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

Facts

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

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

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

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

The Manager appealed to the Federal Supreme court.

Issue

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

Decision

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

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

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

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

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

Key takeaway

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

Comments

The decision is interesting for two main reasons.

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

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

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

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

Other sources presenting the case

Oliver Dreyer, ius.focus 2024 n° 246.

 

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

Facts

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

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

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

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

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

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

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

Issue

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

Decision

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

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

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

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

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

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

Key takeaway

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

Comments

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

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

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

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

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