Paris Court of Appeal, No. 10/11853

Paris Court of Appeal, Pole 1, First Chamber, 9 June 2011, No. 10/11853

S.A. THALES (Y SA)

S.A.S. THALES UNDERWATER SYSTEMS (Y UNDERWATER SYSTEMS SAS)

vs.

REPUBLIC OF CHINA NAVY (TAIWAN)

TAIWAN REPUBLIC OF CHINA

Under the terms of a so-called “Bravo” contract of 31 August 1991, China Shipbuilding Corporation (CSBC) - to which, after various assignments, the Republic of China (Taiwan) is entitled, and its representative, the Navy of the Republic of China (hereinafter A for Republic of China Navy) undertook to purchase six frigates from the company E F, to which Y SA and Y UNDERWATER SYSTEMS SAS (hereinafter Y) are entitled.

Article 18 of that agreement essentially stipulated that the seller undertook that no hidden commission would be paid by any intermediary, whatever the reason for the conclusion of the contract. If such commissions were paid, the purchaser could, at his option, deduct them from the price or terminate the contract.

Considering that commissions had been paid, A, in accordance with the arbitration clause inserted in the contract, initiated arbitration proceedings under the supervision of the International Chamber of Commerce, in order to obtain a reduction of the price and damages.

In a preliminary award rendered in Paris on 6 September 2004, the Arbitral Tribunal, composed of Mr GIARDINA, Chairman, and Mr VAN DEN BERGet Z, arbitrators, dismissed the grounds for the waiver of the arbitration clause and the nullity of the arbitration agreement. Moreover, it held that, notwithstanding the confidentiality of the top-secret defence, the dispute was arbitrable and could be settled in accordance with the rules of fair trial; Thus, it declared it had jurisdiction to rule on the dispute; It also admitted its jurisdiction over Y NAVAL SA and finally, recognised the admissibility of the claims under Article 29-1 of the contract.

The action for annulment brought by Y against this award was dismissed by a decision of the Paris Court of Appeal of 29 June 2006. Following the cassation of this decision by a decision of the Court of Cassation of 11 February 2009, the Paris Court of Appeal, having reopened the case, handed down a new decision on 11 May 2010 rejecting the action.

At the same time the arbitration proceedings continued, the tribunal issued an award on 29 April 2010, in which it :

Declared that Y violated article 18.1 of the Bravo agreement prohibiting all gifts or payments to employees of the buyer, as well as article 18.2 requiring the seller to declare to the buyer the names of the intermediaries it used for the conclusion of the agreement and the terms of their remuneration

Ordered Y to repay to the sums of 482,326,869 USD,209,341,703 FF and 38,770 FF 785 in respect of the commissions paid to Andrew X’s network A and XXX’s commission paid to Lily Liu’s network B, plus interest shall pay A’s arbitration costs and the costs of the arbitral tribunal and charge them to Y;

Fixed the arbitration costs of A as well as the costs of the arbitral tribunal and ordered Y to pay them;

Rejected any other claim.

On 7 June 2010, Y brought an action against this award.

In its submissions of 14 October 2010, Y seeks the setting aside of the decision and the condemnation of A to pay the sum of 50,000 euros pursuant to Article 700 of the Code of Civil Procedure.

Y submits that :

by basing its decision on documents covered by top-secret defence which it could not discuss, the arbitral tribunal violated due process (in French Principe de contradiction) (Article 1502-4 of the Code of Civil Procedure) and international public policy (Article 1502-5 of the Code of Civil Procedure);

by allowing A to obtain compensation greater than the damage allegedly suffered, contrary to the principle of full reparation, the arbitrators disregarded international public policy (Article 1502-5 of the Code of Civil Procedure);

by refusing to decide the question of double compensation which had been expressly submitted to it, the tribunal failed to comply with its mission (Article 1502-3 of the Code of Civil Procedure) and breached international public policy (Article 1502-5 of the Code of Civil Procedure).

In its submissions of 7 January 2011, A requested the Court to dismiss Y’s claims in their entirety and order it to pay Navy of the Republic of China the sum of 85,000 euros pursuant to Article 700 of the Code of Civil Procedure.

