The limits of a foundation's ability to act

Abstract

Decision of the Swiss Federal Supreme Court in the «Diesel Scandal» case

In a lawsuit filed by the Foundation for Consumer Protection (Stiftung für Konsumentenschutz) against a Swiss automotive importer and a German automotive group, the I. Civil Division of the Federal Supreme Court handed down a noteworthy decision on July 16, 2020 (decision 4A_43/2020). The plaintiff had arranged for the assignment to itself of purported damages claims against the defendants of approximately 6,000 car owners in order to pursue them by way of a «class action». The Commercial Court of the Canton of Zurich dismissed the claim without prejudice because the filing of the lawsuit was not within the purpose of the plaintiff foundation. The Federal Supreme Court dismissed the plaintiff’s appeal against the decision of the Commercial Court.

 

Background

The lawsuit concerned diesel vehicles manufactured by the automotive group with software that could detect when the vehicle was being tested for emission control and switch to a mode other than normal operation in which NOx emissions were reduced. In normal operation, this mode was switched off, resulting in higher pollutant emissions. The plaintiff argued that the value of the vehicles affected by this «diesel scandal» did not correspond to their purchase price, thus damaging the customers’ assets.

The defendants argued that the plaintiff was essentially acting as a debt collection vehicle for the individual car owners, and that the foundation’s purpose did not allow for the filing of lawsuits to pursue non-contractual claims for damages. Because the filing of the lawsuit was not within the purpose of the foundation, the plaintiff lacked capacity to sue the defendants for compensation for damages.

The plaintiff foundation’s purpose

According to Article 3 of its deed of foundation, the purpose of the plaintiff is to protect the interests of consumers, in particular to protect consumers from disadvantages (para. 1(a)), and to provide education and information about consumer goods and services as well as legal situations and rights (para. 1(c)). In order to fulfil this purpose, the plaintiff assumes a number of tasks in accordance with Article 3 para. 2 of its deed of foundation. In addition to testing goods and making proposals for quality designations, labelling of goods and guidelines, these tasks include the examination of conditions in the advertising industry, advocacy for truth in advertising, and enforcement of guarantee claims (para. 2(c)).

Reasoning of the Commercial Court and the Federal Supreme Court

Scope and limits of the power of representation of the officers of a foundation

The Federal Supreme Court considered as its starting point that the power of representation of a foundation by its officers, thus the officers’ power of representation, is governed by the same rules as in the case of a corporation. According to these rules, the persons authorized to represent the company can perform all legal acts in the name of the company that the purpose of the company may entail. In order to protect third parties acting in good faith, this provision is interpreted broadly. Legal acts that may further the purpose of the company are not only those that are useful to the company or that are customary in its ordinary business; they also include unusual transactions, provided that they can possibly be based on the purpose of the company, i.e. are not excluded by such purpose.

However, the foundation board, as the body of the legal entity, may not, for its part, invoke this good faith protection against third parties. The Commercial Court had already pointed this out. The broad interpretation of the power of representation of officers primarily serves the protection of good faith and thus protects third parties who enter into a legal relationship with the legal entity. Protection of good faith does not justify the behavior of a legal entity’s officers towards the legal entity or the expansion at will of the scope of their capacity to act.

The Federal Supreme Court agreed with the reasoning of the Commercial Court. Therefore, the Federal Supreme Court saw no reason to criticize the Commercial Court’s view that the concept of good faith protection outlined above did not apply to active litigation by the foundation’s officers. The board of the foundation enjoys no protection for deviating from the will of the founder and expanding its competencies beyond the limits of the foundation’s purpose by reference to a broad interpretation of that purpose.

Interpretation of the foundation’s purpose and determination of the permissible actions within the scope of that purpose

As reasoned by the Commercial Court, the purpose of the foundation defines the tasks and objectives of the foundation. It is set out in the foundation deed and is determined by the founder. The interpretation of the purpose aims at determining the founder’s will. The power of representation of the foundation’s board results from the defined purpose of the foundation; at the same time, this purpose limits the scope of the board’s power of representation.

The Commercial Court then considered that a distinction should be made between the interpretation of the purpose and the determination of the actions permitted within the scope of that purpose. Unlike in the case of companies, the foundation’s purpose or the foundation deed specifies not only the objective, but to a certain extent also the means or tasks by which the objective is to be achieved. These details specify and concretize the tasks, and thus the purpose, of the foundation. Details regarding activities included in the definition of the purpose are to be taken into account in determining which activities are covered by the purpose.

