Paris Court of Appeal, No. 08/02094 | Rory Wheeler, avocat (Paris) & solicitor (England)

Paris Court of Appeal, First Pole, First Chamber, 11 June 2009, No.08/02094

Mrs. H Ivs.

Vs.

EVERSHEDS LLP

Mrs. H I, a lawyer registered at the Paris and New York Bars, after having been a partner in the law firm ANDERSEN LEGAL, joined the law firm ABAC as an equity partner on 6 January 2003 and then Eversheds LLP, a limited liability partnership under English law, with retroactive effect from that date. ABAC was at the time a general partnership under English law without legal personality and is since then a branch of Eversheds LLP.

Following a letter dated 28 February 2006, Eversheds LLP and ABAC notified Mrs. H I of her forced withdrawal from each of these structures effective as of 31 May 2006. The Constitutional Committee, a conciliation structure within the law firms, was unable to resolve the conflict between Mrs. H I and the law firms.

An arbitration clause is stipulated in particular in the event of a dispute between a French resident partner and Eversheds LLP in the articles of association of Eversheds LLP, article 2 annex 2, and in those of ABAC, article 21.

On 21 July 2006, Mrs. H I seized the President of the Paris Bar to obtain compensation for the damages suffered as a result of her exclusion. Following the award of 20 December 2006, Mr. E, the arbitrator appointed by the President of the Paris Bar, declared himself incompetent, designating the arbitral tribunal referred to in the arbitration clause as the competent court.

The parties agreed on the implementation of an ad hoc arbitration governed by the UNCITRAL Arbitration Rules, in lieu of institutional arbitration under the aegis of the London Court of International Arbitration provided for by default by the arbitration clauses inserted in the Articles of Association of ABAC and Eversheds LLP.

Following the award rendered on 8 January 2008, the arbitral tribunal composed of Messrs. E and G, arbitrators, and AF, chairman:

— dismissed Mrs. H I from her claim seeking damages for economic and moral damage

— declared that she is entitled to receive her enhanced share of profits as provided for in the Partnership Agreements for an amount of £467,944 (subject only to the deduction of amounts paid on her behalf to the competent tax authorities in the United Kingdom and France, such amounts have to be substantiated in writing to the claimant) and all other amounts specifically provided for in the Partnership Agreements for partners who are constrained to resign. The Claimant is entitled to the indemnity due under Article 4 of annex 2 to the Articles of Association of Eversheds LLP in respect of taxes (but not social security charges) to be paid by her in the future to the tax authorities in the United Kingdom or France or if she fails to receive a retroactive application of the tax rescript of 31 July 2007 obtained by ABAC as long as she cooperates reasonably with the firms in an attempt to minimise her tax obligations.

Mrs. H I lodged an appeal against the arbitral award, registered under No. 08/02094 and an appeal to annul the award, registered under No. 08/04856.

It should be noted that all the parties have concluded in these two files but that their respective writings are identical, mixing arguments and grounds of appeal.

Mrs. H I requests the Court, mainly, to overturn the award and rule that only French law is applicable to the dispute, that Eversheds LLP and the former partners of ABAC violated the contractual procedure of forced withdrawal of the articles of association to its detriment, that Eversheds LLP and the former partners of ABAC initiated the contractual procedure of exclusion in disregard of their duty of good faith and of Article 1 of the internal rules of the Paris Bar, and that the numerous faults committed caused her prejudice.

She seeks a condemnation:

of former partners of ABAC, who became partners of the French branch of Eversheds LLP, namely […], to pay her:

— the statutory share of additional income, amounting to €60,861 with contractual interest at 30 September 2006 with capitalisation of interest in accordance with statutory clauses

— the share of earnings not paid for an amount of €106,937 in application of the tax returns for the distribution of ABAC’s earnings in France for the 2003 and 2004 financial years, with interest at the legal rate, from 31 December 2004 for €74,959 and from 31 December 2004 (and not €3004 as written in the submissions) for €31,878

— a contractual indemnity of €83,728 to compensate for the difference between English and French social security charges for the financial years 2003 to 2006 inclusive;

of the company Eversheds LLP to pay her:

