analyzing its scope.

The fundamental principle of Swiss contract law is based on freedom of contract, enshrined in art. 19 para. 1 SCO, which allows the parties to freely determine whether or not to enter into a contract, with whom, and under what terms and conditions. This principle is a corollary of respect for private autonomy, which is supported in several constitutional and legal guarantees.[3]

While freedom of contract is a fundamental principle, it is not absolute. Art. 19 para. 2 SCO imposes general restrictions, specifying that contractual clauses must not be unlawful, immoral or contrary to public policy. Furthermore, Art. 20 para. 1 SCO provides for the nullity of contracts that relate to an impossible, illicit or immoral object.

However, additional limitations may apply to specific contracts. For example, art. 340 et seq. SCO imposes strict limitations on non-competition clauses included in an employment contract, particularly with regard to their duration, geographical and material scope, in order to protect the employee’s economic freedom.

B. Application to non-competition clauses in a share purchase agreement

Non-competition clauses in share purchase agreements are not governed by any specific provision of the SCO and are subject to the general principles of the law of obligations. Unlike non-competition clauses in an employment contract (art. 340 et seq. SCO), they are assessed exclusively according to arts. 19 and 20 SCO.

The main question put to the Federal Supreme Court here concerns the interpretation of the scope of the non-competition clause and enforceability of the agreed sanction.

Accordingly, the Federal Supreme Court’s analysis initially focused on the contractual interpretation of the non-competition clause in order to determine its scope (art. 18 SCO) and whether the alleged conduct constituted a breach .

2. Contractual interpretation and the intention of the parties

A. Interpretation of the contract

Art. 18 para. 1 SCO establishes that the interpretation of a contract must be done according to the true and common intent of the parties rather than merely limiting it to the wording used. This principle, which is essential in contract law, can be broken down into two stages:

1. Subjective interpretation: The court seeks to establish the true and common intent of the parties by relying on contextual elements such as previous negotiations or the parties’ post-contractual behavior (ATF 144 III 93, para. 5.2.2).
2. Objective interpretation: If the parties’ common will cannot be ascertained, the court must resort to normative (or objective) interpretation, i.e. seek out their presumed will by determining the meaning that, according to the rules of good faith, each of them could and should reasonably attribute to the declarations of will of the other. This is an interpretation in accordance with the principle of trust, itself deduced from art. 2 para. 1 CC. The determination of the objective will of the parties, according to the principle of trust, is a question of law, which the Federal Supreme Court examines freely; to decide it, however, it is necessary to base oneself on the content of the expressions of will and on the circumstances, which are a matter of fact (ATF 144 III 93, para. 5.2.3).

B. Interpretation means and maxims

When interpreting a clause, the court uses various means of interpretation. The text of the contractual clause is the primary means of interpretation (ATF 148 III 57, para. 2.2.1). However, others include but are not limited to contextual (ATF 148 V 70, para. 5.1.1), historical (ATF 77 II 154 para. 4), teleological (ATF 144 V 84 para. 6.2.1), commercial usages (ATF 132 III 460, para. 4.3).

With regard to maxims of interpretation, some legal authors, with whom we agree, consider that the wording of a clause does not take precedence over other means of interpretation.[4] Consequently, the wording of the disputed clause is merely an indication of the parties’ intentions, in the same way as the other means of interpretation. For the Federal Court, this lack of primacy of the text applies both to subjective interpretation (4A_290/2017, para. 5.4) and to objective interpretation (4C.94/2000, para. 2c).

In this decision, the Federal Supreme Court largely relied on the literal wording of the non-competition clause in order to determine its scope. On this basis, it found that the defendant had breached the non-competition clause (4A_202/2024, 4A_212/2024, paras. 4.2.1 – 4.2.5).

As one might expect, this practice is not necessarily contrary to the practice of the Federal Court, in its ATF 136 III 186 para. 3.2.1, the Federal Supreme Court points out that ‘there is no reason, however, to depart from the literal meaning of the text adopted by the parties when there is no serious reason to believe that it does not correspond to their wishes.’[5] Furthermore, although the Federal Supreme Court does not express this directly in its ruling, the weight of the contractual clause may be reinforced by the fact that the contracting parties are professionals (business-to-business contract).

3. Application and reduction of the penalty clause (art. 163 SCO)

A. Nature and function of the penalty clause

The parties are free to determine the amount of the penalty clause. However, if said amount is found to be excessive, the court may reduce it as it sees fit (art. 163 paras. 1 and 3 SCO). The penalty is due even if the creditor suffered no actual damage (art. 161 para. 1 SCO).

A penalty clause is an accessory contractual undertaking that sanctions the non-performance or breach of an obligation.[6]

It fulfils two functions:

1. Repressive: It deters the obligated party from breaching its contractual obligation; and
2. Compensatory, restorative: It compensates for the loss suffered in the event of a breach without the creditor needing to prove any damage.

In the case under review, the penalty clause served to guarantee the effectiveness of the non-competition clause by imposing a financial penalty in the event of a breach.

Excessive penalty clauses must be reduced by the courts. However, this does not mean that the court must intervene ex officio. The burden of proof lies with the debtor, who bears the consequences of failing to allege the conditions justifying a reduction, and of failing to prove them. However, the allegation need not be formulated in a particularly rigorous manner. The debtor need not explicitly request a reduction in the contractual penalty: it is sufficient for him/her to conclude, by way of exception, that the action has been dismissed in its entirety and to invoke facts, whether established or contested, that justify a reduction. The creditor may be required to indicate their loss and to contest with supporting reasons the allegation that the loss is non-existent or insignificant; they are not, however, required to prove their interest with supporting figures.[7]

B. Legal grounds for judicial reduction of excessive penalties

Art. 163 para. 3 SCO allows the court to reduce an excessive penalty clause if it clearly exceeds the damage suffered.