UPON WHICH :

On the first ground of breach of due process (in French Principe de contradiction) and violation of international public policy insofar as the arbitral tribunal based its decision on documents covered by top-secret defence which the Y companies could not discuss (Articles 1502-4 and 1502-5 of the Code of Civil Procedure):

Y states that A produced, together with its statement of reply of 14 April 2006, a significant amount of documents classified as top-secret defence documents or containing information covered by national defence secrecy, in breach of the provisions of the Criminal Code. It firstly submits that, despite the late withdrawal of some of those documents from the arbitration proceedings, the court examined them over a period of several months and formed an opinion on them, without any defence having been able to be raised against them. On the other hand, it submits that certain elements covered by secrecy were not excluded from the proceedings and were expressly retained by the arbitrators in support of their decision. Lastly, it alleges that the claimant was deprived of the opportunity to debate the matter in a meaningful way and to discuss the quantum of the claims.

Whereas that under the provisions of the ‘Bravo’ contract dated 31 August 1991, CSBC - to whose rights A is entitled - undertook to acquire six frigate-type vessels from the company E F, to whose rights Y is entitled;

Whereas Article 18 of this contract stipulates:

“18.1 The Service Provider shall not grant or attribute any generosity, gift or personal payment, either directly or indirectly, to any officer or member of staff of the Purchaser.

18.2 The Supplier represents and assures that it did not employ or engage, in addition to its own employees, any company or person for the purpose of obtaining the Contract or ensuring its award, and that it did not engage any intermediary, representative or any other person who received or is to receive any commission, percentage, brokerage or performance fee in connection with the Contract. If any person other than the Service Provider’s employees receives any remuneration of any kind from the Service Provider in connection with the Contract, the Service Provider shall disclose to the Purchaser the identity of such person and the terms and basis of such payment.

18.3 In the event that the Service Provider fails to comply with any of the foregoing provisions concerning the payment of commission, percentage, brokerage or performance fees, the Buyer shall be entitled to:

(i) terminate the Contract for default by the Service Provider

(ii) deduct from the Contractual Price a sum equal to the amount of the commission, percentage, brokerage fee, performance fee or any other remuneration paid by the Service Provider'.

Whereas that A, relying on the arbitration clause provided for in the contract, submitted to arbitration its claims seeking an order that Y pay various sums to it for breach of articles 18.1 and 2;

Whereas the award declares that Y has breached its obligations under these two provisions and orders it to reimburse A the sums of USD 482,326,869, FF 209,341,703 and EUR 38,770,785 in respect of commissions paid to network A (Andrew X), as well as XXX in respect of network B (Lily Liu), together with interest for late payment; whereas, on the other hand, it rejects the claims made in respect of network C (Frontier AG);

Whereas that as a violation of Article 18. 1, the Arbitral Tribunal finds that sums were paid through Andrew X to Captain Kuo Li-heng, a Taiwanese officer who participated in the conclusion of the contract; that the tribunal relies on a press release of the Federal Office of Justice of the Swiss Confederation of 13 June 2007, according to which this officer and his brother admitted that they had received a sum of USD 34 million in connection with the sale of the frigates and expressly consented to the restitution to the Republic of China of those funds, which were blocked in bank accounts held by them in Switzerland (§ 351). In support of their decision on this point, the arbitrators further rely on the statements made by the lawyers for the Kuo brothers and Andrew X before the courts of the Republic of China (paras. 352 and 353), as well as on the closing order issued by the investigating judge in the mutual legal assistance proceedings in Switzerland, which states that Captain Kuo illegally received more than USD 17,580000 for having disclosed to the sellers information classified as secret (para. 354);

Whereas, as regards Article 18.2, which prohibits the use of commissioned agents, the arbitral tribunal finds that the use of Andrew X’s services is established first by Y’s admission, who maintained during the arbitration proceedings that the role of this intermediary was known to the buyer 422 and 431) and which agreed, according to the Settlement Agreement concluded on 12 May 2007 with the other parties to the arbitration, that the arbitration proceedings be suspended pending the return by the Swiss judicial authorities to the Republic of China of an amount of approximately USD 420 million ‘frozen’ in bank accounts ‘…'.belonging to Andrew X or entities controlled by him’ (§ 187-192, 432 and 434); that the arbitrators also relied on press reports (§ 423 and 424), on documents relating to the mutual legal assistance proceedings in Switzerland (§ 426-429), and on Taiwanese criminal proceedings (§ 430);

