Supreme Court issues ruling on applicability of arbitration clauses in the context of business transfers
A recent ruling by the Finnish Supreme Court on the applicability of arbitration clauses serves as a reminder of the importance of ensuring clarity in connection with business transfers for both transferees and the remaining contracting parties.
The Finnish Supreme Court handed down a ruling (KKO 2020:89) on 1 December 2020 concerning the applicability of an arbitration clause in an agency agreement following a business transfer conducted as an asset deal. The Supreme Court held that the transferee (i.e. the buyer in the business transfer) had not become bound by the arbitration clause in the agency agreement despite the fact that the agent and the transferee had continued to conduct business for a number of years after the business transfer on the basis of the old agreement.
The case before the Supreme Court concerned a situation in which the transferor had sold a part of its business operations to the transferee in 2008. Following the business transfer, the transferee continued to conduct business with the agent. The agent and the transferee did not enter into a new written agency agreement. In 2013, the transferee terminated the agency.
Following the termination, the agent sought to commence arbitration under the arbitration clause in the agency agreement that had been entered into between the agent and the transferor. The arbitration institute, however, did not allow the arbitration to proceed due to the lack of a binding arbitration agreement between the agent and the transferee. The agent then commenced court proceedings in which it requested the Finnish courts to declare that the arbitration clause in the agency agreement was binding on the transferee.
In its assessment, the Supreme Court noted that, in accordance with the so-called doctrine of separability, the question of whether a party is bound by the arbitration clause must be determined independently from the question of whether the party is bound by the other provisions of the agency agreement. Therefore, as a general rule in the context of a business transfer, for an arbitration clause to remain binding, the transferee must have agreed to be bound by the clause.
The Supreme Court went on to assess the facts of the case, and noted that the parties had continued their business relationship for a number of years after the business transfer in accordance with the terms of the agency agreement. However, the evidence presented regarding the transferee’s communication to the agent immediately after the business transfer showed that the transferee had not agreed to be bound by the agency agreement in its entirety. Therefore, the Supreme Court concluded that the agent had failed to establish that the arbitration clause was binding on the transferee.
Although it was the transferee that argued successfully in this case that it was not bound by the arbitration clause, the Supreme Court’s ruling raises the question of whether the remaining party to the agreement could also have contested the validity of the arbitration clause if it had been in its interests to argue in favor of litigation rather than arbitration.
In most business transfers, the transferee has an interest in ensuring that contracts relating to the transferred business (including the arbitration clauses therein) remain valid and binding after the asset deal has closed. Overall, while the outcome in the case hinged on the facts and evidence presented, the Supreme Court’s ruling underlines the importance of ensuring clarity in transferring contracts in the context of business transfers.