— in cash or receipts, the statutory share of additional income for the equivalent in euros at the exchange rate of 30 September 2006 of the sum of £426,370, after deducting the share of additional income owed by the respondents, former partners of ABAC, with contractual interest at 30 September 2006 with capitalisation of interest pursuant to the statutory clauses

— acknowledge that she has been reimbursed for the additional cost of taxation for the 2004 tax year and that she waives the request for a judgment of €191,357 in this regard , requesting however that the respondents be ordered to reimburse the sum of €20,000 excluding VAT which she had to pay to defend her interests, and therefore those of the respondents'

— the sum of €78,208 corresponding to the French social security charges paid by her in respect of the 2004 financial year on the income received from Eversheds LLP Services Partnership, in accordance with the provisions of the agreement

jointly and severally from the former partners of ABAC and Eversheds LLP to pay her:

— the sum of €600,000 in compensation for material damage and €500,000 in compensation for moral damage,

Alternatively, in the event that English law is held to be applicable, the condemnation

jointly and severally from Eversheds LLP and the former partners of ABAC to pay her:

— the sums of €600,000 in compensation for the economic loss suffered for loss of reputation and clientele and €500,000 in compensation for her moral prejudice

— the countervalue in euros at 30 September 2006, of the payment of the sum of £426,370 as compensation for the damage resulting from the loss of opportunity to benefit in the event of an irregular forced withdrawal of its share of additional earnings (in respect of loss of profits) compensable under English law

— her ordinary share of profits from 1 August 2006 to the date on which the court will rule, after deduction of the amounts paid since her departure from Eversheds LLP and ABAC

of the former partners of ABAC to pay her:

— a contractual indemnity of €83,728 to compensate for the difference between English and French social security charges for the years 2003 to 2006 inclusive, in application of the contractual stipulations.

of Eversheds LLP to pay her:

— acknowledge that she has been reimbursed the additional cost of taxation for the 2004 tax year net that it waives its request for a judgment of €191,357 in this respect , ‘requesting, however, that the respondents be ordered to reimburse the sum of €20,000 (excl. VAT) that she had to pay to defend her interests, and therefore those of the respondents.

In the alternative, Mrs. H I requests the court to set aside the award if the arbitration is international. Finally, she seeks the condemnation of Eversheds LLP and the former partners of ABAC jointly and severally to pay the sum of €150,000 under Article 700 of the Code of Civil Procedure.

Mrs. H I says that her appeal is admissible because the parties have not waived the appeal and that the arbitral award was rendered as a domestic matter.

She states that she has in no way waived the possibility of appealing against the award and that the UNCITRAL rules which the parties have agreed to apply to arbitration do not exclude the possibility of appealing against the award.

She maintains that the arbitration in question is internal because it does not involve the interests of international trade within the meaning of Article 1492 of the Code of Civil Procedure. She explains that the exercise of the profession of lawyer excludes any commercial activity, that the dispute submitted to the arbitral tribunal concerned the conditions of her exclusion from two law firms, as a French resident lawyer practising exclusively in Paris, in contravention of the statutory rules and ethical principles of the Paris Bar and in the absence of any good faith, and the financial consequences of this exclusion, which does not jeopardise the interests of international trade. She claims to have been a sleeping partner of Eversheds LLP, never having practised there, providing her legal services through the law firm ABAC, registered with the Paris Bar Association and practising only in France, and to have requested the condemnation of all the partners of the law firm ABAC, half of whom were French resident lawyers. She adds that the results of the ABAC structure were to be used primarily to remunerate the French partners and that her share of the remuneration was paid to her from a French bank account.

She specifies that the partners of ABAC who have claimed the exclusively civil character of their activity in order to benefit from the favourable tax treatment of the Franco-British double tax treaty cannot, in the name of estoppel, claim that their activity has a commercial character.

On the merits, she argues that French law is applicable and not English law as ruled by the arbitral tribunal.

She points out that the mission statement did not mention the law applicable to arbitration and that the arbitral tribunal made a restrictive interpretation of the statutes of the law firms because the clauses that submit disputes to English law, while the contracts provide that no provision requires a French resident to take any action that violates the rules applicable to the legal profession, do not comply with the ethical principles of loyalty, confraternity and delicacy provided for in Article 1 of the Paris Bar Association’s internal rules.