When a court reduces a penalty clause, restraint is required in order to respect the principle of contractual fidelity and freedom of contract (art. 163 para. 1 SCO). Judicial intervention in the contract is only justified where the agreed penalty exceeds the reasonable threshold compatible with law and equity (ATF 133 III 201, para. 5.2 ; ATF 133 III 43, para. 3.3.1).

A reduction in the penalty clause is particularly justified where there is a clear disproportion between the agreed amount and the creditor’s interest at the time of the breach of contract. This assessment must be based on the specific circumstances of each individual case.

Factors to be taken into account include: the nature and duration of the contract; the seriousness of the fault and breach of contract; the creditor’s interest in compliance with the clause; and the economic situation of the parties, particularly that of the debtor of the obligation.

Other relevant factors include any dependencies arising from the contractual relationship and the commercial experience of the parties. A reduction is more easily justified when an economically weaker party is involved, rather than in a contract concluded between partners of equal economic strength and experience in business (ATF 133 III 201, para. 5.2 ; ATF 133 III 43, para. 3.3.2)

In this judgment, the Federal Supreme Court upheld the reduction of the penalty clause for several reasons:

• The minor nature of the breach;
• The absence of proven or potential damage;
• The previous court had already reduced the penalty clause to CHF 10,000 on the grounds that the initial amount was disproportionate.

The Federal Supreme Court upheld this reduction, considering that this sum constituted an adequate penalty that is both proportionate and dissuasive.

This ruling illustrates the rigorous approach of the Federal Supreme Court to apply the principles of contractual interpretation in commercial matters, as well as its measured use of judicial discretion in reducing penalty clauses. It underscores the importance of contractual clarity in a business-to-business context and shows that the Swiss courts will intervene sparingly to modify a penalty clause, except in cases of manifest disproportion.

[1] The letter reads as follow in the original German version: “Rückwirkenden Übernahme des operativen Geschäfts der Construction21”.

[2] The letter reads as follow in the original German version: “Rückwirkende Übernahme Vermittlungsprozesse von Kandidaten der Construction21”.

[3] Guillod Olivier/Steffen Gabrielle, art. 19-20, no. 1-5, in: Thévenoz Luc/Werro Franz (éd.), Commentaire romand du Code des obligations I, 3 éd., Bâle (Helbing Lichtenhahn) 2021, (hereinafter: CR-CO-I-Auteur).

[4] D. Oppliger, Interprétation contractuelle – Poids du texte du contrat et clause d’intégralité, in Aktuelle Juristische Praxis – Pratique Juridique Actuelle (AJP/PJA), 2022, p. 1054 ss.

[5] In French : « Il n’y a cependant pas lieu de s’écarter du sens littéral du texte adopté par les intéressés lorsqu’il n’existe aucune raison sérieuse de penser qu’il ne correspond pas à leur volonté » (ATF 136 III 186 para. 3.2.1).

[6] CR-CO-I-Mooser, art. 163, no. 4.

[7] CR-CO-I-Mooser, art. 163, no. 6.

Judgment of the Federal Supreme Court of 5 July 2022
Case Reference : 4A_180/2022

Facts

The dispute concerned the following (summarized) facts:

A company active in the international trade of machinery and industrial goods, as well as financial and consulting services (the “Distributor”), and a company active in the development, manufacture and trade of machinery and software, and the provision of services thereof (the “Supplier”), entered into an Agreement entitled “Sole Distributorship and Agency Agreement” (the “Agreement”).

The Supplier contracted the services of the Distributor as an exclusive distributor and agent for the Russian national territory. An annex to the Agreement listed a series of machines which included model xxx but not model yyy, the latter being a model which did not exist at the time the Agreement was concluded.

The Distributor’s main obligation was to purchase and resell the products independently “in its own name and for its own account” in the territory assigned to it. Contingent to mutually agreed conditions, the Distributor could act as an agent for the Supplier on a case-by-case basis. With regard to remuneration, the Agreement provided that the Distributor would sell the Supplier’s products with a 25% maximum mark-up in order to cover its expenses and margins. The Agreement also provided that the Distributor would be entitled to its “respective commission” on any pending offers that would lead to a customer order within 6 months of the Agreement’s termination.

On November 8, 2012, the Supplier terminated the contract effective May 15, 2013 and admitted to having sold five model yyy machines directly to Russian customers up until November 15, 2013.

On March 24, 2014, the Distributor initiated debt enforcement proceedings against the Supplier in order to obtain payment of CHF 480’000 with interest, to which the defendant filed an opposition. Following a first legal proceeding, the First Instance Court of Gruyère ordered the Supplier to pay the Distributor CHF 480’000 with interest. The Court held that the Agreement was an agency contract and an exclusive distribution agreement, subject to the rules of Art. 418a et seq. of the Swiss Code of Obligations (SCO), granting the Distributor a commission to which it was entitled to for business concluded without its assistance during the term of the Agreement (Art. 418g para. 1 SCO “the agent is entitled to the agreed or customary commercial agent’s commission or sales commission on all transactions that it facilitated or concluded during the agency relationship and, unless otherwise agreed in writing, on transactions concluded during the agency relationship by the principal without the agent’s involvement but with clients acquired by it for transactions of that kind”). In addition, the Court considered that model yyy machines were covered under the Agreement.

