Paris Court of Appeal, No. 09/18018 | Rory Wheeler, avocat (Paris) & solicitor (England)

Paris Court of Appeal, First Pole – First Chamber, 9 November 2010, No. 09/18018

Judicial chronology:

Court of Cassation, First Civil Chamber, 19 December 2012, No. 11-10.973

SA APAX PARTNERS

vs.

SA FINO

S.A.R.L. MARSA FASHION COMPAGNY

S.A.R.L. PARTNER TEXTILE

The companies incorporated under Tunisian law MARSA FASHION COMPAGNY (MFC), FINO and PARTNER TEXTILE (Tunisian companies) operate in the textile and garment sector. Since 1998, they have maintained regular commercial relations with the company MORGAN SA (MORGAN), which specializes in the creation and sale of ready-to-wear clothing.

The company APAX PARTNERS SA (APAX) is an investment fund that manages two mutual funds holding 79.49% of the voting rights in the company MORGAN INTERNATIONAL PARTICIPATIONS (MIP), which itself holds 100% of the capital of MORGAN.

Following a sharp drop in orders in 2007, the Tunisian companies sued MORGAN on 27 July 2007 before the Tunisian courts for payment of damages for wrongful termination of established commercial relations. Negotiations, in which Mr. Z, president of APAX, intervened, led to the signing on 25 January 2008 of a settlement agreement between MORGAN and the Tunisian companies under the terms of which the latter waived their legal action in return for MORGAN’s commitment to ensure a certain volume of orders for three years.

Alleging the non-performance by MORGAN of its commitments, the Tunisian companies initiated, on 30 July 2008, arbitration proceedings in accordance with the arbitration clause stipulated in the agreement (first arbitration, whose headquarters were located in Geneva).

The doubtful solvency of MORGAN, confirmed by its admission on 24 December 2008 to the benefit of the receivership, led the Tunisian companies to seek the extension of the arbitration procedure to APAX and its chairman. Finally, a new arbitration agreement was concluded on 16 January 2009 between APAX and the Tunisian companies (second arbitration). It established the seat of arbitration in Paris and elected the rules of procedure of the French Code of Civil Procedure and the French substantive law.

The constituted court, in execution of this agreement, Ms. Augendre, chairwoman, and Mr. Delvolvé and Mr. F, arbitrators, rendered an award on 30 July 2009 with provisional enforcement which:

orders APAX to pay to MFC 7,000,000 euros for loss of opportunity and 500,000 euros in compensation for moral prejudice and to FINO, 2,000,000 euros for loss of opportunity and 500,000 euros in compensation for moral damage;
notes that PARTNER TEXTILE makes no claim in these two respects;
dismisses APAX’s counterclaim.

APAX appealed against this award on 7 August 2009.

In its submissions of 6 September 2010, it seeks the annulment of the award and request the Court to dismiss the objection of inadmissibility presented by the Tunisian companies and to order them to pay it the sum of 80,000 euros pursuant to article 700 of the Code of Civil Procedure.

It invokes, in substance, the disregard of due process (in French Principe de la contradiction) (Article 1502-4 of the Code of Civil Procedure) and the disregard of the same principle, together with violation of procedural public order (Article 1502-5 of the Code of Civil Procedure).

By submissions of 29 September 2010, the Tunisian companies request the Court to rule that the grounds raised by APAX tend to the review of the award and that the alleged breach of the rights of defence is not established, that the appeal should therefore be declared inadmissible and unfounded, and to order APAX to pay the sum of 65,000 euros under article 700 of the Code of Civil Procedure.

UPON WHICH

On the first ground of annulment taken from the disregard of due process (in French Principe de la contradiction) (article 1502-4 of the code of civil procedure):

On the ground taken in its first part:

APAX maintains that the arbitrators based their decision on a fact not debated by the parties, namely the circumstance that Mr. Z would have concealed a request for recapitalisation of MORGAN, formulated by the latter’s bankers as a condition for the rescheduling of its debt.

Considering that the Tunisian companies argued before the arbitral tribunal that Mr. Z., intervening in his capacity as president of APAX, in the negotiations leading to the conclusion of the settlement agreement, concealed the financial situation of MORGAN as well as APAX’s will to quickly sell its shares in this company. Moreover, the Tunisian companies argued that this breach of the duty of loyalty led them to withdraw their action before the Tunisian courts in return for illusory commitments from MORGAN and thus deprived them of an opportunity to obtain in the court proceedings compensation for the damage caused by the termination of established commercial relations.

Considering that APAX replied on these various points.

Considering that, in order to accept the claims of the Tunisian companies and to characterise the disloyalty of APAX, the award (§ 37) states that, “while Mr. Z made every effort to induce Mr. Y and the ‘Tunisian companies’ to compromise, i.e. to renounce their legal action in Tunisia in return for the promise of the ‘exceptional’ effort of MORGAN described in the above-mentioned memorandum of 30 October 2007, he himself concealed two essential pieces of information from his interlocutor.

