Paris Court of Appeal, No. 09/10252

Paris Court of Appeal, 1st Pole – 1st Chamber, 11 May 2010,No. 09/10252

SA THALES , SAS THALES UNDERWATER SYSTEM vs.
REPUBLIC OF CHINA (TAIWAN) , REPUBLIC OF CHINA NAVY (TAIWAN)

Under the terms of a so-called “Bravo” contract dated 31 August 1991, China Shipbuilding Corporation - which, after various deed of assignment, is owned by the Republic of China (Taiwan) and its representative, the Navy of the Republic of China (hereinafter “ROCN” for Republic of China Navy) - undertook to purchase six frigates from F G, which is owned by THALES SA and THALES UNDERWATER SAS (hereinafter “Thales” companies).

Article 18 of this agreement stipulated, in substance, that the seller undertook that no hidden commission would be paid by any intermediary whatsoever for the conclusion of the contract. In the event that such commissions were paid, the buyer could, at its option, deduct them from the price or terminate the contract.

Believing that commissions had been paid, ROCN, on the basis of the arbitration clause stipulated in the contract, initiated arbitration proceedings under the supervision of the International Chamber of Commerce in order to obtain a reduction in the price and damages.

In a preliminary award rendered in Paris on 6 September 2004, the arbitral tribunal, composed of M. and M., decided that the seller had failed to comply with the terms of the contract. In a preliminary award rendered in Paris on 6 September 2004, the arbitral tribunal, composed of Mr. X, Chairman, and Mr. H I J and Mr. Y, arbitrators, dismissed the grounds alleging the waiver of the arbitration clause and the nullity of the arbitration agreement. Notwithstanding the objection relating to top-secret classification, the dispute was arbitrable and could be settled in accordance with the rules of fair trial. Consequently, it declared it had jurisdiction to settle the dispute, also admitted its jurisdiction over Thales Underwater SA; and finally, recognised the admissibility of the claims under article 29-1 of the contract.

The action for annulment filed by the companies against this award was dismissed by a judgment of the Paris Court of Appeal of 29 June 2006, which was set aside in its entirety by a judgment of 11 February 2009 and the case was referred back to the same Court of Appeal with a different composition. In accordance with article 455 of the French Code of Civil Procedure, the Court of Cassation considered that the judgment under appeal, while refraining from any explicit reference to the reasons of the arbitrators whose reasoning it approved, did not enable it to exercise its review. In application of the judgment of the Court of Cassation, the companies, which were referred to the present Court of Appeal by an action dated 27 March 2009.

In their statements filed on 16 February 2010, the Thales companies request the annulment of the arbitral award of 6 September 2004 and request the Court of Appeal to order to ROCN and the Republic of China to both pay jointly the sum of 50,000 euros pursuant to article 700 of the Code of Civil Procedure. They argue that the arbitrators ruled without an arbitration agreement (article 1502-1 of the Code of Civil Procedure) since, on the one hand, ROCN waived the arbitration clause by referring the dispute to the State courts and, on the other hand, the dispute is not arbitrable in order to be covered by secrecy. The Thales companies also argue that by admitting the arbitrability of the dispute when the main elements of evidence are covered by the top-secret classification, the award does not comply with due process (in French Principe de contradiction) (Article 1502-4 of the French Civil Procedure Code), as well as international public policy (Article 1502-5 of the French Civil Procedure Code).

In its submissions dated 18 March 2010, ROCN requests the rejection of the opposing claims and that the Court of Appeal order the Thales companies to jointly pay the sum of 50,000 euros pursuant to Article 700 of the French Civil Procedure Code.

In the present case, it states, on the one hand, that the waiver of an arbitration clause is not presumed and cannot be inferred from attempts to file a civil action that do not contain a claim on the merits, and, on the other hand, that the application of top-secret classification to certain documents is a question of admissibility of evidence and not a question of arbitrability of the dispute.

The Public Prosecutor’s Office, intervening as an joined party, considers that the award should be set aside pursuant to article 1504-4 of the Code of Civil Procedure and article 6 of the European Convention on Human Rights, arguing that the dispute is not arbitrable as covered by the top-secret defense and that the settlement does not meet the requirements of a fair trial since the classification of many decisive parts for the outcome of the trial does not allow to guarantee the balance of the rights of the parties and the respect of due process (in French Principe de contradiction).

