Paris Court of Appeal, No. 08/19673

Paris Court of Appeal, Pôle 1 - Chamber 1, 21 January 2010, No. 08/19673

KREDITANSALT FUR WIEDERAUFBAU (KfW) Vs. INERSIONES ERRAZURIZ LIITADA (IEL)

INERSIONES ERRAZURIZ LIITADA (IEL) is a company incorporated under Chilean law, holding company of a group active in the mining sector, in the wood and paper industry, in the food processing industry, in real estate and distribution. KREDITANSALT FUR WIEDERAUFBAU (KfW) is a German public limited bank whose main purpose is to grant export credits.

On 17 August 1995, the parties concluded a ‘basic contract for the granting of Individual Loans F 2565 “for a maximum amount of 50,000,000 DM and a ‘loan contract F 2566” for a maximum amount of 5,000,000 DM. Within this framework, KfW financed between March 1997 and April 2000 seven contracts for the acquisition of depreciated assets by IEL from German suppliers. KfW also granted loans directly to a subsidiary of IEL, D.

Defaults in payment led KfW to invoke the forfeiture of the term on 10 January 2002. This led to various legal actions and negotiations on debt restructuring.

On 21 December 2005, KfW submitted a request for arbitration to the International Chamber of Commerce under the arbitration clauses of the two 1995 Conventions. The tribunal, composed of Messrs. A, J and K, arbitrators, and Mr. Y, President, rendered its award in Paris on 1 October 2007. In accordance with the arbitration clause, the law of the Federal Republic of Germany was applicable to the substance of the dispute. The award awarded KfW USD 48,869,555.87 in respect of the outstanding principal amount under the two 1995 contracts, liquidated the interest until 13 July 2004, determined the interest rate due beyond that date and charged all costs to the defendant.

On 17 October 2008, IEL appealed against this award.

In its pleadings of 15 October 2009, it requested the Court to annul the decision and order KfW to pay it the sum of EUR 100,000 pursuant to Article 700 of the Code of Civil Procedure.

It maintains that the arbitrators ruled without an arbitration agreement or on the basis of a null or expired agreement (Article 1502-1 of the Code of Civil Procedure) and that they exceeded their mandate (Article 1502-3 of the Code of Civil Procedure).

By submissions of 5 November 2009, KfW asked the Court, as a preliminary matter, to declare inadmissible IEL’s claims which had not been raised before the arbitral tribunal, in the alternative, to dismiss IEL’s appeal and to order it to pay the sums of EUR 150,000 as damages for abusive proceedings and EUR 100,000 in application of Article 700 of the Code of Civil Procedure.

UPON WHICH:

On the inadmissibility raised by KfW:

Considering that KfW submits that IEL’s grievances before this Court should be declared inadmissible for not having been raised before the arbitrators;

Considering that in response to the request for arbitration filed by KfW with the International Chamber of Commerce in December 2005, IEL raised objections to the existence of an arbitration agreement; pursuant to Article 6 (2) of the Rules of Arbitration of the International Chamber of Commerce, the International Court of Arbitration decided that the arbitration would nevertheless take place and that the arbitrators would decide on their jurisdiction; that IEL then made known its decision not to participate in the proceedings; that the Terms of Reference were drawn up and the court constituted, in accordance with the provisions of the Rules of Arbitration, in spite of IEL’s abstention;

Considering that IEL did not at any time participate in the arbitration proceedings, it cannot be complained that it did not raise before the arbitrators the pleas which it presents to the Court;

On the first ground for annulment: the arbitrators ruled without an arbitration agreement or on the basis of an invalid or expired agreement (Articles 1502-1 and 1504 of the Code of Civil Procedure):

IEL argues, on one hand, that KfW tacitly but unequivocally renounced the benefit of the arbitration agreement. It infers this waiver, in the first place, from the introduction by KfW before the Chilean courts of actions for the judicial liquidation of KfW and company D and of an action in recognition of signature and debt for a promissory note subscribed in execution of the loan agreements, secondly, the conclusion in 2002 of a ‘Memorandum of Understanding’, which includes a clause conferring jurisdiction on the German courts, and a ‘Settlement Agreement’, which stipulates the waiver by the parties of any current or future action, lastly, KfW’s procedural conduct subsequent to these agreements which, on an action brought by IEL before the Chilean courts for the rescheduling of a promissory note, raised an exception based on the jurisdiction of the court of its registered office, in Germany, without invoking the arbitration clause.