She states that the respondents’ liability is established on the basis of the violation of the contractual procedure of forced withdrawal due to the lack of prior consultation and consultation within a reasonable period of time, the breach of the contractual duty of good faith, the discriminatory nature of the decision to exclude her on the basis of her age and sex, the moral harassment to which she was subjected and the wrongful disclosure of the decision of forced withdrawal.

She further claims that, in any event, the respondents' civil liability is also established under English law for breach of contractual obligations relating to forced withdrawal and lack of good faith.

In the event that the court considers the award to be rendered in an international matter, Mrs. H I said that the award should be annulled on the grounds that the arbitral tribunal had violated the terms of reference given to it, as the arbitrators had failed to give reasons for the award even though reasons are required by the UNCITRAL arbitration rules. She explains that she made different claims against the partners of ABAC on the one hand and Eversheds LLP on the other hand, for payment of the amount of the statutory share of the additional result, but that the arbitrators, without justifying the award, dismissed her request to allocate the sums due to each of the defendants when this was part of their mission. She further states that the arbitrators did not give any reasons for rejecting her claim for compensation for social security charges.

Eversheds LLP and others find that Mrs. H I’s appeal is inadmissible on the ground that the arbitration was rendered in the context of an international arbitration and dismiss the action for annulment which they claim to be unfounded. In the alternative, if the arbitration is internal, they request that it be declared that Mrs. H I has waived her right of appeal, that her appeal is inadmissible and that her action for annulment is unfounded, and in the further alternative, if the arbitration is internal, that the claims for damages and for payment to Mrs. H I be dismissed, compensation for the additional cost of social security charges and taxation and for defence costs incurred in seeking reimbursement of the additional cost of taxation for the 2004 tax year, and in any event to exclude from the proceedings the documents produced by Mrs. H I in English without French translation, and to order her to pay symbolic damages of €1 for abusive proceedings and €100,000 under Article 700 of the Code of Civil Procedure.

The Paris Bar Association, which intervened voluntarily, as in an amicus curiae requests that ‘the qualification of internal arbitration should be recognised for arbitration between a practice structure established in Paris and one of its partners practising in Paris, concerning the exclusion of this partner, and this regardless of any foreign elements that may exist in the case in question’ and explains that the Bar’s interest in acting lies in ‘its desire to see a single system of appeal recognised against arbitral awards relating to the termination of the practice of a group of lawyers, regardless of whether the award was made by the President of the Bar or by ad hoc arbitrators’.

UPON WHICH, THE COURT

Whereas, for the proper administration of justice, it is advisable to order the joinder of the proceedings registered under numbers 08/02094 and 08/04856;

Whereas Eversheds LLP and others failing to identify precisely which opposing pieces they wish to have set aside, this request should be rejected;

On the admissibility of the appeal and the action for annulment

Whereas the domestic or international rules of arbitration determine, in particular, the system of recourse regarding awards; that the qualification of the arbitration, and consequently the determination of the means of recourse, the nature of which is imperative and cannot be modified by the will of the parties, governed by Articles 1484 of the Code of Civil Procedure for domestic awards and 1504 of the Code of Civil Procedure for international awards made in France, are a function of the nature of the economic relations at the origin of the dispute;

That in order to define international arbitration, Article 1492 of the Code of Civil Procedure adopts an exclusively economic criterion according to which it is sufficient that the dispute submitted to the arbitrator relates to a transaction which cannot be settled economically in a single State;

Whereas to maintain that the arbitration is internal and that the only recourse open against the award is the appeal, Mrs. H I wrongly claims to oppose the other parties to the estoppel rule on the ground that they claimed the non-commercial nature of their activities in order to benefit from the favourable tax treatment of the Franco-British Double Taxation Limitation Convention, whereas the system of remedies against awards which is not up to the parties depends exclusively, as has already been said, on the nature of the economic relations at the origin of the dispute;

Whereas, in this respect, the economic transaction is not reduced to the status of the parties, even if they are lawyers, nor to the subject matter of the contract, the place of practice of the profession being irrelevant, nor to the applicable law, nor to the existence of a commercial act in the strict and technical definition of French domestic law;