Following the Supplier’s appeal, the Court of Appeal of Fribourg reversed the above ruling and dismissed the claims put forward by the Distributor.

The Distributor filed a civil law appeal with the Federal Supreme Court.

Issue

The issue in this case was whether the Distributor was entitled to a commission on direct sales that were made by the Supplier in the territory granted to the Distributor.

Decision

1. The Conditions of Agency and Distribution Agreements

The Federal Supreme Court recalled the Court of Appeal’s reasoning on the nature of the Agreement and the application of Art. 418a et seq. SCO and reminded the key distinctions between an Agency Contract and an Exclusive Distribution Agreement.

According to Art. 418a para. 1 SCO, an agent is a person who undertakes to act on a continuous basis as an intermediary for one or more principals in facilitating or concluding transactions on their behalf and for their account without entering into an employment relationship with them (Federal Supreme Court judgment 4C.218/2005 of April 3, 2006, para. 3.2).

An Exclusive Distribution Agreement is one by which a person (i.e. the supplier) promises to another (i.e. the exclusive distributor) to deliver specific goods to it at a certain price and to ensure it exclusivity in a given geographic area, in exchange for payment and promotion of sale within said geographical area (Federal Supreme Court judgments 4A_393/2021 of March 4, 2022, para. 6.2.1; 4A_241/2017 of August 31, 2018, para. 3; 4A_61/2008 of May 22 2008, para. 2 unpublished in ATF 134 III 497. As opposed to an Agency Contract, the Distribution Agreement is not subject to a specific legal regulation (Federal Supreme Court judgment 4A_71/2019 of October 8, 2019, para. 4.1.1). The distributor has greater independence since it acts in its own name and on its own account, whereas an agent does so in the name and on behalf of the other party (Federal Supreme Court judgment 4C.130/2004 of June 18, 2004, para. 2.2). In the case at hand, the Distributor purchased the products from the Supplier and resold them in its own name and to its own customers, as provided for in the Agreement.

2. The Will and Intent of the Parties

The Federal Supreme Court analyzed the question of the will and intent of the Parties in response to the Distributor’s allegation that the manner in which the facts had been established by the Court of Appeal were a violation of Art. 18 SCO. According to the Distributor, the Parties had agreed that it was entitled to a commission on direct sales.

According to Art. 1 para. 1 SCO, the contract is perfected when the parties have, mutually and consistently, expressed their will. If the parties have not agreed on all essential elements of the contract, the contract has not been concluded (ATF 127 III 248, para. 3d and the references cited; Federal Supreme Court judgment 4A_553/2020 of February 16, 2021, para. 4.2).

To determine the content of a contract, and whether it has been concluded, the judge shall interpret the parties’ expressions of will (ATF 144 III 93, para. 5.2; Federal Supreme Court judgment 4A_177/2021 of September 6, 2021, para. 3.2).

According to the rules of interpretation of contracts derived from Art. 18 SCO, the judge shall, first and foremost, seek the real and common intention of the parties (subjective interpretation), and, if necessary, empirically, on the basis of clues. Clues are not limited to the content of the declarations of will – written or oral –, but also the (general) context, i.e., all circumstances making it possible to determine the (real) will of the parties. These could include statements made prior to the execution of the contract or facts arising subsequent to its execution, and, in particular, the subsequent conduct of the parties which would highlight their own conceptions thereof at the time.

Lastly, if the judge fails to determine the real and common will of the parties, either because the evidence is lacking or it is inconclusive, or if the judge finds that one party did not understand the will expressed by the other at the time of the contract’s execution–which does not result from the simple fact that it asserts it during the procedure, but shall result from the administration of evidence, the judge shall resort to normative (or objective) interpretation according to the Principle of Trust. In other words, the judge shall seek their objective will by determining the meaning that, according to the rules of good faith, each of them could and should reasonably lend to the declarations of will of the other. This principle makes it possible to impute to a party the objective meaning of its declaration(s) or its conduct, even when it does not correspond to its intimate will. Determining the objective will of the parties in accordance with the Principle of Trust is a question of law, which the Federal Supreme Court is at liberty to review (ATF 144 III 93, Section 5.2.3 and the cited references).

In this case, the Federal Supreme Court concluded that the Court of Appeal had accurately determined the subjective will of the parties without needing to resort to objective interpretation, because in assessing the evidence, it was clear that according to the Agreement, the Distributor’s main requirement was to purchase from the Supplier and to resell the products as an independent party “in its own name and for its own account” in the territory assigned to it and that its remuneration would be based on reselling the products with a 25% maximum mark-up. Thus, the Parties were bound by an Exclusive Distribution Agreement and not by an Agency Contract. The title of the Agreement’s Section 10 related to the remuneration of the Distributor, the “commission rate”, had no bearing on the analysis of the Federal Supreme Court.

The Federal Supreme Court also considered that the Distributor did not claim that the SCO’s provisions concerning the agent’s remuneration should be applied by analogy.

Furthermore, although the Agreement also provided for a case-by-case Agency Contract, the Parties did not agree on the terms of an Agency Contract concerning the products that the Supplier sold directly on the territory assigned to the Distributor, and in particular those relating to the commission.

Following these considerations, the Federal Supreme Court deemed it unnecessary to examine whether model yyy machines were covered under the Agreement.

In conclusion, the Federal Supreme Court rejected the appeal, thereby confirming the judgment handed down by the Court of Appeal of Fribourg.