Considering that in order to find that Lily Liu or ‘her associated company’ also acted as a commissioned agent under the Bravo contract, the arbitral tribunal relies on the admission of Y, who admitted that he had used this intermediary, but who, according to the arbitrators, did not show that he had informed the buyer of this, contrary to his allegations (§ 456 and 457);

Considering that, in order to fix the amount of the unlawful commissions which, according to Article 18.3 of the contract, must be returned to A, the arbitral tribunal, after having, in the main part of its award, mentioned the elements for the assessment of the sums in question which result from the Swiss procedure as well as from the Settlement Agreement, states that: ‘in addition to the (unsuccessful) grounds of defence referred to above, the Defendants did not contest the following sums claimed by the Claimant under Article 18.3 of the Bravo Contract:

528. In respect of the Defendants’ breach of their obligation under Articles 18.1 and 18.2 of the Bravo Agreement concerning Network A, the Claimant claims the sums of USD 482,326,869, FF 206,341,703 and 38,770,785. EUR

529. In respect of the Defendants' breach of their obligations under Article 18.2 of the Bravo Agreement concerning Network B, the claimant claims the sum of xx

530. It will be called to mind here that the Tribunal dismissed the claimant’s claims regarding the alleged breach of section 18.2 of the Bravo Agreement regarding the C system for lack of consent on the part of E-F since that consent was tainted by fraud.

531. Accordingly, the Arbitral Tribunal shall award the claimant the sums referred to in paragraphs 528-529 above;”

Considering that, in order to maintain that the elements that determined the arbitrators' decision are covered by top-secret defence, Y invokes the requests for the lifting of this secrecy that were made by the French magistrates Van Ruymbeke and de Talancé in the context of the investigation (in French by the examining magistrate (in French Juge d’instruction) to determine the existence of the offences of abuse of company assets and receiving of stolen goods, in respect of commissions that were allegedly paid on the fringes of the Bravo contract;

Whereas an initial request, submitted on 16 October 2001, concerned commission declarations made by E-F to the customs authorities on 17 September and 19 December 1991;

Whereas Y states that a second request was submitted by the investigating magistrates on 8 April 2002 in the following terms: ‘On 5 December 2001 you informed us of your decision not to declassify the file held by the Directorate General of Customs, following the unfavourable opinion issued by the National Defence Advisory Committee, whose observations you sent us.

On February 13, 2002, we went to the head office of the Thales company in order to seize the contracts concluded by the company E with the beneficiaries of the commissions. We were refused by the company on the grounds that these documents had been classified as top-secret defence (apparently belatedly) because they were linked to the documents officially communicated to the Customs authorities at the time and which had originally been classified as top-secret defence only. We therefore have the honour of requesting the lifting of the top-secret defence with regard to these documents, given that, paradoxically, Thalès communicated to us the main contract relating to the sale of the frigates’ (reproduction of the investigation documents in a letter dated 25 April 2006 from Mr Giamarchi, Production No. 8 of Y).

Whereas Y adds that the scope of the ‘retrospective’ classification of the latter documents is explained by an exchange of letters between one of its executives and a minister; whereas the former, in a letter dated 11 January 2002, explained the scope of the ‘retrospective’ classification of the latter documents:

It appears that the declarations made by E-F to the Directorate General of Customs at the end of 1991 concerning the sale of the frigates to Taiwan were classified as top-secret defence on their receipt in the service. This was confirmed to the investigating magistrate by Mr C., a senior customs inspector, at his hearing on 16 October 2001.

In response to the magistrates' request for declassification of these documents, you followed the opinion of the Advisory Committee on Secrecy of National Defence, recommending that the classification be maintained.

