Paris Court of Appeal, No. 06/18493

Paris Court of Appeal, 22 May 2008, No. 06/18493

LINEAS AEREAS AZTECA S.A. DE C.V.
vs.
BAVARIA INTERNATIONAL AIRCRAFT LEASING COMPANY

On the 25 October 2006, the Mexican law company LINEAS AEREAS AZTECA, filed an action for annulment of the award 13751/RCH/JHN issued on 19 September 2006 under the supervision of the International Chamber of Commerce (“ICC”) by Mr. M. Sachs and X, arbitrators, Fernandez-Armesto, President, who ruled on two aircraft purchase contracts entered into with the company Z INTERNATIONAL AIRCRAFT LEASING, held that: "

1. Z has standing to request this arbitration,

2. The arbitral tribunal shall have jurisdiction to rule on the merits,

3. AZTECA is ordered to pay Z the sum of US$18,350,000, representing the purchase price of the aircraft, plus the interest dues thereon at the rate stipulated in paragraph 243 of this award, from 30 July 2004 until the effective date of payment,

4. AZTECA is ordered to pay to Z (i) US$420,000, representing the arbitration costs fixed by the Court, plus (ii) US$400,000 representing the costs of the proceedings, as determined in paragraph 250 of this award,

5. In parallel of the payments ordered in the two previous decisions, Z is ordered to transfer the property of the aircraft to AZTECA and AZTECA is ordered to accept this transfer of property; the transfer of property by the claimant will include the delivery of the deed of sale, invoices and various documents provided for in the previous two decisions by the aircraft purchase contracts.

6. Z’s application for provisional execution of the award is accepted,

7. All other requests or motions of the parties are rejected”.

The company LINEAS AEREAS AZTECA, in support of its action, raises three grounds for annulment: the absence or nullity of the arbitration agreement (Article 1502-1 Code of Civil Procedure), the failure to comply with the due process (Article 1502-4 Code of Civil Procedure) and violation of international public order (Article 1502-5 Code of Civil Procedure). It requests that the company Z INTERNATIONAL AIRCRAFT LEASING should be ordered, in addition to the costs, to pay it a sum of €30,000 under article 700 of the Code of Civil Procedure.

The company Z INTERNATIONAL AIRCRAFT LEASING considers that the action should be dismissed and requests the Court to order LINEAS AEREAS AZTECA to pay it US$476,019 and €115,953 in damages because of the abusive nature of the action, to pay €45,000 under article 700 of the Code of Civil Procedure and to bear the costs.

UPON WHICH:

On the first ground of annulment based on the absence or nullity of the arbitration agreement (article 1502-1 of the Code of Civil Procedure):

The company LINEAS AEREAS AZTECA asserts that Mr. A Alvarez, who was mandated to sign the disputed lease agreements, was empowered to enter into an arbitration clause, according to Mexican law applicable upon choice of the parties as article 2587 of the Mexican Civil Code requires a special authorisation in this respect.

The claimant adds that the existence of a willingness of the parties to submit disputes to arbitration cannot be found in the substantive rules of French international arbitration law.

Whereas the arbitral tribunal, at the end of an analysis of the Mexican law applicable to the power of attorney given to Mr. B C A by the company LINEAS AEREAS AZTECA, after having recalled that “providing arbitration clauses is part of the usual practices of Mexican companies, especially internationally”, stated to declare it has jurisdiction:

“When article 2.554, second and third paragraphs, Cc Mex refers to all acts of an administrative nature and all powers of the owner, these generic terms must be interpreted as including the faculty to insert arbitration clauses in the contracts in question, otherwise the purpose of the rule of law would not be achieved, namely that third parties acting in good faith and relying on the sufficiency of the power of attorney should be protected against a subsequent allegation by the principal, that the powers were insufficient and that the submission to arbitration is null and void' (§169) ‘…..'.” The arbitral tribunal notes that in international trade it is customary to insert arbitration clauses, and that a party having given a power of attorney for the signature of an international contract without a ‘Special Clause’ would be in breach of its duty to act in good faith if it were to recuse the submission to international arbitration accepted by its official agent” (§ 170);

Whereas, in view of the principle of validity of the international arbitration clause, a substantive rule of French international arbitration law applicable when the case is submitted to the French court, it is not required, if one were to follow the claimant’s argument that a special power of attorney which is here absent, is required by Mexican law, to neutralise the applicable law with rules of eviction such as the principle of good faith. This principle of validity implies the recognition of a principle of capacity in the international order and the rejection of the first ground of nullity;

On the last two grounds of annulment for non-compliance with due process and the violation of the recognition or execution of the award with regards to the international public order (article 1502-4 and 1502-5 of the Code of Civil Procedure):

The company LINEAS AEREAS AZTECA states that the arbitral tribunal should have submitted in the debates the grounds according to which the general powers of administration and acting as owner as regards article 2254 of the Mexican Civil Code implied the power to enter into an arbitration clause, as neither party had supported such an interpretation of Mexican law.