Key takeaway

This case constitutes an important reminder of the distinctions between an Agency Contract and an Exclusive Distribution Agreement as well as the legal consequences of such distinction. In this case the very title of the Agreement was ambiguous because it referred to both a distributorship and to an agency agreement, “Sole Distributorship and Agency Agreement”.

Comments

This case prompts three important practical comments/takeaways:

1. This case is an interesting and didactical example of the fundamental distinction that is made under Swiss contract law between an agency agreement that is regulated under Swiss contract law (Art. 418a et seq. SCO) and an exclusive distribution agreement which is an innominate agreement to which legal provisions relating to agency agreements do not apply directly even though certain legal provisions may be applied by analogy.

2. Due to the comment above, this case triggers the specific question whether Art. 418g SCO which is applicable to agency agreements may be applied by analogy to exclusive distribution agreements which was not discussed in this case. As mentioned by the Federal Supreme Court, the Distributor did not claim that the SCO’s provisions concerning the Agent’s commission should be applied by analogy in the event the Agreement would be qualified as an Exclusive Distribution Agreement (which is what the Federal Supreme Court decided). One can wonder whether the Distributor could have potentially benefitted from the application by analogy of Art. 418g SCO by relying on a source of legal literature. To the best of our knowledge, the author of this comment is the only author who has suggested the application, by analogy, of Art. 418g para. 2 SCO (which provides that “an agent to whom a particular area or clientele has been allocated exclusively is entitled to the agreed commission or, in the absence of such an agreement, the customary commission on all transactions concluded during the agency relationship with clients belonging to that area or clientele”) to the Exclusive Distribution Agreement (see Kaveh MIRFAKHRAEI, Les indemnités de fin de contrat dans le contrat d’agence et le contrat de distribution exclusive, Basel/Zurich/Geneva 2014, p. 62, N 206). As such, it would have been interesting to have the opinion of the Federal Supreme Court on this issue.

3. According to the Federal Supreme Court, an Agency Contract is one by which a person undertakes to act on a continuous basis as an intermediary for one or more principals in facilitating or concluding transactions on their behalf and for their account without entering into an employment relationship with them. However, the definition of an Agency Contract provided by the Federal Supreme Court is partially incorrect because the agent shall have several agency contracts in order to act for “more principals” (see Kaveh MIRFAKHRAEI, Les indemnités de fin de contrat dans le contrat d’agence et le contrat de distribution exclusive, Basel/Zurich/Geneva 2014, p. 9, N 11, n. 2).

Judgment of the Federal Supreme Court of 30 July 2020

Case reference : 4A_186/2020

Facts

The dispute concerned a share purchase agreement (the “SPA”) between Z (the “Seller”) and X. SA (the “Purchaser”) for shares of the company W. SA (the “Target Company”). At the time of the conclusion of the SPA on December 3, 2007, both parties were aware that the Target Company had an ongoing conflict with a former agent of the Target Company (the “Agent”) who had initiated court proceedings in which he claimed the payment of CHF 738,500 from W. SA. The risk of said dispute was reflected in Article 6 of the SPA as follows:

“In view of the potential procedural risk of the claim raised against [the Target Company] by [the Agent], the [S]eller shall undertake to secure this risk to the [P]urchaser by issuing of a first-rate bank guarantee of CHF 850,000, which shall be maintained until a final and enforceable judgment is rendered on the matter, but which shall be fully released by February 28, 2012 at the latest in any event and without any further condition.
In the event that [the Target Company] should lose in these proceedings, the said guarantee shall be released subject to the amount charged to W. SA”.^[1]

In execution of the SPA, the Purchaser paid the last installment of the sales price on July 30, 2008. The Parties signed a SPA closing protocol on the same day, by which they confirmed the obligation of the Seller to issue a bank guarantee. Upon instruction of the Seller, a bank issued a bank guarantee on the same day that was valid until February 28, 2012 (pursuant to Art. 6 of the SPA). The bank guarantee was released on that date.

The court proceedings initiated by the former Agent against the Target Company ended only on March 17, 2016 (i.e. over four years after the release of the bank guarantee). The Target Company was ordered to pay CHF 363,000 plus 5% interest as of September 30, 2001 and expenses amounting to CHF 39,000. On February 17, 2017, the Purchaser sued the Seller before the Court of First Instance claiming the payment of approximately CHF 880,000 on the grounds that the Seller had the contractual obligation to reimburse the costs of litigation with the Agent. The Court of First Instance rejected the Purchaser’s claim, which was later upheld by the Court of Appeal.

Issue

The Federal Supreme Court had to decide on the interpretation of Art. 6 of the SPA. In other words, it had to assess whether the Seller was no longer liable through the application of this contractual provision (which was the verdict reached by the Cantonal Courts). More specifically, the issue was whether Art. 6 of the SPA set a time limit for the liability of the Seller whereby the liability would expire when the bank guarantee was to be released (i.e. February 28, 2012).

Decision

The Federal Supreme Court was confronted with two vastly diverging interpretations of Art. 6 of the SPA. The Purchaser claimed that the Seller was obliged to reimburse him for any costs incurred in the proceedings against the former Agent without limit in time, and without being bound by the time limit for the release of the bank guarantee, which had to be released at the latest on February 28, 2012. The Purchaser claimed in this respect that the bank guarantee to be provided by the Seller was only intended to confirm the Seller’s ability to perform its obligation to reimburse the Purchaser until February 28, 2012. The Seller, on the other hand, claimed that Art. 6 of the SPA had to be interpreted as meaning that its sole obligation was to provide a bank guarantee until February 28, 2012, with no further obligation following the expiration date of the bank guarantee.