For its part, Thales has copies of the letters it sent to customs, as well as various documents that reflect their contents.

In a letter dated 30 November 2001, our company asked the Director General of Customs to confirm the classification made by its services of the letters that we sent them on 17 September and 19 December 1991.

In another letter dated 4 December 2001, we also requested it to specify the scope of this classification, regarding the various documents containing or reflecting the information contained in the documents classified by your departments, in accordance with the recommendation given to us by the Secretary General of National Defence.

In order to avoid committing one of the offences provided for in Articles 413-9 and 413-10 of the Criminal Code relating to violations of national defence secrecy, we have formally classified these documents.

In order to remove any ambiguity regarding this classification and to guarantee the legal security of the classification procedure, particularly with regard to the judicial information in progress, I would ask you to refer the two requests submitted to your departments to the Consultative Commission on National Defence Secrecy;

That this request was answered on 18 January 2002 in the following terms: “It seems obvious and essential to me that when documents are discovered in a State department or one of its partners in a file dealing with protected information which, in the light of the above-mentioned criteria, should have been classified when they were issued and which, by mistake or ignorance, were not, it is necessary to proceed without delay to classify them ‘retrospectively.”

Such a decision cannot be analysed as a classification of circumstance or comfort, since it results from the imperative need to protect sensitive information, the disclosure of which would be likely to harm the fundamental interests of the Nation (…) That is why, as to the specific questions put by President de Thales, it seems to me that there can be no reasonable answer other than this one:

the classification carried out by the Director General of Customs in 1991 and not notified to Thales at the time applies ipso facto to the documents held by Thales and they must be classified at the same level as those held by the Director General of Customs.

related, preparatory, additional, ancillary or enforcement documents must today receive the same degree of classification as the ‘master documents’ to which they relate, from which they derive or for which they were used as a basis (agreements giving rise to them, documents relating to the enforcement of these agreements and all documents referring to them)’ (documents reproduced in a letter sent on 16 May 2006 to the arbitral tribunal by Y’s counsel: Exhibit No. 31 of Y);

Considering that in the arbitration proceedings, counsel for Y argued, by letter of 13 July 2006, that various documents which were transmitted to Judge Van Ruymbeke by the Maritime Police on 30 June 2006 ‘under closed seals’ were identical to exhibits C-245 A, B, C, D, E, F, G, H, I, J, K, L, N and AA produced by A in support of its statement of claim of 14 April 2006; Whereas by letter of 15 June 2007, Mr Coirre and Mr Trévidic, examining magistrates at the Paris Tribunal of Grand Instance, informed the president of the arbitral tribunal :

that “certain passages of a memorandum of 14 April 2006 filed in support of A’s claims and the evidence disclosed on which it relied were to be regarded as classified'.

that their attention had been drawn to ‘the production of another document from the DGA, translated into English and stamped ‘SECRET DEFENSE’.”

that they were therefore obliged to have all the documents likely to contain this information seized by the international court of arbitration:

Memorandum of 14 April 2006: pages 24, 25, 27, 29,30, 31, 32, 33, 34, 35, 37, 39, 53, 74, 75, 76, XXX

Exhibit C 245 (A, B, C, D, E, F, G, H, I, J, K, L, N, O, V, W, X and AA),

Exhibit C 161 (letter from the DGA dated 12 June 1991 referenced 110569 DGA/D)’.

that ‘since a redacted version of the statement of claim dated 14 April 2006, transmitted to the International Court of Arbitration in October 2006, still contained classified information. The tribunal had to remove pages 74, 75 and 76’ (Statement of Claim Y, § 46);

The arbitral tribunal, having drawn the parties' attention to this letter from the examining magistrates in a letter dated 3 July 2007, A withdrew exhibits C 245 O, V, W, X and C161 and redrafted its conclusions once again on 23 June 2008; the contested award was handed down at this stage of the proceedings;

Whereas, in the first place, the arbitrator - like any other judge - has the power to decide on the merits of the dispute, to assess the admissibility of the evidence presented before him and to exclude from the proceedings documents which are not legally produced; that, consequently, it is irrelevant to the lawfulness of the award that documents which Y claims to be covered by the obligation of secrecy - which were withdrawn from the proceedings and whose references and content were obliterated in A’s submissions - remained available to the arbitrators for several months, without being the subject of an adversarial discussion on the merits, since the arbitrators did not draw any conclusions from them in support of their decision;

