Paris Court of Appeal, No. __ | Rory Wheeler, avocat (Paris) & solicitor (England)

Paris Court of Appeal, CT0051, 9 March 2006

INSTITUT ESTHEDERM

Vs.

GUERLAIN SA

A partnership has been concluded between GUERLAIN on the one hand and INSTITUT ESTHEDERM and Mr. THOREL on the other hand in view of the international commercialisation of cosmetic products called “Etat Pur”. By letter dated 21 June 2002, GUERLAIN referred the dispute opposing it to its co-contractors to the arbitration institution AFA, asking it to implement the arbitration procedure in application of the arbitration clause contained in the protocol of 21 March 2001 and the shareholders' agreement of 20 June 2001.

Following the award of 13 July 2004, the Arbitral Tribunal composed of Mr. X…, Mr. Cohen, arbitrators, and Mr. Bézard, chairman, has in particular:

– pronounced the termination at the exclusive fault of the company INSTITUT ESTHEDERM and Mr. THOREL of the contracts except for the provisions relating to the constitution and statutes of the company Etat Pur and the procedure of transfer of shares from one party to the other, in the event of the blockage of the functioning of the company,

– condemned in solidum the company INSTITUT ESTHEDERM and Mr. THOREL in compensation for the prejudice caused to the company GUERLAIN to pay to the latter, by way of damages, the sum of 5,139,000 € ,

– dismissed the counterclaims presented by the company INSTITUT ESTHEDERM and Mr. THOREL seeking to establish the voluntary non-performance by the company GUERLAIN of the essential stipulations of the contract and to compensate the damage caused to them.

INSTITUT ESTHEDERM and Mr. THOREL brought an action for annulment of the award on the grounds that the arbitrators had ruled on an expired agreement (Article 1502 1o of the New Code of Civil Procedure), that they had exceeded their mission (Article 1502 3o of the New Code of Civil Procedure) and, subsidiarily, that they had disregarded the principle of contradiction (Article 1502 4o of the New Code of Civil Procedure). They request the condemnation of the Guerlain company to pay the sum of 15,000 € pursuant to article 700 of the new code of civil procedure.

The Guerlain company raises the inadmissibility of the appeal in that it is based on article 1484 of the new code of civil procedure, arguing that as the dispute involves the interests of international trade, only the cases of annulment listed in article 1502 of the new code of civil procedure are open. In any event, it found the action to be ill-founded and requested that the appellants be ordered, in solidum, to pay the sum of 50,000 € pursuant to Article 700 of the New Code of Civil Procedure.

UPON WHICH, THE COURT

Whereas, according to article 11.5 of the protocol of 21 March 2001, the economic and financial objective pursued by the partnership concluded between the company INSTITUT ESTHEDERM and Mr. THOREL, on the one hand, and the company GUERLAIN, on the other hand, targeted “the whole world” and the purpose of these agreements was the commercialisation of Etat Pur products on an international scale; that, as a result, since this arbitration involves the interests of international trade, which is no longer discussed by the company INSTITUT ESTHEDERM and Mr. THOREL, who, in their last submissions, invoke the cases of annulment of article 1502 of the new code of civil procedure, the appeal is admissible;

On the first ground of appeal concerning the expiry of the arbitration agreement (Article 1502-1 of the new Code of Civil Procedure)

The company INSTITUT ESTHEDERM and M. THOREL argue that the arbitrators' mission was for a period of six months both under Article 1456 of the new Code of Civil Procedure and under Article 15 of the AFA Rules, which provide that awards shall be made within six months from the date of the minutes by which the arbitral tribunal records its referral, and that the Arbitration Committee may, at the request of the arbitral tribunal, decide on three extensions of six months each; in the absence of an extension by agreement or a decision by the President of the Trial Court, the award was made after the time limit since the arbitral tribunal established that the case had been referred to it on 13 December 2002 and its decision had to be made before 13 June 2003.

They argue that before the expiry of this time limit, no extension took place since the Chairman of the Arbitral Tribunal indicated in the minutes of a meeting dated 14 June 2003 that the Arbitral Tribunal should ask the Arbitration Committee for an extension of the time limits; that even assuming that the AFA had spontaneously extended the time limit until 20 March 2004, as the Chairman of the Arbitral Tribunal wrote to the parties on 17 June 2003 for nine months in breach of the provisions of its Rules, the award was rendered on 13 July 2004 without any further extension being requested from the Arbitration Committee after 20 March 2004 and without any intervening .

They add that it is claimed in vain that they waived their right to prevail themselves of the expiry of that period, whereas such a waiver would have been conceivable only if they had been in a position to suspect that the agreement had expired.

