Paris Court of Appeal, No. 13/09465 | Rory Wheeler, avocat (Paris) & solicitor (England)

Paris Court of Appeal, 18 November 2014,No. 13/09465

Upheld by: Court of Cassation, First Civil Chamber, 18 January 2017, No.15-12.744

IMAL S.R.L vs. ARIAN SINA INC

On 4 April 2003, the Iranian company ARIAN SINA INC (ARIAN) and the Italian company IMAL S.R.L concluded a contract for the supply, construction and operation of a plant for the production of medium density fibreboard in Sari (Iran).

On February 7, 2005, the same parties signed a service contract to set the terms of remuneration and payment by ARIAN for site supervision services to be provided by IMAL S.R.L.

Disputes arose between the parties and ARIAN, who blamed IMAL S.R.L for its failures, in particular with regard to the dispatch of supervisors to the site, which caused significant delays in the implementation of the plant and the need to call upon third parties, filed a request for arbitration with the ICC under the arbitration clause stipulated in Article 16 of the services contract.

In a final award rendered in Paris on 7 February 2013, the arbitral tribunal composed of Messrs. DE and B C, arbitrators, and Mr. Klaus SACHS, chairman, in substance:

On the request of ARIAN:

found that IMAL S.R.L had partly breached its contractual obligation to provide technical information as well as its contractual obligation to provide ARIAN with the material, ordering it to pay a sum of USD 26,544.86 in respect of these matters,
stated that IMAL S.R.L breached the contract by not paying the contractor in full,
stated that IMAL S.R.L partly breached its contractual obligation to provide supervision, training and mechanical security to ARIAN, ordering it to pay a total sum of USD 311,824.86,
Stated IMAL S.R.L responsible for 231 days of delay in the commissioning of the factory, ordering it to pay the sum of USD 3,733,893.21,
ordered IMAL S.R.L to pay interest at the rate of 5% on these sums,
rejected his other requests.

On the counterclaims of IMAL S.R.L :

ordered ARIAN to pay IMAL S.R.L the sum of USD 150,000 plus interest or the increase in the contract price in respect of the Siempelkamp press, in addition to the sum of € 84,212.70 for additional transport costs and the sum of € 5,252.23 for supervision services relating to the construction of the plant, and USD 790,000 for variations in the EUR/USD exchange rate, plus interest,
rejected the other applications,
pronounced on arbitration costs and fees.

By an amendment dated 6 June 2013, the arbitral tribunal accepted IMAL S.R.L’s request for correction of errors in calculation, amending paragraph 751 of the award.

On 10 May 2013, IMAL S.R.L filed an action for annulment of the award.

In submissions filed on 4 June 2014, the claimant requested the partial annulment of the award for breach of due process (in French Principe de la contradiction), in that it was held liable for 201 days of delay in the launch of the plant and was consequently ordered to pay USD 2,122,923.45 for loss of profit and USD 361,813.20 for interest. It seeks an order for ARIAN to pay it €100,000 under Article 700 of the Code of Civil Procedure.

Y argues that the arbitral tribunal breached due process (in French Principe de la contradiction) by basing its decision on a ground of law raised on its own motion without prior discussion.

In submissions filed on 27 June 2014, ARIAN requested the dismissal of the action for annulment, in the alternative, if the court were to consider that the arbitral tribunal raised a new ground of law of its own motion, namely ‘a condition of proportionality’, without submitting it to the parties' observations. It also requested the Court to find the action unfounded with regard to the period from 3 January to 22 February 2007, and to dismiss IMAL S.R.L’s requests concerning the 50 days of delay, quantified at 528. 090.4 USD for loss of earnings and 90,003.3 USD for interest. Finally, ARIAN requested the Court to order IMAL S.R.L to pay ARIAN 150,000 € HT under Article 700 of the Code of Civil Procedure.

UPON WHICH:

On the single ground for annulment based on the violation of due process (in French Principe de la contradiction) (1520-4 of the Code of Civil Procedure):

It argues that while arbitrators must submit to prior discussion any ground of law raised on their own motion, the arbitral tribunal based a part of its award on a ground of Swiss law raised on its own motion without prior discussion. It argues in this respect that the requirement of proportionality retained by the arbitrators as a condition for the defence of non-performance of the contract was not debated, whereas the reference to the principle of good faith is not sufficient to bring this condition into the proceedings and that this is a new plea which does not arise from article 82 of the Swiss Code of Obligations, which is based solely on brief extracts from two foreign-language commentaries on doctrine which were neither produced in the proceedings nor submitted to the parties for comments.

IMAL S.R.L considers that by rejecting the defence of non-performance for the three reference periods which it raised on the basis of a new condition, it was deprived of its right to an adversarial debate. IMAL S.R.L adds that, in holding that the proportionality relationship did not exist because the amounts it claimed to justify the deferred dispatch of supervisors were not sufficiently clear or substantiated, the arbitral tribunal relied on factual allegations not previously relied upon. Finally, IMAL S.R.L invoked the quotation by the arbitral tribunal of two undisclosed and untranslated articles of doctrine.

