In a recently published decision, the Supreme Court annulled a partial award on jurisdiction in which an International Chamber of Commerce arbitral tribunal in Geneva had extended the arbitration agreement to a subcontractor based on its implied consent to arbitration.(1)
As part of a project for the construction and operation of power plants in Bangladesh, the supplier subcontracted the delivery of diesel engines for one of these power plants. After the installation of these engines, numerous technical issues occurred, following which the purchasers refused to make payments under the supply contracts.
Thus, the supplier started arbitration based on the identical arbitration clauses contained in four supply contracts. The purchasers requested that the subcontractor become a party to the arbitration, which the latter refused, arguing that the arbitral tribunal lacked jurisdiction. The arbitral tribunal rejected the subcontractor's jurisdictional objection. The subcontractor challenged the award before the Supreme Court, arguing that it had not consented to arbitration and that the arbitral tribunal had thus wrongly accepted jurisdiction.
The arbitral tribunal interpreted the arbitration clause pursuant to Swiss law and examined whether the extension of such clause could result from the subcontractor's involvement in the conclusion and performance of the main supply contract. The tribunal noted the circumstances of the subcontractor's involvement, including:
- its participation in meetings with the purchasers, including the first meeting before the conclusion of the main contract;
- its involvement in the conclusion of the main contract (namely, its provision of an annex thereto, which contained the guarantee values and performance test procedure of the engines);
- its attendance at the installation of the engines and its interventions to solve technical issues; and
- its direct correspondence with the purchasers regarding such technical issues.
While these circumstances taken separately would not have justified an extension of the arbitration clause to the subcontractor, the arbitral tribunal found that, viewed together, they established the subcontractor's involvement in the conclusion and execution of the main contract to such an extent that the parties could in good faith have understood that the subcontractor intended to be bound by the arbitration clause. The arbitral tribunal considered that it was particularly relevant that one of the essential technical documents of the main contract originated from the subcontractor. Under these circumstances, the arbitral tribunal was not convinced that the subcontractor had had no knowledge of the content of that contract (including of its arbitration clause). Further, the handling of the technical issues, particularly the joint letters sent on behalf of the supplier and subcontractor, further corroborated this interpretation.
As regards the other supply contracts, the arbitral tribunal found that similar circumstances were not established. Thus, it denied its jurisdiction to decide claims resulting from such contracts.(2)
The Supreme Court could review the arbitral tribunal's interpretation of the arbitration clause because it was not based on a finding of a true and common intention to be bound by the arbitration agreement (ie, a subjective interpretation, which cannot be reviewed by the Supreme Court). The arbitral tribunal had interpreted the subcontractor's conduct in accordance with the principle of good faith (ie, an objective interpretation, which can be reviewed by the Supreme Court).(3)
The Supreme Court noted that the arbitral tribunal had rightly recognised that, under certain circumstances, an arbitration clause may be extended to third parties.(4) However, it found that such circumstances were not met in the present case – in particular, that the subcontractor's involvement in the performance of the main contract was not sufficient to admit its implied consent to be bound by the arbitration agreement contained in that contract.(5) In this respect, the Supreme Court held, among other things, that:
- it was unsurprising that the guarantee values and performance test procedure for the engines originated from the subcontractor as the engines were provided by the subcontractor, which was expressly recognised in the main contract;
- although the subcontractor had attended the first meeting with the purchasers, only the supplier had eventually entered into a contractual relationship with the purchasers;
- it was also unsurprising that the subcontractor had been involved in the performance of the main contract as it had supplied the engines, which were an essential component of the power plant; and
- it was likewise unsurprising that the subcontractor had intervened to resolve the technical issues (or guaranteed to take care of these issues jointly with the supplier), as part of its obligations as subcontractor.
In view of the contractual arrangements made for the construction of the power plant, the purchasers must have been aware that the subcontractor was not a party to the main contract and was also not bound by the arbitration clause contained therein.(6)
According to the Supreme Court, the case at hand differed from a previous one (relied upon by the purchasers) in which the Supreme Court had admitted the extension of an arbitration clause based on a third party's implied consent. In that case, although the third party was not contractually involved in the performance of a construction project, it had influenced the management of two companies involved in that project, which was carried out on land indirectly owned by the third party and the permit for which was issued to that party.(7)
Thus, the Supreme Court concluded that the arbitral tribunal's jurisdiction could not be based on the subcontractor's implied consent to the arbitration clause contained in the main contract. Therefore, the Supreme Court annulled the award and remanded the case back to the arbitral tribunal for a new decision, including a decision as to whether jurisdiction over the subcontractor was given based on an assignment of the suppliers' contractual obligations to the subcontractor, which the arbitral tribunal had left open in its first award.(8)
Considering the specific factual background underlying this decision, it may be difficult to draw generally applicable conclusions from the Supreme Court's findings. However, this decision nonetheless provides some assurances to subcontractors that they will not easily be deemed to have provided implied consent to an arbitration clause contained in a main contract based on the mere performance of their obligations under a subcontract.
Endnotes
(1) Supreme Court, 4A_124/2020, 13 November 2020 (in German).