Whereas the provisions of Article 1456 of the New Code of Civil Procedure are inapplicable, unless otherwise agreed, since they concern only domestic arbitration, whereas in this case the arbitration is international;

Whereas in order to be admissible before the judge of the annulment, the ground of complaint invoked against the award must have been raised, whenever possible, before the Arbitral Tribunal itself; whereas the company INSTITUT ESTHEDERM and Mr. THOREL, who were aware of the timetable of the procedure which was drawn up in their presence and the duration of the mission of the arbitrators - minutes of 20 March 2003 and 14 June 2003 signed by the parties, and who had been informed by the Chairman of the Arbitral Tribunal that the Arbitration Committee should be asked for extensions of time limits, were fully entitled, throughout the arbitration procedure, to question the Arbitration Committee or the Arbitral Tribunal on the status of the extensions; that in the present case, both before and after 20 March 2004, the company INSTITUT ESTHEDERM and Mr. INSTITUT ESTHEDERM and Mr. THOREL participated in all phases of the arbitration proceedings up to the rendering of the award, settling the balance of the provisions for arbitration costs in accordance with the request made to them on 25 March 2004 by the AFA and appearing at the oral argument hearing of 5 April 2004, developing their arguments without ever raising before the arbitrators any dispute or even a reservation regarding the extensions of the arbitration period; that, consequently, the first ground of appeal must be dismissed;

On the second ground, relating to the arbitral tribunal’s failure to comply with its mandate (Article 1502-3 of the new Code of Civil Procedure)

The company INSTITUT ESTHEDERM and Mr. THOREL maintain that by pronouncing the termination of the agreements to their exclusive fault, the arbitrators ruled ultra petita on an unsolicited matter. They argue that the arbitral tribunal was seized by Guerlain of a claim for damages and by them of a request for termination at Guerlain’s exclusive fault of the memorandum of understanding of the shareholders' agreement and various agreements; that the arbitrators, who not having been seized by Guerlain of any request for termination or cancellation of the contract at their exclusive fault, substituted themselves to the parties in determining their interest in invoking or not invoking an advantage, whereas it was not their role to qualify the subject matter of the claim, since the extent of the referral to the court has to be determined by the parties pursuant to article 4 of the new code of civil procedure.

Whereas Guerlain has, in its request for arbitration and in its various briefs, requested to:

“- give notice to GUERLAIN that the company INSTITUT ESTHEDERM and Mr. THOREL no longer contest that it has validly initiated the withdrawal procedure …

– consequently, record the transfer to INSTITUT ESTHEDERM of its 50% stake in the capital of the company Etat Pur…

– say that the company INSTITUT ESTHEDERM and Mr. THOREL will be solely responsible for the failure of the partnership and the launch of the products,

– consequently, order them to pay the sum of 5,139,000ç by way of damages

– generally draw all the consequences of the failure attributable to the company INSTITUT ESTHEDERM and Mr. THOREL of the international commercial transaction giving rise to the present arbitration procedure, and of their faults in the execution of the agreements concluded between the parties”;

Whereas the arbitrators were thus seized of the assessment of the contractual faults of the company INSTITUT ESTHEDERM et M. THOREL and the consequences of the failure of the operation imputed by the company GUERLAIN to its co-contractors; that the arbitral tribunal responded to this by stating that “the sanction for non-performance for fault of the contracts established for the launch and distribution of Etat Pur can only be the termination of these contracts”; that by attributing to the company INSTITUT ESTHEDERM and Mr. THOREL the responsibility for the failure of the operation, and, consequently, by sanctioning their faults by terminating the contracts to their detriment, the arbitration tribunal did not exceed its mission; In addition, the company INSTITUT ESTHEDERM and Mr. THOREL having also submitted a request for contractual termination, although to the detriment of the company GUERLAIN, the question was in the debate; that, consequently, the arbitrators did not exceeded their mission, the second ground of appeal must be set aside;

On the third ground, alleging that the arbitrators failed to observe due process (in french principe de la contradiction) (Article 1502-4 of the New Code of Civil Procedure)

The company INSTITUT ESTHEDERM and Mr. THOREL argue that in order to pronounce the termination of the contracts by interpreting or requalifying the claims of the company GUERLAIN, the arbitral tribunal should have initiated the observations of the parties and that failing this, it violated the principle of contradiction.

However, whereas this ground of appeal, which constitutes a repetition of the previous one under another qualification, is no more well-founded since the termination of the agreements was requested and the parties were able to discuss it contradictorily; that this last ground of appeal, and therefore the appeal, must be dismissed;

On Article 700 of the new Code of Civil Procedure

Whereas the company INSTITUT ESTHEDERM and Mr. THOREL should be condemned in solidum to pay the company GUERLAIN the sum of 15 000 € pursuant to article 700 of the new code of civil procedure;

FOR THESE REASONS:

Dismisses the action for annulment,

Condemns the company INSTITUT ESTHEDERM and Mr. THOREL to pay the company GUERLAIN the sum of 15 000 € pursuant to article 700 of the new code of civil procedure,

Condemns the company INSTITUT ESTHEDERM and Mr. THOREL to pay the costs and admits the SCP Fisselier Chiloux Boulay to the benefit of article 699 of the new code of civil procedure.