The claimant also argues that the arbitral tribunal ex officio stated it had jurisdiction to hear the ground based on the tacit ratification of the aircraft purchase contracts because it had retained possession of the aircraft after the expiry of the term of the leases.

Finally, the company Lineas Aereas Azteca states that the arbitral tribunal breached the equality between the parties by denying it the opportunity to cross-examine a witness called by its opponent.

Whereas, in order to rule on the alleged nullity of the arbitration clauses due to the fact that the representative who signed the contracts on behalf of LINEAS AEREAS AZTECA did not have the power to do so, the arbitral tribunal interpreted the Mexican law applicable to this issue, and in particular articles 2587 and 2254 of the Mexican Civil Code invoked by the parties in support of their respective arguments on the necessity or not of a special authorisation of the agent to enter into an agreement to arbitrate. Thus, having decided in view of the elements of law and fact which the parties had been called upon to discuss in a contradictory manner, the arbitrators, before issuing their award, did not have to submit the legal reasoning deduced from their arguments for discussion by the parties;

Whereas the same conclusion must be reached with respect to the arbitral tribunal’s decision on the merits of the case, according to which, although the powers of the agent who signed the contracts for the purchase of the aircraft on behalf of LINEAS AEREAS AZTECA would have been insufficient, by taking possession of the aircraft, the latter had tacitly ratified the purchase contracts, since Mexican law allowed the principal to ratify the agreement given by a representative who did not have sufficient power (§ 210 and 214 of the award); as submitted by the company Z INTERNATIONAL AIRCRAFT LEASING (§ 175);

Whereas now with respect to the arbitrators’ refusal to question Sr. Alègre, legal counsel for Z INTERNATIONAL AIRCRAFT LEASING, the arbitral tribunal held that:

“The decision not to call Sr. Alègre to the hearing concerning the witness statements did not affect the defendant’s ability to defend itself in this case. Sr. Alègre was a witness proposed by the claimant and it was the claimant who waived the opportunity to request his intervention at the hearing. In addition, Sr. Alègre interfered as outside legal counsel for the claimant. The defendant argued vehemently during the proceedings that lawyers have an obligation of secrecy and it convinced the tribunal that according to Mexican law, it was necessary to prevent its own lawyer, Sr. A, from testifying as a witness. The same reasoning should be applied to the claimant’s lawyer, otherwise the claimant would be justified in denouncing a violation of the principle of fair treatment of the parties.”

The arbitral tribunal concluded that its decision not to summon Sr. Alègre did not in any way affect the principles of fair procedure, equality, adversarial process and the right to be heard and did not in any way affect the ability of the defendant to fully present and defend its case' (§ 86 and 87);

Whereas the court shares this view, the use of testimonial evidence is never mandatory for the arbitrator, who can therefore rule it out;

Whereas none of the grounds based on articles 1502-4 or 1502-5 of the Code of Civil Procedure are founded, the principle of adversarial proceedings, the rights of the defence have been respected and the procedural international public order has not been breached. Thus, the last two grounds of annulment are rejected as well;

That the appeal, unfounded, is rejected;

On damages, costs and article 700 of the Code of Civil Procedure:

Whereas the company Z INERNATIONAL AIRCRAFT LEASING, which does not demonstrate the abusive nature of the appeal, cannot claim compensation;

Whereas LINEAS AEREAS AZTECA shall bear the costs and cannot claim compensation on the basis of article 700 of the Civil Procedure Code, under which it pays the defendant the sum of €45,000;

FOR THESE REASONS:

Dismisses the action for annulment against the ICC award N°13751/RCH/JHN of 19 September 2006;

Orders the company LINEAS AEREAS AZTECA to pay the company Z INTERNATIONAL AIRCRAFT LEASING a sum of €45,000 on the basis of article 700 of the Code of Civil Procedure,

Rejects all other claims,

Orders the company LINEAS AEREAS AZTECA and allows the SCP Duboscq et Pellerin, lawyers, as beneficiary of article 699 of the Code of Civil Procedure;

THE CLERK, THE PRESIDENT
R. Y J.F. PERIE