UPON WHICH:

On the ground of annulment based on the absence of an arbitration agreement due to the waiver of the benefit of the arbitration clause (article 1502-1 of the code of civil procedure):

The Thales companies argue that on 26 February 1997, F G filed a complaint for attempted fraud against Unknown Persons (in French: contre X) with a civil action, following an arbitration agreement rendered on 31 July 1996 in Geneva, which condemned it to pay various sums to a company called FRONTIER A.G. BERN, in respect of the role of the intermediary that the latter allegedly had in the conclusion of the ‘Bravo’ contract. They allege that ROCN became a civil party in these proceedings by invoking the damage resulting from the inclusion of these commissions in the sale price; that a new case against Unknown Persons (in French: contre X) was opened at the initiative of the Public Prosecutor’s Office on 22 June 2001 on the grounds of abuse of company assets committed during the conclusion and performance of the ‘Bravo’ contract; that these proceedings was joined to the previous one on June 28, 2002 and that ROCN filed a new civil action to this case; that these civil actions must be analysed as claims on the merits tending to call into question the responsibility of F G for the same facts and for the reparation of the same damage as those that were the object of the arbitration, namely the extra-billing resulting from the inclusion in the sale price of illicit kick-backs; that it follows that ROCN renounced the arbitration agreement.

Whereas, it follows from the provisions of articles 1502-1 and 1504 of the Code of Civil Procedure that the award rendered in France in international arbitration may be the subject of an action for annulment when the arbitrators ruled without an arbitration agreement; that this is the case in particular when the parties waived the arbitration clause; that if the waiver can be effected, it must be unequivocal; that it may result, in particular, from the introduction before a State court of a claim on the merits that should have been submitted to arbitration;

Concerning the civil action, if its admissibility is subordinated to the allegation of personal damage directly caused by the offence, may not be accompanied by any claim for compensation and may have as its sole purpose to corroborate the public action, in particular when the compensation for damage caused by the offence is beyond the jurisdiction of the criminal court; that such an action cannot, by itself, and independently of the circumstances of the case, presume the waiver of the benefit of an arbitration agreement by the party exercising it;

Whereas, in the present case, no claim for compensation was brought by ROCN against F G or against the Thales companies before a domestic court; that ROCN merely participated in the two criminal proceedings, relating to the payment of sums on the occasion of the conclusion and performance of the “Bravo” contract, one of which was initiated by the incorporation of F G, and the other by the public prosecutor’s office; that these two civil actions were moreover declared admissible on the grounds that the damage invoked did not result directly from the facts before the examining magistrates.

That, ROCN, without waiving the arbitration clause stipulated in the contract of August 31, 1991, could participate to preserve its rights in criminal proceedings indirectly concerning this contract and involving third parties whom it could not have brought to arbitration;

That, therefore, ROCN’s claims as a civil party, even if they evoke the inflation of the price of frigates and the dispute opposing it to F G, are not such as to establish unequivocally its waiver of the arbitration agreement; that the ground must be set aside;

On the ground of setting aside the award for the nullity of the arbitration agreement because the dispute is not arbitrable (article 1502-1 of the Code of Civil Procedure):

The Thales companies maintains that by virtue of provisions criminally sanctioned by French law, it is prohibited for anyone to disclose information covered by top-secret classification and to produce it before a court, whether national or arbitral, documents covered by this top-secret classification; that the merits of the classification cannot be discussed before a court and that the only possibility of access to the documents collected consists in using the proceedings known as ‘declassification’ governed by Law No. 98-567 of 8 July 1998. Moreover, top-secret classification does not only protect documents subject to a regulatory mark in application of the provisions of the decree of 17 July 1998, but also, irrespective of their medium, information from these documents, which would be reproduced in other documents; the rules governing top-secret classification contained in a title of the French Penal Code devoted to the “fundamental interests of the nation” are international public order; that, in this case, the essential elements for the solution of the dispute are covered by the top-secret classification; that these are, in fact, the documents relating to the alleged payment of commissions abroad for which the investigating magistrates made requests for declassification which have been rejected on the grounds that their disclosure would be likely to harm in the most serious way the fundamental interests of the Nation, as well as the respect of the external commitments of the country; that the subsequent conduct of the arbitration proceedings demonstrated that the dispute could not be judged without the court having knowledge of classified information; that, consequently, in affirming their jurisdiction to rule on the subject matter of the dispute, as well as the main elements of evidence, the arbitrators disregarded the rules governing the arbitrable nature of disputes, the violation of which is assimilated to the absence of an arbitration agreement.

The Public Prosecutor’s Office maintains under article 2060 of the Civil Code the dispute is, in itself, a dispute not arbitrable because it concerns public policy since the concept of secrecy prevents arbitrators, in fact, from having knowledge of these elements of the dispute. The public order nature of the concept of top-secret classification is the result of its criminal sanction in the French legal system and its recognition by most States; that the very object of the dispute concerns the application of this top-secret classification, as it results from the perspective of the dispute submitted to arbitration and from the criminal information during which the declassification of documents relating to possible commissions was refused; that, moreover, if the contract appears to have been concluded by a private person, it is in fact a matter of inter-State diplomatic relations.

It follows from articles 1504 and 1502-1 of the Code of Civil Procedure that an award rendered in France in international arbitration matter may be subject to an action for annulment if the arbitrators render their decision in the absence of an arbitration agreement or on the basis of a void or expired agreement.