In its decision (reference ACJC/292/2020), the Court of Appeal (similarly to the Court of First Instance) came to the conclusion that the contract, in particular Art. 6 of the SPA, expressed the real and common intention of the parties pursuant to Art. 18 of the Swiss Code of Obligations (“SCO”). It reached this decision by taking into account the documents that the Parties had used during the negotiations that led to the SPA: the annexes to the SPA, a clause in the agreement stating that the SPA shall replace all previous written or oral agreements between the Parties, other sections of the SPA, the SPA closing protocol, as well as the expectations of the parties with regard to the likely outcome of the proceedings between the Target Company and the Agent.

In its decision, the Federal Supreme Court summarily confirmed the Court of Appeal’s judgment that Art. 6 of the SPA expressed the real and common intention of the parties (based on subjective contract interpretation which looks at facts) and that Art. 6 only required the Seller to provide a bank guarantee that was limited in time. The Federal Supreme Court further stated that the Purchaser had not pleaded that the Court of Appeal had applied the wrong method of interpretation and had simply used the appeal to reiterate its arguments from the proceedings before the Court of Appeal.

Key takeaway

This case constitutes an important reminder of the precision required when formulating guarantee provisions in share purchase agreements. In particular, parties (and their counsel) are strongly advised to clearly set out what shall be the term of the liability of the seller for any third-party litigation risks. In this case, the liability of the Seller was set out in such a way that it was interpreted to consist only in the issuance of a bank guarantee that was limited in time and to be released at the latest by a certain date, which was well before the litigation, whose risk was at the heart of the issue, had terminated.

The case further illustrates that whenever a lower court reaches the conclusion that a contract corresponds to the parties’ true and corresponding intent on the grounds of subjective interpretation, it is a question of fact and thus not a question of law. This means that the review by the Federal Supreme Court is extremely limited and that a reversal of a lower court judgment is highly unlikely.

Comments

Swiss contract law distinguishes between subjective and objective contract interpretation. According to this principle derived from Art. 18 SCO, a contract has to be interpreted primarily subjectively. This means that courts are held to give the contract the meaning that corresponds to the common inner will of the parties at the time the contract was concluded. Only where such common intent cannot be established, should Courts resort to interpret the contract objectively, i.e. determine how a reasonable party in the position of the parties to the contract could have understood the agreement. It is clearly established by the Federal Supreme Court’s caselaw that the question of whether or not the parties had a common inner will at the time the contract was concluded, is a question of fact that cannot be reviewed by the Federal Supreme Court except in cases of manifest error. In other words, the Federal Supreme Court can only review decisions where the Cantonal Courts have resorted to objective interpretation.

In this case, the Court of Appeal had applied a subjective interpretation and came to the conclusion that Art. 6.1 SPA corresponds to the “real common intention” of the parties. The Federal Supreme Court pointed out that the Purchaser had not criticized the “method of interpretation” applied by the Court of Appeal in principal, but merely reiterated its own prior arguments. This might be seen as a hint that the Federal Supreme Court would have potentially been willing to scrutinize the decision handed down by the Court of Appeal more thoroughly if the Purchaser had pleaded that the method of interpretation applied by said Court was misguided and that the contract should have been interpreted in an objective manner. In the case of an objective interpretation, there could have potentially been additional arguments made to challenge the decision of the Court of Appeal.

 Other sources presenting the case

Judith Rothen / Dario Galli / Markus Vischer, Leistungs- und Sicherungsversprechen in

Aktienkaufverträgen, in: dRSK, published on June 7, 2021, https://www.walderwyss.com/user_assets/publications/210607-Leistungs-und-Sicherungsversprechen-in-Aktienkaufvertragen.pdf

Christoph Brunner / Dario Galli / Markus Vischer, Die Rechtsprechung des Bundesgerichts zum Kaufvertragsrecht im Jahr 2020, in: Jusletter November 29, 2021

[1] In the French original text « Compte tenu du risque procédural potentiel présenté par la demande en paiement formée contre W. SA par M.U., le vendeur s’oblige à garantir ce risque envers l’acquéreur par la remise d’une garantie bancaire de premier ordre à hauteur de 850’000 fr. qui sera maintenue jusqu’à droit jugé de manière définitive et exécutoire, mais qui sera totalement libérée au plus tard le 28 février 2012, en tout état et sans autre condition. Dans l’hypothèse où W. SA succomberait dans cette procédure, ladite garantie serait libérée à due concurrence des montants mis à sa charge […].»

Judgment of the Federal Supreme Court of 2 September 2021

Case Reference: 4A_531/2020

Facts

The case concerned the owner of an ancient villa in Geneva. He undertook to completely renovate his villa and entrusted an architect to supervise the renovations.

Initially, the total cost of the home renovation was estimated at CHF 880,000. The owner asked the architect to reduce the cost by CHF 30,000 as he did not want to exceed the amount of CHF 850,000. He made this request known several times and even made concrete proposals to lower the total cost. He also asked for a new quote with several of the items reduced. Although he never received this new quote, he regularly paid all the invoices submitted by the architect during the project. He also ordered additional work at a cost of about CHF 20,000.

When the final bill arrived six months later, the total cost was CHF 915,000. The owner requested that the architect be ordered to pay the difference between the total cost of the renovations and the maximum amount he did not want to exceed.

Issue

The issue was whether the architect breached his contractual duty since the cost of the home renovations had been higher than the owner wished and, if so, whether the architect had to reimburse the owner for the excess amount.

Decision

For the architect to be held liable either (1) the principal set a binding cost limit or (2) the quotes were inaccurate or exceeded the acceptable margin of uncertainty.