IEL argues, on the other hand, that KfW, by pleading for three years before the Chilean courts the jurisdiction of the German courts over the action for the rescheduling of a promissory note and then, by reversing its previous procedural position, caused it damage consisting of the interest accrued from 2003 to 2005; that this violation of the rule of estoppel made KfW inadmissible to bring an action before the arbitral tribunal.

IEL invokes, finally, the novation effect attached to the transaction. It argues that the ‘Transactional Agreement’ of 2002, by stipulating a general waiver by the parties to exercise any action in return for reciprocal concessions on their rights, extinguished the obligations resulting from the 1995 contracts and replaced them with new obligations which are removed from the original arbitration clauses which have lapsed; that since the ‘Transactional Agreement’ itself does not contain an arbitration clause, no arbitration agreement is binding on the parties.

With regard to proceedings brought before the Chilean courts:

Considering that the renunciation of the benefit of the arbitration clause, if it can be tacit, must be the result of an unequivocal expression of intent;

Considering, firstly, that on 17 August 1995 the parties concluded a ‘basic contract’ and a ‘loan contract’ enabling individual loans to be granted to IEL for the purchase of capital goods from German companies, up to ceilings of 50 million and 5 million marks respectively. That these two conventions stipulated recourse to arbitration under the aegis of the International Chamber of Commerce for the settlement of all disputes arising from these contracts and from the individual loan contracts granted under the basic contract; that additional clauses increased the borrowing limits and provided for additional guarantees that additional clauses no. 2 to the basic contract and to the loan contract imposed on the borrower the obligation to subscribe for promissory notes before a Chilean notary each time a part of the loan was made available in execution of the individual contracts; it was stipulated that the subscription of these notes did not affect the rights and obligations of the parties resulting from the individual contracts.

Considering, on one hand, that the action taken on 27 June 2002 by KfW before a Chilean court in order to obtain recognition of the signature of a representative of IEL on a promissory note whose validity was disputed is a specific action for the implementation of this autonomous undertaking, which cannot lead to the presumption that KfW has waived its right to have recourse to arbitration to rule on the rights and obligations resulting from the 1995 agreements that no other proceedings have been brought by KfW against IEL before the Chilean courts.

Considering, on the other hand, that if KfW has brought an action for the judicial liquidation of D, a subsidiary of IEL, a debtor of KfW under separate contracts, such an action, falling within the exclusive jurisdiction of the state courts, cannot be held to reveal the intention of KfW to waive arbitration in its relations with IEL;

Considering, secondly, that following the lapse of the term pronounced by KfW on 10 January 2002, the parties entered into talks with a view to restructuring the debts of IEL; that a ‘Settlement Agreement’ was concluded on 23 October 2002; that on 27 January 2003 IEL brought an action before the Civil Court of Santiago in order to obtain the rescheduling of a promissory note of 10,000,000 USD subscribed in execution of this agreement; IEL complains that KfW did not avail itself of the arbitration clause before the Chilean court;

However, considering that because of the autonomy of the action relating to the conditions of execution of a promissory note, the fact that KfW has pleaded before the Chilean courts, without concluding on the merits, the lack of jurisdiction of the court seized in favour of the German courts cannot lead to the presumption that the arbitration clauses have been waived; IEL opposes in vain the rule of estoppel to KfW which implemented the arbitration procedure without having invoked the arbitration clause in these proceedings which was not included in the scope of the arbitration;

With regard to the transactional process:

