Paris Court of Appeal, No. 10/10807 | Rory Wheeler, avocat (Paris) & solicitor (England)

Paris Court of Appeal, First Pole, First Chamber, 29 September 2011, No. 10/10807

Mr. René SCOLARDI

Ms. Danièle BINI

Ms. Elie TAMMAM

Mr. Joël TORTE

91346-7997 QUEBEC INC

vs.

S.A.S.U. TECHMAN HEAD (FIM’s)

S.A.S.U. TECHMAN HEAD (A), a one-person simplified joint-stock company, is active in the design and manufacture of parts for the aeronautical industry.

After a recovery plan allowing the settlement of liabilities over a period of 10 years, by judgment of the Toulon Commercial Court of 16 January 1995, the company faced new difficulties during 2006 and 2007.

On 13 August 2008, a protocol of sale was signed for the sale of all the shares in the company by the shareholders of TECHMAN HEAD to FIM’S, subject to conditions, at a provisional price of €1,240,000 and a final price set based on changes in the company’s shareholders' equity over the period between 31 December 2006 and the date of completion.

The deed of sale of the shares recording the transfer of ownership took place on 12 October 2008. The sum of €900,000 was paid to the sellers and the sum of €340,000 was placed in escrow.

As the parties were unable to agree on the final price, the assignors proposed on 16 February 2009 to implement the arbitration clause stipulated in the deed of assignment.

By award rendered in Paris on 31 March 2010, the ad hoc arbitral tribunal, composed of Messrs. L and J, arbitrators, and Mr. Kling, Chairman, ruling in the last instance, inter alia, has:

decided that the change in TECHMAN HEAD’s shareholders' equity between 31 December 2006 and 12 October 2008 amounted to €588,768, without the need to approve the reference company financial statements, and that consequently the final price of all of the shares in TECHMAN HEAD, sold to FIM’S on 12 October 2008, is set at €651,232,
decided that consequently the sum of €340,000 placed in escrow should be paid in full to TECHMAN HEAD (formerly FIM’S)
decided that Mr. X, Mrs. D, Mr. Z, Mr. Y and the company 9134-7997 QUEBEC inc, shall return in solidum the sum of 248,768 € as part of the price reduction of TECHMAN HEAD’s shares, to the company TECHMAN HEAD (ex FIM’S) in addition to funds placed under escrow,
decided that any interest received by the receiver on the €340,000 that it had to invest will revert in full to TECHMAN HEAD (FIM’S),
jointly and severally ordered the assignors to pay TECHMAN HEAD (FIM’S) interest at the legal interest rate, calculated as from 13 January 2009 on the sum of €115,036.41, but that no further interest should be paid.

On the 19th and XXX, Mr. X, Mrs. D, Mr. Z, Mr. Y and the company 91346-7997 QUEBEC inc. filed two actions for annulment against the award registered respectively under numbers 10/10807 and 10/11156.

By submissions of 8 June 2011, they carry on with the annulment, and request that the parties be invited to plead on the merits of the case, to give them a record of what they take up the grounds and applications before the Court in their successively submitted briefs before the arbitral board, to dismiss A (FIM’S) of its requests, in any case, they request the conviction of A (FIM’S) to pay them in solidum the sum of 50,000 € for non-recoverable costs and to reimburse the full amount of the costs and fees they have paid.

First of all, the reproach the arbitrators with having ruled outside the terms of the arbitration agreement and in violation of the principle of adversarial process on the basis of articles 1484 3°4° and article 5 of the Code of civil procedure, by ruling ultra petita, and second of all that the arbitrators have ruled in disregard of their mandate on the basis of article 1484 3° of the Code of civil procedure, by not ruling lawfully and by distorting the data of the dispute. On the consequences of the annulment of the award, the claimants claim that the qualification of international arbitration is false and thus the Court will must take up the entire dispute on the merits.