1) Did the principal set a binding cost limit?

Under the rules of the contract of agency (Art. 394 SCO), which are, as a rule, applicable to the contract agreed upon with an architect regarding construction works, the principal can set a limit on the construction costs to avoid the risk of having to assume additional costs. There are two possibilities: (1) a binding cost limit, which is tantamount to a formal instruction given by the principal to the architect (Art. 397 SCO); or (2) a merely non-binding guideline as to the wished maximum amount. Whether the principal had imposed a binding cost limit on the architect is a matter of interpretation (Art. 18 par. 1 SCO).

If the cost limit ordered by the principal is binding on the agent, violating this instruction constitutes a breach of contract (Art. 97 and 398 SCO). Specifically, if the architect notices or should notice that the cost limit cannot be met or if he doubts that it can be met, the architect must stop the construction works, investigate and inform the owner so that the latter can take appropriate measures to maintain the cost limit. If the architect fails to perform these duties promptly, he shall compensate the client for the damage incurred, which corresponds to the additional costs that the principal specifically wanted to avoid with the binding cost limit.

In the case at hand, the judges ruled out the existence of a binding cost limit of CHF 850,000.

According to the Court, the owner should have indicated precisely which renovations he thought should be reduced and required the architects to submit a new quote. However, he let the renovations go ahead and paid all the contractors’ and architects’ payment orders and invoices with no objection until the work was completed. Given the owner’s behavior, there could not have been a binding cost limit.

2) Were the quotes inaccurate and was there a margin of uncertainty?

A quote is an assessment of the presumed costs of the works to be performed by third-party contractors. As such, any quote contains an inherent element of uncertainty. The overruns may be caused by two factors: (1) an inaccurate estimate of the costs at the outset; (2) an error in the way the work of the architect is conducted (not applicable in the case at hand).

To avoid miscalculating the costs, the architect must draw up the quote carefully, give the client all the necessary information regarding costs, including the degree of uncertainty attached to the estimate, and monitor the development of costs during the work so that any overruns can be reported promptly. If the architect fails to meet these obligations, he is liable for this breach of confidence in the accuracy of the quote and must compensate the principal for the damage resulting therefrom and for having made arrangements accordingly.

However, a slight overrun does not yet constitute a breach of the architect’s duties. The architect must in principle indicate the margin of uncertainty in his quote, but if the margin of uncertainty has not been stated, Courts generally acknowledge that a 10% margin of uncertainty is acceptable for new constructions.

In the case at hand, the architect did not indicate the margin of uncertainty in his quotes. The final price was about 2% higher than the initial estimate, after deduction of the additional work ordered by the owner. Under these circumstances, the client cannot argue disappointed confidence in the architect and the latter is not liable.

Key takeaway

When an owner hires an architect for home renovations and wants a cost limit to be respected, he must make it clear that there is a cost limit and that it is binding. It is advisable to clearly state the cost limit in writing in the contract. If this is not feasible, the client must either stop the work or make explicit proposals to the architect that are likely to lead to a reduction in costs. Otherwise, a cost overrun of up to 10% is generally considered acceptable.

Comments

Swiss and French law (Dutilleul/Delebecque, Contrats civils et commerciaux, Dalloz, 2019, p. 658), as well as German law (Oechsler, Vertragliche Schuldverhältnisse, Mohr Siebeck, 2013, p. 776), hold that an architect’s contract may include elements of a contract of agency, subject to an obligation of means (e.g., the management of the work), and elements of a contract for work and services, subject to an obligation of result (e.g., the preparation of the plans).  The legal rules governing a specific architectural contract therefore depend largely on the concrete content given to it by the parties.

This provides an opportunity to recall a fundamental principle of Swiss contractual liability law: the liability is limited by the extent of the obligation incurred by the debtor. However, unless this obligation is set out in the Code of Obligations, it must be sought in the contractual arrangements made by the parties. This was the reasoning behind the first test carried out by the Court in the case at hand (the binding cost limit test).

The first step of the analysis was therefore to determine the architect’s duty: what did he commit to? In this assessment, the judges had been relatively unyielding and blamed the principal for not proving that the limit of CHF 850,000 was a binding cost limit. To prove the existence of a binding cost limit, the principal should have: studied the quotes more carefully; made clear and relevant cost reduction proposals; not paid all the invoices for the work carried out without complaint; and not ordered additional work. It can be observed that the architect is therefore relatively well protected against a binding cost limit if such binding cost limit had not been explicitly mentioned in the contract.

Nevertheless, it is still possible to rely on a principle of good faith, taken from the particular point of view of loss of confidence, when the overrun of the estimate exceeds what is acceptable (in principle 10%). This was the reasoning behind the second test performed by the Court (the margin of uncertainty test). Here, the test failed due to the small cost overrun.

It should be added that, even in the case of a significant cost overrun, the entire cost overrun does not necessarily have to be paid by the architect. On the one hand, the client must prove that he would have adopted a different behavior and thus saved some costs. On the other hand, the architect does not have to reimburse the value that the client would have likely accepted if the architect had informed him correctly.

Judgment of the Federal Supreme Court of 19 January 2021
Case Reference : 4A_503/2020

Facts

By agreement dated 27 July 2017, two Swiss companies undertook to work together on an IT project, whereby one of the contractual partners had to carry out work for the Swiss government.