The Federal Supreme Court also approved this reasoning. According to the Federal Supreme Court, the Commercial Court rightly pointed out that the wording of the foundation’s purpose was intended to ensure that the foundation’s officers use the dedicated assets in accordance with the founder’s intentions; the leeway granted to the officers must not allow them to determine the foundation’s activities in the same manner as a company. It was not objectionable under federal law for the lower court to assume that the interpretation of the foundation’s purpose based on the founder’s will had to be relatively narrow, because this was the only way to ensure that the foundation’s officers used the available funds in accordance with the founder’s will.

Interpretation of the purpose of the plaintiff foundation

The Federal Supreme Court further reasoned that the fact alone that the plaintiff, according to its purpose, aims to protect the interests of consumers is not sufficient to affirm its capacity to sue. Rather, the Commercial Court had correctly examined whether the procedural action at issue was covered by the definition of the purpose as interpreted in line with the intention of the founders. The Commercial Court thus properly considered whether and to what extent the general principle of protecting the interests of consumers was specified by further definition of the purpose. The Federal Supreme Court shared the Commercial Court’s finding that the foundation or its officers are not allowed to be active in any area and in any way whatsoever that could even remotely be related to the protection of consumer interests.

The Federal Supreme Court further took into account that in Article 3 para. 1(c) of the foundation deed, the terms «legal situation and rights» are only mentioned in connection with the education of, and provision of information for, consumers. More important was the description of the tasks in Article 3 para. 2. The Federal Supreme Court pointed out that in subsection c of Article 3 para. 2, the enforcement of claims is only mentioned in connection with guarantee claims related to advertising issues.

The plaintiff had brought an action for damages based on alleged non-contractual liability, which was intended to remedy the loss of assets of numerous vehicle owners. In view of the narrow constraints provided in Article 3 para. 2(c) with regard to the enforcement of individual claims, the plaintiff’s view that the purpose of the foundation encompasses any action taken by the plaintiff in the so-called «diesel scandal» is not tenable. The Federal Supreme Court assumed, on the contrary, that in view of the restriction to advertising issues and the limitation to contractual (guarantee) claims, the founder’s will excludes the enforcement of non-contractual claims for a large number of aggrieved parties as a debt collection vehicle.

Irrelevant conduct of the Foundation Supervisory Authority (Stiftungsaufsichtsbehörde)

The plaintiff had asserted that the Foundation Supervisory Authority had not objected to the action initiated by the plaintiff and had approved the plaintiff’s bylaws. The Federal Supreme Court held that nothing could be inferred from this in favor of the plaintiff with regard to the interpretation of Article 3 of the foundation deed. It was not discernible that the Supervisory Authority had issued a specific interpretation of this provision; furthermore, any understanding of the Supervisory Authority would not be binding on the civil court in the context of the examination of prerequisites for the proceedings.

Summary appraisal of the Federal Supreme Court

The Federal Supreme Court concluded that the Commercial Court did not violate federal law when, based on its interpretation of the definition of the purpose in the foundation deed, it determined that the filing of a lawsuit to enforce thousands of damages claims of individual consumers arising from non-contractual liability was not within the specific purpose of the foundation. The Commercial Court also correctly assumed that the action in question, by which the plaintiff acted as a debt collection vehicle for a large number of assigned non-contractual damages claims, was not a preparatory or supportive secondary action that was encompassed within the foundation’s purpose. The Commercial Court was therefore right to dismiss the claim without prejudice due to lack of capacity to sue.

Analysis

The ruling of the Federal Supreme Court, which has not been published in the Official Gazette but can be accessed in the case decisions section of the Federal Supreme Court’s website, reminds us that the power of representation of the officers of a foundation does not automatically extend to all conceivable legal acts. Rather, at least in close cases, it requires closer examination on the basis of the purpose of the foundation. It is a special feature of the law on foundations that the purpose of the foundation is to be interpreted according to the so-called principle of intent (Willensprinzip); the (presumed) will of the founder determines for what the dedicated foundation capital is to be used and which activities fall within the purpose of the foundation. In contrast to commercial law companies, the purpose is not to be interpreted so broadly that the officers may also conclude transactions that are not essentially excluded by the purpose of the foundation.

It should also be noted that the officers cannot justify actions exceeding the foundation’s purpose by reference to the principle of protection of good faith. This principle protects third parties acting in good faith, not the officers; the latter cannot rely on it to expand their capacity to act at will.

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