Paris Court of Appeal, No. 09/15742

Paris Court of Appeal, Pole 1, First Chamber, 2 December 2010, No. 09/15742

BOTAS BORU HATLARI ILE PETROL TASIMA A.S (X) Vs. TEPE INSAAT SANAYII A.S (Y)

The construction of the Baku-Tbilisi-Ceyhan oil pipeline is provided by a consortium of companies called Participants in the ‘Leading Export Group’ (LEG) led by British F. The realisation of the section of the structure located on Turkish territory was entrusted by EPP to a semi-public company under Turkish law X F G H (X) in under a lump-sum ‘turnkey contract’ from 19 October 2000, the enforcement of which was guaranteed by the Turkish state.

On 20 September 2002, X, the contracting authority, concluded with the Turkish company Y INSAAT SANAYII A.S. (Y) a contract of engineering, suppliance and construction of four pumping stations and an intermediate station of scraping.

Disputes have arisen between X and Y in relation to the extent of the respective services of the parties, to the financing of the work and compliance with deadlines. Following a request for additional funding addressed by Y to X on 22 March 2005, X terminated the contract with immediate effect by letter of 29 March 2005.

On May 21, 2007, Y implemented the arbitration clause which stipulated the settlement of the disputes by arbitration under the supervision of the International Chamber of Commerce, with application of substantive law English. Y claimed compensation for the damage it said it suffered due, on the one hand, to the co-contractor’s failure to provide detailed plans in good time and, on the other hand, to the unlawful termination of the contract.

By an interim award issued in Paris on 5 June 2009, the court composed of Mr. Schwartz, Chairman, and Messrs Blessing and D, arbitrators, :

• Declared Y’s claims based on breaches of obligations in good faith, on misrepresentation, on the breach of tacit contractual agreements, and on erroneous and negligent statements, were unfounded;
• Recognised Y’s right to obtain additional remuneration under the amendments to the quantity of work;
• Declared that Y was not entitled to an extension of time limit or extension costs;
• Declared that X was not entitled to the payment by Y of lump-sum damages for delay;
• Stated that the termination by X was unlawful regarding clause 15.2.2 of the contract or the common law and was not reasoned regarding clause 15.2.1;
• Stated that X was not entitled to call in the guarantee of good performance of Y;
• Stated that Y was entitled to recover its retention and milestone guarantees, as well as the costs incurred to maintain these guarantees;
• Reserved the surplus of applications and fees.

X appealed against this award on 10 July 2009.

In its submissions of 29 September 2010, X requests the annulment as well as the condemnation of the party to pay it the sum of 50,000 Euros in application of article 700 of the Code of Civil Procedure. It alleges a breach of international public order by a failure to comply with the duty of good faith in the performance of the contractual obligations (art. 1502-5 of the Code of Civil Procedure), the violation of the doctrine of estoppel (article 1502-5 of the Code of Civil Procedure) and finally, the ignorance of the adversarial principle, and procedural equality (Article 1502-4 and 1502-5 of the Code of Civil Procedure).

In its submission dated 21 October 2010, Y mainly requests the rejection of the claimant’s appeal and the confirmation of the award, alternatively the confirmation of the first four points of the operative part of the award. It estimates at 150,000 euros its irrecoverable costs of procedure.

UPON WHICH :

On the first ground for annulment based on the violation the principle of international public order through failure to comply with the duty of good faith in the performance of the contractual obligations (article 1502-5 of the Code of Civil Procedure) :

X states that Y, in its letter of 22 March 2005, alleged the impossibility of finishing the construction work unless the co-contractor consents immediate assistance of $35 million, or agrees to replace the agreed all-in price by a reimbursement of expenses effectively committed; that Y by threatening to abandon the construction work two months before the deadline of the works delivery, while the Bilkent group to which it belongs could have mobilised the capital needed to complete the work, did not perform its obligations in good faith; that in deciding that the termination made by the client following this letter was irregular, and thus confirming that it was not Y’s unfair conduct, the award constitutes a flagrant, effective and concrete violation of international public order regarding the duty to performance contractual obligations in good faith.

Considering that for various reasons, for the attribution of which the parties are opposed, the work entrusted to Y was delayed and the contractor was faced with cash flow difficulties; after several amendments to the contract - concluded between the parties from May to December 2004 - X granted Y financial support, notably in the form of interest-free loans;

Whereas on 22 March 2005, Y sent X an letter entitled: ‘Application for additional funding’, according to which, it stated that due to the client’s failure to prov that Y added that it was not in a position to finance the continuation of the work without immediate additional funding from the client, but that it was prepared to complete the project in accordance with the provisional delivery date of 30 June 2005 in exchange for the payment of an additional sum of USD 35 million, otherwise the parties could agree to terminate the contract and immediately sign a new contract on the basis of a reimbursement of the services actually provided; Y concluded that if the parties did not reach a mutually acceptable solution allowing the work to continue in good time, it would be obliged to terminate the contract on the basis of the project owner’s breach of his obligations;

