On 7 April 2003, the Complainant A, a Swedish national domiciled in Italy, and the Corporation (Y), incorporated under the laws of and with its corporate seat in British Virgin Islands (BVI), entered into a sales agreement (Sales Agreement) pursuant to which A sold to Y the corporation X. The respondent (B), domiciled in Switzerland, was a majority shareholder in Y, and acted for and on behalf of Y at material times. The Sales Agreement contained an arbitration clause to which Swedish law applied.

On 27 March 2007, A initiated an arbitration against Y in Sweden claiming payment of Swedish krona (SEK) 13,000,000 plus interest, which equalled the remaining purchase price under the Sales Agreement. The arbitration, however, never took place because, at some stage between 2003 and 2007, B liquidated Y.

Subsequently, A filed a claim against B before the state court of the Canton of Nidwalden (Switzerland), requesting that B be ordered to pay to A the remaining purchase price. B, in turn, argued that the claim should be submitted to arbitration (pursuant to the arbitration clause in the Sales Agreement), whereupon the court of first instance of the Canton of Nidwalden decided that it did not have jurisdiction in this matter. A appealed against this decision before the cantonal court of second instance, which dismissed A's appeal.

In his claim, A requested that the corporate veil of Y be pierced and that B be held responsible for the payment of the outstanding sum. At the same time, A argued that the arbitration clause did not apply to B, because he was not a party to the Sales Agreement. Although A requested that Y's corporate veil be pierced, he argued that the arbitration clause did not apply to B because B did not succeed to the rights and liabilities under the Sales Agreement from Y. He further argued that B acted contrary to good faith by liquidating Y in order to escape responsibility under the Sales Agreement, and that neither Y nor B had accepted A's request for arbitration. For that reason, the arbitration clause ceased to exist under Swedish law and B could be held responsible before the state courts. A finally argued that B was not in a position to raise the plea of arbitration because he had filed a claim for declaratory relief against A in Sweden requesting that the state court in Sweden declare that B was not liable under the Sales Agreement.

In their reasoning, the courts at both instances held that, because of the piercing of Y's corporate veil, the Sales Agreement, including the arbitration clause, had become binding upon B. They further held that B did not act contrary to good faith when he filed a claim for declaratory relief against A in Sweden because one could not expect that B would voluntarily pierce Y's corporate veil and submit to arbitration. The courts of the Canton of Nidwalden finally held that the arbitration clause did not cease to exist because A's request for arbitration in Sweden was against Y, but not B.

A filed an appeal against the decisions of the court of first as well as of second instance (according to the so-called Dorénaz-practice), before the Swiss Federal Supreme Court.

In his appeal before the Federal Supreme Court, A advanced several arguments in order to set aside the decision of the cantonal courts. This legal update focuses on one of the arguments, namely the question of applicability of the arbitration clause to B, who was not a party to the Sales Agreement, but was the majority shareholder of Y.

On the issue of piercing of the corporate veil, the Federal Supreme Court referred to established law and practice according to which a corporate veil of a corporation can be pierced :

If a claimant can, by way of piercing the corporate veil, direct a contractual claim towards the majority shareholder, however, all rights and obligations from the relevant agreement, including the arbitration clause, become binding on the shareholder. Therefore, the Supreme Court held, the arbitration clause was binding also upon B.

However, with respect to the further reasoning of the lower courts, namely that A's request for arbitration in Sweden had only been directed to Y, but not B, and that therefore the arbitration clause did not cease to exist, the Supreme Court held that such reasoning was wrong. B's behaviour, in particular his obstruction of the arbitration in Sweden, justified the piercing of Y's corporate veil and was therefore to be treated as a so-called doubly-pertinent fact which should, for the time being, be deemed proven. On this basis, both Y (if it still existed) and B were bound by the arbitration clause. Hence, it was irrelevant against whom (Y or B) A's request of arbitration in Sweden had been directed and B should have, but did not, accepted A's request for arbitration.

For these reasons, the Supreme Court concluded that the decisions of the courts of the Canton of Nidwalden were incorrect, and remitted the decision back to the first instance court for further consideration. In so doing, the Federal Supreme Court applied Article 7 of the Swiss International Private Law Act which provides that where there is an arbitration agreement, the Swiss courts should decline jurisdiction, unless the arbitral tribunal cannot be appointed for reasons that are obviously attributable to the defendant in the arbitration.

The facts underlying the decision of the Federal Supreme Court presented above seems to be an (almost) perfect plot:

B, the Swedish "real" buyer of a corporation buys a company through its sham company incorporated in the BVI. After the payment of the first instalment, but before the payment of the second instalment, the BVI company is liquidated by its owner, the "real" buyer, who acts as a de facto director of the BVI company.

Meanwhile, and without knowing about the liquidation, in order to claim his second instalment, the seller initiates arbitration proceedings against the BVI company as the formal party to the Sales Agreement. However, these proceedings cannot commence because the, meanwhile liquidated, BVI company refuses acceptance of the documents initiating the arbitration proceedings.

The seller, in his despair, subsequently initiates court proceedings in Switzerland at the domicile of the "real" buyer. In these proceedings, the seller relies on the piercing of corporate veil theory in order to claim the second instalment of the purchase price. However, the buyer objects to the jurisdiction of the Swiss courts claiming that if the seller raises a piercing of the corporate veil claim, then, in order to be consistent, the arbitration agreement is within the effect of the piercing and thus, the Swiss courts have no jurisdiction.

The two lower courts in Switzerland confirmed this view, ended their analysis there and thus rejected seller's claim. It seems that, at this stage, the seller would never recover the second instalment without having to file for arbitration proceedings against the "real" buyer personally. (However, this would involve a lot of uncertainty since it is not clear whether the arbitral tribunal would have to take into account the basis of the decision of the Swiss courts. At the very least it is unlikely that the "real" buyer could effectively object to the jurisdiction of the arbitral tribunal, claiming that he was not a party to the agreement, since this would be contradictory and thus abusive behaviour under Swiss law).

However, the Federal Supreme Court, as third and last instance, has now changed this rather unfortunate temporary outcome for the seller and sent back the decision to the court of lower instance for further considerations. Article 7 of the Private International Law Act is very rarely applied but, as this case shows, it is very useful to give the courts some (limited) discretion when rendering a decision on their jurisdiction based on a valid arbitration agreement.