By submissions of 27 May 2011, A named FIM’S in the claimant’s appeal asks the Court, principally, to declare inadmissible and in any event unfounded the appeal for annulment, and, in the event of the annulment of the arbitral award to order the reopening of the debate on an internal arbitration, and in any case to dismiss the appellants of their claims and to condemn each of them to pay for its benefit €30,000 under the article 700 of the Code of Civil Procedure.

UPON WHICH,

On the consolidation

Given that it is appropriate for a good the administration of justice to order the consolidation of the procedures registered under numbers 10/10807 and 10/11156 ;

On the qualification of the arbitration in question

Given that according to Article 1492 now 504of the Code of Civil Procedure, ‘International arbitration is arbitration that involves interests of international trade’;

Given that, contrary to what is claimed by the parties, that’s what the case involves, since indeed although the sale transaction relates to company A under French law, with its head office in Toulon, one of the transferors is a Canadian so that the dispute submitted to arbitration relates to a transaction non-exclusively placed on French territory, the payment of the transfer price entailing necessarily a movement of funds cross-border ;

On the ground for annulment taken out of ignorance by the arbitrators of their mandate (article 1502-3 now 1520-3 of the code of civil procedure)

The claimants claim that the arbitrators have misunderstood their mission :

on the one hand by pronouncing an in solidum and a joint condemnation against the transferors in the absence of a request to this effect from the transferee company,
on the other hand, by not ruling in law and distorting the data of the dispute, arguing:

Firstly, that the arbitrators:

did not rule on the failure of the transferee to comply to the duty of consistency, in violation of the Article 5 of the Code of Civil Procedure, whereas they have requested, alternatively, from the arbitrators in support of their claim for damages that they say claim that their consent ‘has been vitiated by the behaviour that is fraudulent or equivalent to fraud of FIM’S company or that the latter failed in its obligation of coherence’. In this respect, they explain that FIM’S, which has been selected on the basis of its successively improved offers in a substancial manner, claimed after signing the sales deed under the guise of the clause intended to correct the agreed price for the change in the prices of the shareholders' equity of A within the signing of the sales deed and the effective acquisition of control, that the price should be reduced to a negative value or, at best for sellers, to a negative value at 21.000 €,
have violated national internal regulations (NIR) without rationale on the confidentiality of exchanged correspondence between lawyers, to take into account a further reduction of capital equity and jointly condemn the sellers to legal interest since 13 January 2009 the date of the letter.
have used an approach expressly rejected by the parties in the Terms of Reference; that of an amicable composer instead of ruling in the law on all the points in dispute.

Secondly, that if the substance of the dispute included analysis of changes in shareholders' equity, which could not lead to the restatement of the ‘company accounts of reference’ for the balance sheet at 31 December 2006 without distortion of the fixing clause of the price, expression necessarily implying the intangible character of the resulting net equity as used as a reference for setting the price provisional.

As regards to the first branch of the ground,

Given that the arbitrators’ mandate is essentially delimited by the subject matter of the dispute as determined by the respective claims of the parties;

Given that if, at the end of its memorial of 21 December 2009, Company A (FIM’S) requests the seller/transferor’s conviction to refund the provisional price received in excess of the final price as well as the repayment of interest and financial expenses borne by the transferee under the financing contracts implemented for the part of the provisional price exceeding the final price, it is not requested any joint or in solidum condemnation of the transferors/sellers ;

That consequently, amidst deciding that Mr. X, Ms D, Mr. Z, Mr. Y and company 91346-7997 QUEBEC inc shall refund ‘in solidum’ the sum of €248,768 following the price reduction of A shares, to A company (ex FIM’S) in addition to the funds placed under sequestration and in ‘jointly’ condemning the transferors/sellers to pay A (FIM’S) interest at the legal interest rate, calculated from 13 January 2009 on the sum of 115,036.41, the arbitrators have failed to fulfil their mandate;

Given that, contrary to what is claimed, the cancellation of the convictions’ solidarity contained in the sentence does not make it unenforceable, since it results a joint condemnation, by virile shares, applicable to each of the transferors/sellers according to its number of shares ;