Considering that due process (in French Principe de la contradiction) only requires that the parties were able to debate the grounds and the documents produced in an adversarial manner;

Considering that ARIAN, who criticised IMAL S.R.L for having delayed the commissioning of the factory by 224 days by deferring the provision of site supervisors, was charged by IMAL S.R.L, in addition to the responsibility for the delays due to its own failings in the construction of the factory, with the exception of non-performance resulting from Article 82 of the Swiss Code of Obligations. IMAL S.R.L considered that the delays of ARIAN in the payment of invoices justified, according to it, its delays in the performance of its supervision obligation;

Considering that in its Statement of Reply of 9 December 2010, ARIAN, invoking the requirement of good faith under Article 2 of the Swiss Civil Code, argued that IMAL S.R.L could not rely on Article 82. ARIAN argued in particular that ‘the Defendant not only failed to fulfil its obligations but also, at certain times, deliberately stopped performing and finally left the site without being able to justify its position with regard to Article 82 of the Swiss Code of Obligations’ (§70). It also refers to the fact that IMAL S.R.L, once the service contract was signed, ‘deliberately delayed sending supervisors to the site… in order to put pressure on ARIAN Sina to settle ongoing discussions on the separate issues’,(§349). It also mentions that ‘on 16 May 2005 (i.e. only one day after the expiry of the deadline to pay the first invoice) and despite the fact that the Claimant advanced the sum of EUR 15,000 (out of a total invoice amount of EUR 28,141) and undertook to review the invoice promptly in order to return to the subject promptly, the Defendant cancelled the imminent trip of the engineers … in breach of its contractual obligations and its obligations of cooperation and good faith under Swiss law’(§360);

Whereas the Arbitral Tribunal found that the Contract and the Contract for Services were part of the same contractual entity. Furthermore, the arbitral tribunal stated that ‘the Defendant was in principle entitled to suspend the performance of its supervisory obligations as long as the Claimant did not perform its payment obligations in accordance with the Contract’ (§706). Thus, in order to hold that IMAL S.R.L’s breach of its contractual obligation of supervision resulted in 201 days of delay in the launch of the plant, the arbitral tribunal held that IMAL S.R.L could only invoke the defence of non-performance within the limits of good faith, stating in this respect: ‘under Swiss law, the exercise of the defence of non-performance is limited by the principle of good faith. Thus, it can only be invoked to the extent that the relationship between the right and the obligation is not unreasonable. The same applies if the right on which the defence of non-performance is based is not proportionate to the consequences which the suspension may entail’ (§707) and in the present case such a suspension of the obligation was not justified;

Considering that, contrary to what the claimant argues, the principle of proportionality retained by the arbitral tribunal does not constitute a new condition for the application of the defence of non-performance of the contract by IMAL S.R.L, but is part of the good faith control which the arbitral tribunal exercised in the context of its discretion;

Consequently, without disregarding due process (in French Principe de la contradiction); the arbitral tribunal was able to uphold:

for the period from 23 February 2005 to 11 April 2005, that ‘the Defendant has therefore failed to show that the damage potentially caused by the withholding of supervisors, i.e. the supervision of the project, was proportionate to the sums still owed to the Defendant at that time. The Court concluded that the Defendant’s reliance on the plea of non-performance under Article 82 of the Swiss Code of Obligations was unreasonable in the circumstances’ (§710). In particular, the Tribunal states that: ‘the Defendant was not entitled to retain the supervisors from 23 February 2005 (date of the Defendant’s letter invoking the payment obligations of the Claimant) as the principle of good faith (Article 2 of the Swiss Civil Code) does not allow a party claiming payments of an insignificant amount to rely on Article 82 of the Swiss Code of Obligations’ (§711),
for the period from 18 May to 22 September 2005, ‘that in view of the circumstances and considering the principle of good faith, which limits the exercise of the defence of non-performance, … that the potential damage caused by the restraint of the supervisors is not proportionate to the payments still due to the Defendant in May 2005’ (§721),
for the period from 3 January 2007 to 22 February 2007, that ‘the relationship between the Defendant’s demand for payment and its refusal to comply with its obligation to provide assistance to enable the plant to become operational is unreasonable’ and that ‘the Defendant cannot therefore, in the light of the principle of good faith, invoke a right to withhold payment based on an alleged demand for payment’ (§ 728);

Considering that IMAL S.R.L also wrongly criticises the arbitral tribunal for having rejected the defence of non-performance in the light of factual allegations not previously relied upon, according to which the amounts claimed by IMAL S.R.L were not sufficiently clear and substantiated, whereas it was put in a position to usefully present its defence to the opposing party’s claims and pleas;

Considering finally, that the Arbitral Tribunal cannot be criticised for having quoted two articles of doctrine relating to legal grounds ( the defence of non-performance and the principle of good faith) which were at issue in the proceedings, whereas the arbitrators are under no obligation to submit in advance their legal reasoning deduced from the elements of fact and law which the parties are called upon to discuss;

That the ground based on the breach by the arbitral tribunal of the due process (in French Principe de la contradiction) is rejected and therefore the action for annulment of the award is dismissed.

On other requests

Considering that IMAL S.R.L, who is unsuccessful, is dismissed from his claim under Article 700 of the Code of Civil Procedure and is ordered to pay ARIAN the sum of 100,000 € on this basis;

FOR THESE REASONS,

Dismisses the action for annulment;

Dismisses IMAL S.R.L SRL’s application under Article 700 of the Code of Civil Procedure

Orders the company IMAL S.R.L SRL to pay the costs to be recovered in accordance with article 699 of the Code of Civil Procedure and to pay the company ARIAN SINA Inc. the sum of € 100,000 pursuant to article 700 of the Code of Civil Procedure.