According to Article 9, paragraph 5 of the agreement, any dispute arising from the contract shall be settled through negotiations. If such dispute cannot be settled, it may be submitted before the Commercial Court of the canton of Zurich (“Bei Meinungs verschiedenheiten ist vor Anrufung des Richters eine gütliche Einigung anzustreben. Sollte sich dennoch eine gerichtliche Beurteilung nicht vermeiden lassen, gilt als Gerichtsstand: das Handelsgericht Zürich[.]”).

Under Article 2 of the agreement, the parties attached a binding specification sheet for the IT project and further specified that the latter would prevail in case of conflict with the main contract. The specification sheet itself referred to two different sets of general terms and conditions: those of one of the parties, i.e. the defendant (hereafter: the “Defendant’s Terms”), and those of the Swiss Federal government (hereafter: the “Federal Terms”).

The two sets of terms and conditions differed from the main contract regarding the forum clause: the Defendant’s terms set out the jurisdiction of the general courts of the canton of Zurich, rather than that of its Commercial Court (“Gerichtsstand: das Handelsgericht Zürich”, original emphasis), while the Federal Terms had set out the jurisdiction of the courts of the canton of Bern (“Ausschliesslicher Gerichtsstand ist Bern”). Both sets of terms, however, also stipulated that negotiated contractual documents shall prevail over their own provisions.

On 8 April 2020, one of the parties sued its counterpart before the Commercial Court in Zurich, claiming damages on the grounds of an alleged breach of contract. The defendant challenged the jurisdiction of the Commercial Court, and argued inter alia that since the agreement was subject to three contradictory choice of forum clauses, the clauses were void and the competent jurisdiction should be determined in light of the default rule of Article 31 of the Swiss Civil Procedure Code (SCPC), which sets out the jurisdiction of the courts of the canton of either the defendant’s registered office or the place where any of the contractual obligations are to be performed.

Given that the Commercial Court ultimately confirmed its jurisdiction to hear the case on the grounds of the choice of forum clause contained in the main cooperation agreement, the defendant appealed the case before the Federal Supreme Court (FSC), which gave rise to the judgment presented hereunder.

Issues at stake

When several contractual documents, i.e. the main contract and general terms and conditions, contain conflicting choice of forum clauses, which one should prevail?

Judgment

Under Swiss law, the substantive validity of a choice of forum clause rests upon whether the involved parties consented to the jurisdiction of the selected court; in this regard, their choice must be precisely and clearly demonstrated so as to allow said court to establish its competence beyond a reasonable doubt (Art. 17 para. 1 SCPC, see also ATF 132 III 268).

Through the application of this principle, the FSC found that the parties had validly selected the Commercial Court of the canton of Zurich through Article 9 paragraph 5 of the cooperation agreement, which prevailed over the other choice of forum clauses. The Federal Supreme Court held, inter alia, that:

• Article 9 paragraph 5 could be reasonably understood by both parties as selecting the Commercial Court of the canton of Zurich;
• The provision in question had been individually negotiated, whereas the other clauses were set out in pre-formulated general terms and conditions, and were therefore not indicative of the parties’ common intent; and
• Both the Defendant’s Terms and Federal Terms recognized the above principle of interpretation by stating that individually negotiated terms prevailed over them; furthermore, the cooperation agreement only referred to the IT specification sheet itself and not directly to either of the Terms.

The FSC thus concluded that the Commercial Court in Zurich had rightly confirmed its jurisdiction over the case matter and upheld its decision to let the court hear the case.

Key take-away

This case provides helpful guidance for cases where conflicting choice of forum clauses are contained in a contract and its annexes. The FSC will primarily resolve such conflicts by referring to the parties’ common will as expressed in their negotiated contract but also through their other communications and statements of intent. Pre-formulated documents – such as general terms of conditions – shall on the other hand not be considered as an indication of the parties’ common will, and are thus unlikely to prevail over the former.

Comment

The judgment handed down by the FSC, which was rendered in the context of an internal (intra-Switzerland) dispute subject to the SCPC, is in line with the principles applicable to choice of forum clauses in international disputes, including under the Brussels I (recast) Regulation. In its judgment of 8 March 2018 (Case C-64/17, Saey Home & Garden v Lusavouga-Máquinas e Acessórios Industriais), the Court of Justice of the European Union (CJEU) similarly stated that the parties’ consent to a choice of forum clause must be clearly established, e.g. through an express reference made thereto in the main contract. Accordingly, the CJEU voided a choice of forum clause which was contained in a seller’s general terms and conditions since it was only referred to by said seller in its invoices to its counterparty.

As a result, parties to a contract should be aware that choice of forum clauses contained in their general terms and conditions will generally not be enforced by courts in the absence of an express agreement made with their contractual partner(s).

Judgment of the Federal Supreme Court of 4 September 2020
Case Reference : 4A_225/2020

Facts

On December 4, 2015, the main shareholders of F. SA (the “Sellers”), a corporation organized and existing under the laws of Switzerland, entered into a share purchase agreement (the “SPA”) with a UK limited company (the “Buyer”; the Buyer and the Sellers: the “Parties”), whereby they agreed to sell their shares (the “Shares”) in F. SA (the “Company”) to the Buyer for a total aggregate consideration of CHF 7,700,000. At closing, the Buyer paid the amount of CHF 5,600,000 to the Sellers as preliminary consideration. The SPA allowed the Buyer to retain the outstanding consideration (i.e., CHF 2,100,000) as security for any claims for price reduction. The final consideration was to be reduced, according to the SPA’s terms and conditions, if the Company’s revenue for the year 2015 did not reach CHF 4,700,000. This final consideration could be adjusted in line with the Company’s working capital, and reduced where other SPA provisions were met.