That the arbitrators having ruled ultra petita, a partial annulment of the award is necessary on the grounds of solidarity of the pronounced convictions; that at this regard, if A requests that it be acknowledged on occasion of notification of the award bearing the exequatur, it did not request joint payment, it has not, however, expressly waived this solidarity against the transferors/sellers;

As regards to the second branch of the ground,

Given that, firstly, on the failure to give judgment in law taken on the one hand from the failure to abide to the obligation of consistency, which the arbitrators have said was not subject to any compensation for damages; that paragraph 14 of the Act entitled ‘regarding fraud’ (p.41) that reasons this award, states in particular ‘That the auditor mandated by the purchaser has not verified the methods of valuation of stocks and work-in-progress is an important negligence, or even fault, given the importance of these positions in Company A, but that he or she has not brought evidence that this omission had been voluntarily made by the auditor in order to allow the purchaser to subsequently contest the aforementioned methods to lower prices’; that in doing so, arbitrators who were not required to keep up with the detailed argumentation of the parties, have implicitly but necessarily rejected the alleged breach of the duty of consistency of the transferee on the occasion of the issuance of its successive offers; that the grievance made to the arbitrators to have limited their search for the constituent elements of a fraud that was not invoked ‘so much was it considerable the gulf between the initial offers and the subsequent price adjustment’ tends in fact to a review of the sentence prohibited to the court of annulment ;

Given that, on the other hand, on the alleged violation of the obligation of confidentiality which would have allowed a further reduction in equity and which would have helped to set the starting point of the joint conviction of the transferors to the legal interest, that the latter is not a ground for annulment of the award in accordance with the provisions of article 1520-3 of the Code of civil procedure ;

Given that, finally, contrary to what is claimed, the arbitrators ruled in law in accordance with the terms of reference of 11 September 2009; that they reasoned their sentence point by point using legal reasoning, regardless of extraneous considerations to the law; that this is the case in particular for the dispute regarding ‘social security contributions on transactions with managing directors’, from reasoning that leads them, after examination of evidence, and to have decided on the character of salary of these sums, to note the need for a funding of 22,037 € and to subordinate the decrease in shareholders' equity in reference accounts of this amount on condition of actual payment of these allowances; that the same is true regarding the position they take ‘on the challenge to the IT (information technology) maintenance expenses’ recorded as fixed assets or on the lack of evidence of fraudulent manoeuvring committed by the parties ;

Given that, secondly, amidst claiming that the arbitrators could not restate the ‘corporate accounts reference’ without distorting the data of the clause fixing the price, the claimants call on the Court to a revision of the award which is prohibited to the court of annulment;

Given that it follows from the foregoing that the ground for annulment taken from the ignorance by the arbitrators of their mission/mandate cannot be accepted in its second branch ;

As regards to the ground for annulment taken from the violation by the arbitrators of the principle of adversarial process (in french principe de la contradiction) (Article 1502-4 now 1520-4 of the of the code of civil procedure)

On this basis, the claimants resume on this ground their claims of in solidum and joint convictions against the assignors in the absence of request of the transferee company.

Given that in view of what has been said, the ground for annulment alleging infringement of the principle adversarial process, is devoid of object;

On other requests

Given that equity does not require application of article 700 of the code of civil procedure for the benefit of either party;

Given that further extensive or contrary requests of the parties are also rejected;

ON THESE GROUNDS,

Pronounces the consolidation of the procedures under the numbers 10/10807 and 10/11156 ;

Partially annuls the award issued in Paris on 31 March 2010 by the arbitral tribunal in that convictions it has pronounces were assorted jointly;

Dismisses the remainder of the claimant’s appeal and any other request ;

Orders TECHMAN HEAD to pay the costs of the proceedings; and admits SCP TAZE BERNARD & BELFAYOL BROQUET, avowedly, for the benefit of Article 699 of the code of civil procedure.