The Supreme Court(1) recently allowed for court proceedings despite a valid arbitration agreement between the parties, because the legal grounds invoked by the claimant were outside the scope of the arbitration agreement. The court confirmed the doctrine of assertion and clarified the doctrine of connection.
The parties to the dispute were former shareholders in a limited liability company, Arvika Gjuteri Holding AB, which had been sold to a third party. When the company was sold, one of the shareholders, a company named Kemisten AB, undertook the task of administering the sale on behalf of all shareholders, including receiving the purchase price and distributing the money, less transaction costs, to all selling shareholders. To regulate the assignment, the selling shareholders, including Kemisten and its managing director, had concluded an agreement with an arbitration clause, under which any dispute relating to the interpretation or implementation of the agreement was to be settled by arbitration.
After the transaction was completed, Kemisten, through its managing director, paid Skr2.5 million of the purchase price to a third party (a company owned by Arvika Gjuteri's chairman) in breach of the parties' agreement. Subsequently, three of the selling shareholders initiated court proceedings against Kemisten and its managing director. The claimants claimed damages from Kemisten and its managing director on the grounds that the managing director had committed criminal offences by wilfully paying funds to a third party, and that Kemisten had a vicarious liability for the actions of its managing director.
The defendants invoked the arbitration clause in the parties' agreement as a bar to court proceedings and requested dismissal of the case. The plaintiffs contested the dismissal request and upheld their view that the legal grounds invoked were not covered by the agreement and its arbitration clause and that the court had jurisdiction. The district court allowed for court proceedings, but the Court of Appeal dismissed the claim due to the arbitration clause. The Supreme Court reversed the Court of Appeal decision and allowed for continued court proceedings.
The Supreme Court found that although the circumstances to be tried would to a large extent have also been relevant had the legal grounds invoked been the parties' agreement, the legal grounds invoked by the plaintiffs were in fact not based on the agreement, but on alleged criminal offences and vicarious liability, respectively. Thus, the asserted legal grounds for the claims were non-contractual. On the basis of the doctrine of assertion, the Supreme Court therefore ruled that the arbitration agreement did not cover the dispute. The court also concluded that the circumstances were not such that the arbitration clause was deemed to cover the dispute because of the doctrine of connection. Accordingly, the dispute should be decided by the courts and the motion to dismiss the case due to the arbitration clause was denied.
The Supreme Court dwelt on two doctrines in Swedish arbitration law:
- the doctrine of assertion; and
- the doctrine of connection.
Because of previous Supreme Court rulings, there has been some uncertainty as to how the two principles relate and whether they can be applied in parallel.(2) In the decision at hand, the Supreme Court confirmed the two doctrines and clarified that the doctrine of connection should be narrowly applied.
Under Section 2 of the Arbitration Act, arbitrators may rule on their own jurisdiction to decide a dispute. Although not expressly provided in the act, arbitrators should apply the doctrine of assertion.
The doctrine of assertion was first introduced in 1964 by the late professor and Supreme Court judge Lars Welamson and has since been confirmed and further developed through case law.(3) In short, the doctrine of assertion provides that where a claimant makes certain factual assertions as a legal basis for its claim, the arbitral tribunal shall base its decision on jurisdiction on these assertions and see whether they are covered by the invoked arbitration agreement, without determining at this stage whether the assertions are true or not.
An advantage of the doctrine of assertion is that the arbitrators do not have to make a full review of the circumstances of a case to decide their jurisdiction where such circumstances are also to be tried with the merits of the case. Moreover, this saves time when arbitral proceedings are to be commenced and the jurisdiction of the arbitrators is determined.(4)
However, a pre-condition for the application of the doctrine of assertion is the existence of a valid arbitration agreement between the parties. Thus, the doctrine of assertion cannot be used to create an arbitration agreement where there was none in the first place. Additionally, the doctrine of assertion does not allow a party to shop around for whichever dispute resolution procedure it might prefer by construing its case in a certain way. In this case, the Supreme Court restated the principle from Supreme Court Case NJA 2008 page 120 that where it is manifest that the case is something other than asserted by the claimant, the arbitrators or the court should see beyond this and not be bound by the party's assertions. However, as concluded by the Supreme Court in the current decision, this should be done only where it is obvious that the case is different than alleged.
The doctrine of connection, which has been developed in case law,(5) stipulates that a dispute may be covered by the parties' arbitration agreement if the dispute is closely connected to the main agreement containing the arbitration agreement, even if not directly covered by the wording of the arbitration clause. In Supreme Court Case NJA 2007 page 475, it was held that all the invoked legal grounds with a connection to the main agreement were to be settled by arbitration, even though one of the grounds was non-contractual. The doctrine of connection thus expands the scope of an arbitration agreement beyond what could normally be derived from its wording with an interpretation of said arbitration agreement.
The Supreme Court's ruling in Case NJA 2007 page 475 has been debated for expanding the application of arbitration agreements too far, and its seemingly broad application of the doctrine of connection has since been modified by the Supreme Court in Cases NJA 2008 page 120 and NJA 2010 page 734.(6) In the current decision, the Supreme Court further clarified the doctrine of connection in the sense that the conclusions from Case NJA 2007 page 475 are narrowed in line with the Supreme Court's ruling in Case NJA 2010 page 734. It is thus confirmed that the doctrine of connection shall be used only to expand the application of an arbitration agreement to grounds outside the main agreement where the grounds invoked for the claim are closely connected to the main agreement and only in exceptional circumstances.
As for the doctrine of assertion, it has been suggested that it should be codified in the pending revision of the Arbitration Act.(7) Nevertheless, there is no consensus between scholars whether this is necessary.(8) The Revision Committee has not proposed a codification of the doctrine of assertion, but the government bill is yet to be finalised.
For further information on this topic please contact Fredrik Norburg or Erika Finn at Norburg & Scherp by telephone (+46 8 420 035 00) or by email ([email protected] or [email protected]). The Norburg & Scherp website can be accessed atwww.norburgscherp.se.
Endnotes
(1) Supreme Court decision, April 7 2017, Case Ö 1096-16, see www.hogstadomstolen.se/Domstolar/hogstadomstolen/Avgoranden/2017/2017-04-07%20%C3%96%201096-16%20Beslut.pdf.
(2) See Heuman in JT 2, 2009/10, page 335, and the Government Official Report 2015:37, Översyn av lagen om skiljeförfarande, page 166.
(3) See, for example, Supreme Court cases Petrobart, NJA 2008 page 406; Tupperware, NJA 2010 page 734; and Concorp, NJA 2012 page 183.
(4) See Heuman in JT 2, 2009/10, page 335 and page 342.
(5) See, for example, Supreme Court cases NJA 1973 page 620; NJA 2007 page 475; and NJA 2008 page 120.
(6) Case NJA 2010 page 734, concerned not an arbitration agreement, but a prorogation clause.
(7) This was, for example, suggested by the International Chamber of Commerce in Sweden and the Swedish Arbitration Association. See the Government Official Report 2015:37, SOU 2015:37, Översyn av lagen om skiljeförfarande, page 166.
(8) See Madsen, "Kompetenz-Kompetenz in Swedish Arbitration Law is being recast, how should it be done?", in SvJT 2016, page 653.