Whereas in the present case the Arbitral Tribunal mentions, at each stage of its reasoning, the grounds put forward by the parties as well as the documents on which it bases its own assessment; whereas it does not appear, and indeed it is not alleged, that these arguments and documents include explanations cancelled in the statement of case of A or documents removed from the proceedings in accordance with the requirements of the investigating judges Coirre and Trévidic; whereas the first part of the ground of appeal is therefore unfounded;

Considering, secondly, that under the terms of Article 413-9 of the French Penal Code: ‘National defence secrecy within the meaning of this section applies to processes, objects, documents, information, computer networks, computerised data or files of interest to national defence which have been the subject of classification measures designed to restrict their dissemination or access’;

Considering that it follows from these provisions, as well as those of Decree No. 98-608 of 17 July 1998, currently codified in Articles R. 2111-1 et seq. of the Defence Code, that the secrecy of national defence is not defined in French law by its nature but by administrative determination, which is manifested by the affixing of an appropriate marking to the documents or data in question;

Considering that secrecy thus defined covers not only materially classified documents but also information extracted therefrom and reproduced on another medium; that, on the other hand, it cannot extend to information which is claimed to be identical to that contained in classified documents, but which comes from entirely separate sources identified in a precise and certain manner;

Whereas, in the present case, it appears that two declarations of payment of commissions in connection with the Bravo contract, subscribed by E-F on 17 September and 19 December 1991, were marked in the Directorate General of Customs' at the time of their receipt. In 2002, by virtue of an administrative interpretation of that decision, those same documents, held by Y but which were not initially marked, as well as the ‘related, preparatory, supplementary, ancillary or execution exhibits’ of those documents, were held to have been classified ‘retrospectively’ in 2002;

Whereas Y states (statement of case § 133) that A’s final claims, submitted to the Arbitral Tribunal during the hearings of 9 and 10 April 2009, were based on documents numbered C 261-C, C 261-D, C262-D, C 263 B, C 263-C and C 245 Z, which contained information classified as secret, and that it was on that basis that the Arbitral Tribunal awarded the amounts requested;

Whereas it follows from the award that the exhibits in question come from the mutual legal assistance procedure granted by the Swiss judicial authorities to Taiwan; that the present exhibits are bank documents which trace the movement of funds between September 1991 and September 1998 in the accounts opened in the name of companies controlled by Andrew X in establishments located in Switzerland, from which correlations can be deduced with the instalment payments made by Taiwan to the seller of the frigates; that document C 245 Z is a summary table of the sums in question, drawn up by the Swiss examining magistrate Perraudin;

Whereas by a judgment of 3 May 2004, the Swiss Federal Court rejected the challenge by consorts X and others to the order of Judge Perraudin of 28 November 2003 ordering the partial closure of the mutual assistance proceedings, the transmission to the Chinese authorities of the documentation relating to the accounts held directly or indirectly by consorts X and the sequestration of the funds; that this judgment emphasises that all the information contained in the proceedings ‘was gathered in Switzerland by the Swiss authorities’ and does not derive from any document that was submitted ‘by the French authorities with the reservation of secrecy or their prior agreement for subsequent transmission’ (judgment of 3 May 2004, §6);

Moreover, it is common ground that the exhibits at issue were in the file of the International Court of Arbitration when Judges Coirre and Trévidic conducted the search and were not seized;

Considering that, contrary to what Y maintains, it does not appear that, by relying on such evidence, the arbitrators disregarded international public policy or French mandatory rules (in French Lois de police); that the second branch of the ground is therefore unfounded;