Whereas, first of all, that the dispute before the arbitrators, opposing the parties to a contract of sale, concerns the restitution of a part of the price and the compensation of the damage which the purchaser claims to have suffered as a result of the payment, by the defendant, of commissions prohibited by article 18 of the Convention;

Considering, secondly, that the arbitration clause, to which F G agreed in the most general way and without any restriction concerning article 18, includes all disputes relating to the contract; that it is not alleged that the contract itself would be classified, in whole or in part;

Considering that the dismissal by the competent authority of the requests for declassification of various documents - in particular customs declarations made by F G - submitted by the investigating magistrates in the context of the above-mentioned criminal information, prevents the production in the arbitration body of the documents in question and the information extracted from them; that, however, this exclusion from the proceedings only affects the admissibility of the evidence; that it cannot lead to the presumption that the very subject of the dispute - namely any payment, whatever the cause and the recipient, which could have been made in violation of Article 18 of the ‘Bravo’ contract - is necessarily covered by the national defence classification, which is not defined in French law by its nature but by administrative determination;

That it does not appear, therefore, that the dispute would not be arbitrable or that the arbitration agreement would be null and void as contrary to public policy; that this ground of appeal based on Article 1502-1 of the Code of Civil Procedure cannot be upheld;

On the ground of annulment based on the breach of due process (in French: principe de contradiction) and the noncompliance with international public policy (Article 1502-4 and Article 1502-5 of the Code of Civil Procedure):

Thales companies argue that by declaring that they had jurisdiction, the arbitrators themselves violated and incited the parties to violate international public policy, and that they also failed to comply with due process (in French: principe de contradiction), as the parties are not free, or are unequally free, to develop certain arguments and produce certain evidence.

The Public Prosecutor’s Office argues that no evidence not covered by the obligation of top-secret classification appears to be reasonably producible, since that top-secret classification covers not only materially classified documents but also the information they contain and its opposability is in no way conditional on notification of the decision to classify; lastly, due process (in French: principe de contradiction) would be disregarded if ROCN were able to produce non-classified documents on which the Thales companies could not explain themselves and against which they could not oppose other documents covered by the obligation of top-secret classification.

Considering that Articles 1504 and 1502-1 of the Code of Civil Procedure provide that an award made in France in international arbitration may be subject to an action for annulment if the principle of contradiction has not been respected, or if the recognition or enforcement of the award is contrary to international public policy;

Considering that unilateral provisions, by which the competent authorities of a State, designate in accordance with a legally established procedure, documents the confidentiality of which that State intends to protect in the interests of its national defence, are binding on the persons to whom they apply; that such persons should not be placed in a position in an international arbitral tribunal in which they would have to violate such provisions or be deprived of the faculty of presenting their defence in an effective manner;

Considering that it is for the arbitrators, under the supervision of the appeal judge, to ensure that the national mandatory rules resulting from Articles 413-9 to 413-11 of the French Criminal Code and L. 2312-1 et seq. of the Defence Code are reconciled with the principles of a fair trial;

Considering that, as has been said, the question of the validity of the evidence does not affect the subject matter of the dispute; that it does not constitute a ground for dismissal, but must be examined together with the arguments on the merits;

Considering that the parties' freedom of evidence and their equality in the taking of evidence must, therefore, be analysed, not in abstracto and as a whole as being contrary to international public policy or the guiding principles of the trial, but in concreto, when examining the claims on the merits of the claimant and the defendant;

Considering that the referred award exclusively settles the question of the jurisdiction of the arbitral tribunal;

Considering that this interim award which, without refusing to take into consideration the secrecy of national defence, decides that it is an exception to the production of documents, which will be examined in the context of the admission of evidence on the merits, does not involve any flagrant, effective and concrete violation of international public policy, and complies with due process (in French Principe de contradiction); that the grounds of annulment based on Article 1502-4 and 1502-5 of the Code of Civil Procedure are thus unfounded;

Considering that it follows from all the above that the appeal must be dismissed; that the Thales companies, which are involved, will be ordered jointly and severally to pay the sum of EUR 50,000 euros to ROCN pursuant to Article 700 of the Code of Civil Procedure;

FOR THESE REASONS:

Having regard to the decision of the Court of Cassation of 11 February 2009;

Dismisses the action for annulment of the arbitral award rendered on 6 September 2004.

Orders SA THALES and SAS THALES UNDERWATER SYSTEM jointly and severally to pay, pursuant to Article 700 of the Code of Civil Procedure, the global sum of EUR 50,000 to the REPUBLIC OF CHINA (TAIWAN) and the MARINE OF THE DECHINA REPUBLIC (TAIWAN); Rejects any other request.

Orders SA THALES and SA THALES UNDERWATER SYSTEM jointly and severally to pay the costs and admits the SCPFISSELIER-CHILOUX-BOULAY, avowedly, to the benefit of article 699 of the code of civil procedure.

THE REGISTRAR, THE PRESIDENT