Firstly, a report by the MIP Board of Directors on 19 December 2007 indicated that MORGAN’s bankers, who were requested to reschedule its debt, requested recapitalisation of the debt by its shareholders. Mr. Z, a member of that board, should have faithfully communicated this information to Mr. Y, while the transactional negotiations were underway, and the ‘exceptional’ efforts required of MORGAN would probably be difficult to sustain.

Finally, it turned out that, far from being prepared to support MORGAN, Mr. Z was trying to divest himself from it, by means of a transfer as quickly as possible by funds APAX of their shares in MORGAN to a third party, which was hindered by the existence and persistence of legal proceedings pending in Tunisia, the financial impact of which seemed daunting.”

Considering that due process (in French Principe de la contradiction) does not imply that the parties are invited to discuss the reasons for the award before it is pronounced;

Considering that, as soon as they were referred of the allegation, debated in a contradictory manner, of concealment by Mr. Z of two circumstances likely to affect the negotiations - MORGAN’s compromised financial situation and APAX’s will to withdraw from the capital of this company - the arbitrators did not ignore the requirements of due process by retaining, in particular, without provoking any particular explanations from the parties on this point, a report from the board of directors of MIP relating to the difficulties of restructuring MORGAN’s debt, which it is constant that it had been regularly versed in the debates;

On the ground taken in its second part:

APAX claims that the arbitrators violated due process (in French Principe de la contradiction) by basing their decision on a certificate from the auditors of Tunisian companies relating to the amount of compensation of which it was not aware.

Considering that APAX refers to paragraph 46 of the arbitral award which states that “the amount of the repairs was accompanied by accounting evidence and was certified, inter alia, by the auditors of Tunisian companies and by the audit company Horwath, which the arbitral tribunal considers plausible and does not call for the assistance of the expertise requested subsidiarily capacity by both parties”;

Considering that it results from the context of this summons, as well as from its comparison with the documents produced to the arbitral tribunal, that the tribunal thus intended to refer, on the one hand, to the technical reports for the evaluation of the losses incurred by MFC and FINO, drawn up by Horwath (documents produced by the Tunisian companies to the arbitral tribunal under numbers 28 and 29), on the other hand, to the financial statements of MFC for the financial years 2003 to 2006 and the financial statements of FINO for the financial years 2005 to 2007 accompanied by the reports of the auditors (documents 19 and 27); that it infers that, contrary to APAX’s allegations, the arbitrators did not rely on documents that would not have been included in the proceedings;

That the first ground in its two branches cannot therefore be upheld;

On the second ground of annulment based on the violation of the international public order of procedure (Article 1502-5 of the Code of Civil Procedure) and of due process (in French Principe de la contradiction) (Article 1502-4 of the Code of Civil Procedure):

APAX states that the dispute concerns its possible liability in alleged contractual breaches against MORGAN; that the financial and commercial information necessary to assess both the wrongful conducts and the damage are held by Tunisian companies and by MORGAN; that it does not itself have access to the archives of MORGAN, with which it has been in conflict of interest since the latter has been placed in receivership; that the arbitral tribunal, by relying solely on the documents produced by Tunisian companies, without granting its request for an expert opinion, disregarded the principle, inherent in international public order, of equality of arms, as well as due process.

Considering that the arbitrators held APAX liable for breaches of loyalty of its president which led the Tunisian companies to withdraw without any real consideration of their action against MORGAN and thus lose a chance to be compensated for the damage resulting from the abusive termination of established commercial relations;

Considering that the sole circumstance that APAX was not a party to the main contract could not, in the name of the principle of equality of arms, have the effect of depriving Tunisian companies of their right of access to a judge to sanction the personal failings of APAX; that, as the award states, it was up to APAX, if necessary, to request the hearing of representatives of MORGAN, which it refrained from doing; that if the arbitrators, considering themselves sufficiently enlightened on the prejudice to Tunisian companies by the accounting documents submitted to the proceedings, refused to grant the

request for an expert opinion submitted subsidiarily by all parties, this does not infringe the guiding principles of the lawsuit; that, moreover, APAX expressly acknowledged in a report drawn up at the end of the hearing on 19 June 2009 that the arbitral proceedings were conducted in accordance with due process;

That the second ground can therefore only be dismissed;

Whereas it follows from all of the foregoing that APAX’s appeal must be dismissed;

Considering that APAX, which succumbs, should be ordered to pay the Tunisian companies the global sum of 65,000 Euros in application of article 700 of the Code of Civil Procedure;

FOR THESE REASONS:

DISMISSES the action for annulment.

ORDERS the company APAX PARTNERS SA to pay to the companies MARSA FASHION COMPAGNY, FINO and PARTNER TEXTILE the global sum of 65,000 euros in application of article 700 of the Code of Civil Procedure.

DISMISSES the request made by APAX PARTNERS SA on the basis of article 700 of the code of civil procedure.

ORDERS SA APAX PARTNERS to pay the costs and admits the SCP BOLLING DURAND LALLEMENT, solicitor, to the benefit of article 699 of the code of civil procedure.