Whereas, thirdly, the arbitrators expressly referred in their award to exhibits C 245 Z and C 261; whereas the first, entitled ‘table of the flow of funds of the frigates’, represents in the form of two maps the movements of funds made to the various accounts involved in the case; whereas exhibit C 261 consists of the evidence of bank deposits to the Euromax account; although the Court does not expressly refer to other exhibits, it refers to the payments made to the Middlebury accounts, which correspond to exhibits C 262 B, C 262 D, C 263 Bet C 263 C; that those exhibits, which were seized by the Swiss authorities, represent the flow of funds to those accounts and have been summarised in the ‘Frigates’ cash flow table C245 Z;

Whereas, as stated above, those financial flows, their dates and amounts were facts lawfully relevant to the case; Y was free to, without finding itself obliged to disclose the content of the documents which it declared classified, to allege that each of those movements of funds - precisely identified and quantified - had arisen from a cause other than the commissions paid in connection with the Bravo contract; Y systematically refrained from doing so, although it had to debate those facts by all lawful means in order to contribute to the establishment of the truth;

Thus, it was without disregarding due process (in French Principe de la contradiction) or any principle of international public policy that the arbitrators decided that Y, who did not contest the sums claimed by the opposing party, should be ordered to pay them;

Whereas the first ground cannot therefore be upheld in any of its parts;

On the grounds of annulment based on the breach of international public policy (Article 1502-5 of the Code of Civil Procedure) and the arbitrators' failure to comply with their mission (Article 1502-3 of the Code of Civil Procedure) insofar as the court would have allowed A to receive double compensation by refusing to rule on the measures intended to prevent such a situation:

It states, firstly, that the Republic of China submitted a request for legal assistance to the Swiss authorities for the return of funds ‘related to the frigate affair’, which were held between 2001 and 2003. It argues that ‘the Republic of China claimed identical amounts in the arbitration and before the Swiss authorities for the same loss, namely the alleged inflation of the price of the frigates’. It argues that such a situation gives rise to a risk of double compensation, and consequently to an infringement of the principle of full reparation enshrined in the French concept of international public policy. Secondly, it argues that it requested the court either to suspend the determination of the quantum or to take any measure necessary to prevent double compensation, but that the arbitrators, in disregard of their mission and of international public policy, refused to decide this request. Whereas the arbitrators considered Y’s claims relating to the risk of double compensation from both aspects - stay of proceedings or adoption of preventive measures (award § 541 to 571) - and expressly rejected these claims (§ 569 and 571);

Secondly, it argues that it requested the court either to stay the determination of the quantum or to take any measure necessary to prevent double compensation, but that the arbitrators, in disregard of their task and of international public policy, refused to rule on this request.

Considering that the arbitrators considered the claims of Y relating to the risk of double compensation in their two aspects - stay of proceedings or adoption of preventive measures (award § 541 to 571) - and expressly rejected these claims (§ 569 and 571);

Whereas, in order to justify their decision, the arbitrators took into account, in addition to considerations of expediency, the fact that compensation for civil damage resulting from breaches of contractual stipulations was not of the same nature as confiscation of the proceeds of a criminal offence with a view to preventing the use of property of criminal origin;

Whereas by so deciding, the arbitrators, who, contrary to what Y maintains, did not refuse to settle a part of the dispute and therefore they neither disregarded their mission nor violated any principle of international public policy;

That the two grounds can therefore only be dismissed;

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

On claims made under Article 700 of the Code of Civil Procedure

Whereas Y cannot benefit from these provisions; whereas it will be ordered to pay the sum of 50,000 euros to A;

FOR THESE REASONS:

Dismisses the appeal against the award rendered between the parties on 29 April 2010.

Dismisses the application made by Y SA and Y UNDERWATER SYSTEMS SAS according to Article 700 of the Code of Civil Procedure.

Orders jointly and severally the companies’ Y SA and Y UNDERWATER SYSTEMS SAS to pay to the REPUBLIC OF CHINA and the REPUBLIC OF CHINA NAVY the sum of 50,000 euros pursuant to Article 700 of the Code of Civil Procedure.

Orders jointly and severally the companies’ Y SA and Y UNDERWATER SYSTEMS SAS to pay the costs and states that they may be recovered by SCP Fisselier Chiloux Boulay, avowed, following the provisions of article 699 of the code of civil procedure.

THE CLERK THE PRESIDENT