Whereas, in the present case, the dispute concerns the forced withdrawal, and its financial consequences, of Mrs .H I as a partner, a status she acquired by joining the two structures ABAC and Eversheds, the status of partner of one being inseparably linked to that of the other, on the same day, 6 January 2003, that the appellant became a partner of Eversheds LLP by making a capital contribution by means of a loan of £247,536 taken out with an English bank, BARCLAYS BANK PLC, that her remuneration as a partner was determined on the basis of the consolidated results of the two firms and paid, as far as she was concerned, partly by ABAC and partly by Eversheds LLP which was doing so from an English account, the fact that the English funds were transferred to a French account before being immediately distributed to Mrs. H I - as the bank statements produced show - did not reduce the reality of this international transfer of funds and that it was because the remuneration received from Eversheds LLP came from the United Kingdom that the appellant was reporting this income in England; that, as a result, the economic transaction was economically successful in more than one State and therefore the arbitration conducted on this occasion has the character of international arbitration; that, consequently, only the action for annulment of the award is admissible and the appeal against the award should be declared inadmissible;

On the sole ground of annulment based on the arbitrators' failure to comply with the mission conferred on them (Article 1502-3 of the Code of Civil Procedure)

Whereas Mrs. H I essentially maintains that the arbitral tribunal violated its mandate by failing to give reasons for its award when it was bound to do so pursuant to Article 32 §3 of the UNCITRAL Arbitration Rules, on the ground that the arbitrators dismissed without providing grounds the request for distribution between Eversheds LLP and the partners of ABAC of the amount she was claiming for the statutory share of the additional result; that she also states that the arbitrators did not give reasons for the dismissal of her claim relating to compensation for social security charges and that in dismissing this claim the tribunal gave motives for its award ‘solely on the basis of Article 4 of Annex 2 and Article 29 of Annex 3’ without referring to Articles 3. 2.4 of the articles of association of Eversheds LLP and 5.6 of the articles of association of ABAC ;

Whereas, on the one hand, by claiming the lack of breakdown of the amount of the statutory share between Eversheds LLP and the partners of ABAC, Mrs. H I complains that the arbitral tribunal failed to rule on what does not constitute a violation of the mission sanctioned under Article 1502-3 of the Code of Civil Procedure, the infra petita can be remedied by the arbitrator;

Whereas, on the other hand, in the paragraph of the award - according to its translation into French - ‘fiscal and social compensation’, the arbitral tribunal stated in lengthy developments on two pages, ‘The language used does not in any way indicate that this contractual compensation was intended to include social security charges. In France such charges are imposed and recovered by an administration separate from the tax administration; their amount is determined on the basis of income, but their calculation and exceptions differ from those applied by the tax authorities in income tax matters, and payments are currently made on the basis of a system which is not applicable for income taxes… The court has not received any evidence that this provision relating to indemnity has been implemented, in the case of any Paris-based equity partner, in such a way as to include social security charges in the calculation of taxes and no other type of communication or practice in this respect has been brought to our attention. Consequently, the Tribunal decides that the word ‘tax’ in article 4 of Appendix 2 and in article 29 of Appendix 3 of Eversheds’s articles of association was not intended to include (and therefore does not include) French or English social security charges’ gave good motivation to its award; that the appellant, who complains about the arbitrators' good or bad judgement, tries to obtain a revision on the merits of the arbitral award which the annulment judge is prohibited from doing; that the ground is therefore unfounded and therefore the annulment action is dismissed;

Whereas Eversheds LLP and the other defendants in the action do not establish any particular circumstances that caused Mrs. H I’s right of recourse to be abused; that the claim for damages in this respect is therefore dismissed;

Whereas equity does not require the application of the provisions of Article 700 of the Code of Civil Procedure to the benefit of Eversheds LLP and the other defendants in the action;

FOR THESE REASONS

Orders the joinder of proceedings registered under numbers 08/02094 and 08/04856,

Dismisses the request of the appellants to set aside certain opposing pieces,

Declares inadmissible the appeal lodged by Mrs. H I,

Dismisses the action for annulment of the award rendered on 8 January 2008,

Dismisses Eversheds LLP and the other defendants' claim for damages for abusive proceedings and their claim under Article 700 of the Code of Civil Procedure,

Orders Mrs. H I to pay the costs and admits the SCP DUBOSCQ&PELLERIN, avowed, to the benefit of article 699 of the code of civil procedure.