Considering that, by letter of 29 March 2005, X replied that the threat of termination by Y constituted a serious breach of the rights and obligations under the contract. In the first place, X alleged that Y breached its contractual obligations by asserting its rights to additional funds for late delivery of the plans under conditions which were not those provided for in the agreement and its amendments. Secondly, X alleged that Y’s letter did not comply with the ‘rectification’ period stipulated in clause 16.2.1 (ii). Thirdly, X considered that Y was in breach of the settlement agreement of 10 December 2003 and, finally, that the contractor had unambiguously confirmed that he would not complete the work for the contract price. Pursuant to Article 15.2.2 (xi), X terminated the contract with immediate effect for serious breach of contractual provisions other than those listed in the various paragraphs of this article;

To decide that X’s termination of the contract was not properly reasoned in the light of the contractual provisions, the arbitrators firstly stated that clause 15.2.2 (xi), on which the client relied to terminate the contract without notice, contained an obvious clerical error resulting from the defective transposition into the contract between X and Y of the corresponding provisions of the contract concluded between the participants in the EPP and X. The arbitrators added that this clause was in fact to be understood as providing for a period of 30 days between the notification of objections and termination. Y was deprived of this notice period in the present case. Then, the arbitral tribunal stated that the breaches alleged by X could not be regarded as serious breaches of contract; that the fact that Y presented its financial situation as definitively compromised did not fall within the scope of such a classification, since it was clear that, at the date of termination, Y did not interrupt the work and that the possibility to seek further financing within the contractual ‘rectification’ period was not open to it. Moreover, the fact that Y’s request for additional payment did not take the form provided for in the agreement, nor the fact that Y threatened to terminate the contract, since X was entirely free to refuse to comply with Y’s demands and to draw the consequences of the contractor’s attitude at the end of the notice period, did not constitute a serious breach of the contractual obligations either.

That it is apparent that the ground from which the enforcement of the award is not in accordance with the principle of good faith in the performance of contractual obligations is in fact lacking and that, in the name of violation of international public order, X tends towards a review of the merits of the award which is not allowed to the Court of Appeal;

Considering that the first ground of appeal cannot therefore be admitted;

On the second ground for annulment taken from the violation of the doctrine of estoppel (article 1502-5 of the Code of Civil Procedure) :

X states that after having received Y’s mail from the 22 March 2005, it terminated the contract on the basis of paragraph (xi) of Clause 15.2.2, which allows for a such termination without notice or delay of rectification' ‘when the Contractor commits any other serious violation of any of the contract provisions’; that Y after having adhered to the interpretation that there is no deadline for the notice was required in this case, subsequently modified its position claiming that the clause contained a clerical error and should have been understood as providing a deadline; that the arbitral tribunal, amidst rejecting the ground of the estoppel and making this its own interpretation allowed Y to contradict itself for the sake of its opponent “‘in violation of the rule of estoppel’, a general principle of international arbitration and international public order in French, which guarantees procedural fairness, good faith and equality between the parties”.

Considering that the arbitrators' failure to comply with the rule of estoppel, if it is proved, is not one of the grounds for annulment under Article 1502 of the Code of Civil Procedure, except in the case of procedural fraud, which is not alleged in the present case; that the second ground of appeal must therefore be dismissed;

On third ground for annulment based on the violation of the principle of adversarial process and the principle of the procedural equality (Article 1502-4 and 1502-5 of the Code of Civil Procedure):

X maintains that the arbitral tribunal sanctioned it, on the one hand, for not having waited for Y to provide evidence of its financial failure to complete the project and, on the other hand, for not having itself provided evidence that Y was unable to complete the project without financial assistance from the project owner. X claims that by reversing the burden of proof in this way, the arbitral tribunal disrupted the procedural balance between the parties, in violation of the principle of equal treatment of the parties.

Contrary to X’s claim, the arbitrators did not require it to prove Y’s insolvency, but they charged that it had considered Y’s insolvency to be proven solely on the basis of Y’s letter of 22 March 2005 and without giving Y the benefit of the notice period which would have enabled it to seek alternative financing; that the groundl, which is limited to a criticism of the reasoning followed by the arbitral tribunal - by distorting it - tends, under the guise of an alleged violation of the principle of adversarial process and of the principle of equality of the parties, to review the merits of the award, which is prohibited to the court of appeal;

It follows from all the foregoing that the action for setting aside the award must be dismissed; that X, who is unsuccessful, will be ordered to pay Y the sum of 150,000 euros in application of article 700 of the Code of Civil Procedure;

FOR THESE REASONS:

Dismisses the action for annulment.

Orders company X F G H to pay to company Y INSAAT SANAYII A.S. the sum of 150.000 euros in application of article 700 of the Code of Civil Procedure.

Considers X F PIPIELINE H company’s application as rejected based on Article 700 of the Code of Civil Procedure.

Orders X F G H to pay the costs and admits the SCP Hardouin, attorneys, for the benefit of article 699 of the Code of Civil Procedure.