Considering, first of all, that a ‘Memorandum of Understanding’ was signed on 22 August 2002 between KfW, D and IEL which fix the terms and conditions for the rescheduling of D’s debt; that the Memorandum states, with regard to IEL, that, due to the lack of information on its financial situation, KfW is not in a position to propose a restructuring of its loans, that it is, however, ‘willing, in principle, to consider’ such a restructuring subject to the provision of the listed documents;

Considering that this Memorandum did not create any obligation in the relations between KfW and IEL, the stipulation that ‘this Memorandum of Understanding shall be governed by German law and subject to the exclusive jurisdiction of the German courts’ concerns only the relations between KfW and D and cannot be understood as a waiver of the arbitration clauses inserted in the basic contract and the loan agreement concluded with IEL;

Considering that following the ‘Memorandum of Understanding’, a ‘Transactional Agreement’ was concluded between the same parties on 23 October 2002, before a Chilean notary, which contains neither a choice of court clause nor an arbitration clause;

Considering that the stipulations of the ‘Transactional Agreement’ must be interpreted by each other by giving each one the meaning resulting from the entire act; that if clause 3 provides that the parties ‘release themselves in the fullest manner’ and ‘waive their right to initiate or institute proceedings against each other’, this stipulation must, according to the first sentence of the same article, be understood in the light of the preceding clauses; that Clause 1 restricts the scope of the agreement, as regard to the relationship between KfW and IEL, to the proceedings initiated on 27 June 2002 by KfW in recognition of signature on a promissory note and to the criminal complaint lodged by IEL; that Clause 2 sets out the intention of the parties to renegotiate the loan agreements and provides for the substitution of a promissory note of USD 10. 000,000, with staggered deadlines, to two invalid promissory notes of USD 2,361,327.90 and USD 13,393,357.03; that these stipulations should not be understood either as a waiver by KfW of the surplus of its claim, valued in the letter of cancellation at USD 64,547,509.47, or as a waiver of benefit of the arbitration clauses stipulated in the 1995 contracts; in the absence of the express will of the parties, this agreement does not have a novation scope, it being observed, moreover, that a transaction, even if it entails novation of the obligations, does not have for effect to deprive the arbitration clause inserted in the contract of effectiveness.

Considering that in the absence of a waiver of the benefit of the arbitration clause by the parties and the extinction of this clause by the transaction, the means taken from what the arbitrators would have ruled without an arbitration agreement can only be rejected;

On the second ground for annulment: the arbitrators did not comply with the mission conferred on them (Articles 1502-3 and 1504 of the Code of Civil Procedure):

IEL argues that the arbitrators failed in their task by, on one hand, applying the arbitration clauses stipulated in the 1995 agreements despite the novation operated by the ‘Transactional Agreement’ and, on the other hand, by applying this agreement even though it did not contain an arbitration clause and, as the Supreme Court of Chile ruled, its knowledge fell within the jurisdiction of the German courts.

Considering, on one hand, that, as has been said, the transaction does not deprive the arbitration clause of its effectiveness, on the other hand, that the ‘Transactional Agreement’ has its origin in the non-observance of the basic contract and the loan contract, of which it is the complement, so that it falls within the scope of the arbitration clauses stipulated by them; that, consequently, the complaint cannot be accepted;

Whereas it follows from the foregoing that the action for annulment must be dismissed;

Considering that no particular circumstance has been shown to have degenerated the right of action into an abuse; that there is therefore no reason to grant KfW’s claim for damages;

Whereas IEL, who is unsuccessful, will have to pay KfW the sum of EUR 100,000 in application of Article 700 of the Code of Civil Procedure;

FOR THESE REASONS:

Dismisses the action for annulment.

Rejects KfW’s claim for damages.

Condemns IEL to pay KfW the sum of EUR 100,000 in application of Article 700 of the Code of Civil Procedure.

Orders IEL to pay the costs and admits SCP FISSELIER, CHILOUX, E, confessed at the benefit of article 699 of the code of civil procedure.