Pursuant to the SPA, the Buyer committed to deliver to the Sellers the “audited” financial statements of the Company, as well as other relevant financial documentation for the year 2015 by no later than April 30, 2016. Upon receipt, the Sellers would have a 21-day period in which to review and assess the documents and, where necessary, have the 2015 revenue and net working capital of the Company audited. The Parties would then have a 10-day period in which to agree on the revenue and net working capital, which would eventually determine the final consideration for the Shares. The final consideration was to be paid by November 30, 2016.

On June 19, 2017, the Sellers jointly filed suit at the Geneva Court of First Instance seeking payment of the final consideration for the Shares under the SPA. The Court granted the plaintiffs’ motion on April 15, 2019, ruling that the Buyer had failed to deliver the audited financial statements and other relevant documents by April 30, 2016. The Buyer was therefore deprived of its right to claim for a price reduction based on the Company’s revenue and working capital for the year 2015. The Buyer challenged this ruling before the Court of Justice of the Canton of Geneva, which partially admitted the appeal. It found that the April 30, 2016 deadline agreed upon by the Parties for the delivery of the financial documents could not be construed as a conditio sine qua non for a price reduction. The Court of Justice stated that this deadline was only indicative and its violation would not result in the loss of any related right. The Sellers were therefore entitled to CHF 296,648.35 in aggregate as final consideration for the Shares, instead of the full price of the outstanding consideration (CHF 2,100,000). The judgment of the Court of Justice was confirmed by the Federal Supreme Court.

Issue

The Federal Supreme Court had to determine whether the Buyer was entitled to claim a price reduction under the SPA even though it had failed to deliver financial information to the Sellers on the contractually defined date determining the final consideration due for the Shares.

Decision

The Federal Supreme Court first turned to the interpretation of the SPA reached by the Court of Justice of the Canton of Geneva with respect to the consequences stemming from the failure to meet the deadline of April 30, 2016, by which the Buyer had to provide the Sellers with the financial documentation of the Company. Applying Art. 18 para. 1 Swiss Code of Obligations (SCO), the Court of Justice ruled that pursuant to the true and common intention of the Parties to the SPA, the price reduction was not subject to the Buyer delivering the financial documents within the established timeframe. Accordingly, the failure to fulfill this obligation in time would not entail forfeiture of the right to claim a price reduction. As the Federal Supreme Court stated, this constitutes a finding of fact, to which it is bound as a matter of principle (Art. 105 para. 1 of the Federal Supreme Court Act).

The Sellers argued that the findings of fact were established in a manifestly incorrect manner (Art. 97 para. 1 of the Federal Supreme Court Act). In short, they asserted that the Court of Justice erred in its conclusion that the Buyers could claim a price reduction without respecting the deadline of April 30, 2016. While acknowledging that the SPA did not specify the consequences of a failure to meet the deadline, they argued that the deadline was part of a specific procedure agreed by the Parties for the purpose of calculating the final consideration of the Shares on a common basis and according to stringent criteria.

The Federal Supreme Court was therefore called upon to determine whether the findings of fact were tainted by arbitrariness pursuant to Art. 9 of the Federal Constitution (Art. 105 para. 2 of the Federal Supreme Court Act). The scope of such review is limited; a court is deemed to have decided in an arbitrary manner when it disregards evidence that is likely to affect the decision without sound basis, when it manifestly misinterprets its meaning and scope, or when it reaches untenable findings on the basis of the evidence obtained.

The Federal Supreme Court found that the process agreed on by the Parties to determine the final consideration was dependent on the Parties’ goodwill and cooperation because it provided that the Parties had to agree on the amounts of the revenue and net working capital, which would eventually determine the final consideration for the Shares. This process consequently lacked the precision and rigor the Sellers were insisting on. Further, the SPA provided for the possibility to increase the final consideration based on the net working capital. The Federal Supreme Court pointed out that if it were to follow the Sellers’ argument that the Buyer had a strict deadline of April 30, 2016 to submit the documents, the Buyer could have avoided paying more (i.e., a higher final consideration for the Shares) by simply not delivering the financial documentation within the given deadline. The Federal Supreme Court found that such interpretation was neither consistent with the general outline of the SPA nor the true and common intention of the Parties.

In conclusion, the Federal Supreme Court ruled that the Court of Justice’s findings of fact were not tainted by arbitrariness, and that its conclusion that a price reduction would not be adversely affected by delay in the submission of the required financial documentation was correct as a matter of law.

Key takeaway

This case serves as an important reminder that the parties negotiating an SPA with a post-closing sale price adjustment mechanism must precisely define this mechanism and specify the consequences should one of the parties fail to meet a deadline for submitting documents under this mechanism (see also Tschäni Rudolf/Diem Hans-Jakob/Wolf Matthias, M&A-Transaktionen nach Schweizer Recht, 3^rd edn, Zurich (Schulthess) 2021, § 357). If the parties do not specify these consequences, this may lead to litigation (as in this case) where the courts will have to interpret the SPA (with the potential for diverging outcomes, as shown by the opposing conclusions reached by the Geneva Court of First Instance and the Geneva Court of Justice). The courts will have to interpret the agreement by examining the true and common intention of the parties pursuant to Art. 18 SCO. This is a finding of fact made by the cantonal courts that may only be reviewed by the Federal Supreme Court with very limited judicial scrutiny (the standard of review being arbitrariness).

Comment

When drafting a contract, one of the pivotal questions the parties should bear in mind is: “What are the consequences of a failure to meet an established deadline?” and clearly provide for the judicial consequences of such failure to avoid disputes like the one at hand.

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.