Paris Court of Appeal, No. 15/06036 | Rory Wheeler, avocat (Paris) & solicitor (England)

Paris Court of Appeal, Pole 1 – First Chamber, 28 February 2017, No. 15/06036

Upheld by: Court of Cassation, First Civil Chamber, 6 November 2019, No. 17-20.573

DRESSER-RAND GROUP INC

DRESSER RAND HOLDINGS SPAIN SLU

Vs.

SEI TA LAU, S.L

VILLAMENDI, S.L.

DIANA CAPITAL I, F.C.R.

CAIXA CAPITAL FONDOS

SOCIEDAD DE CAPITAL RIESGOD E REGIMEN SIMPLIFICADO S.A.

IBAINARKO, S.L.

CENTAURO CAPITAL, S.L.U.

SUGAR MAGNOLIA 2003, S.L.

ALDAIA BI, S.L.

PCION FOTOVOLTAICA 24, S.L.

FOND-ICOPYME, F.C.R. DE REGIMENSIMPLIFICADO

E-NOVATING VENTURE, S.L.

EL PORTILLO 2005, S.L.

Under the terms of a share purchase agreement signed on 3 March 2011, twelve Spanish companies, Centauro Capital SLU, XXX, XXX, Diana Capital I FCR, Fond-ICopyme FCR, E-Novating Venture SL, Opcion Fotovoltaica 24 SL, Caixa Capital Fondos (hereafter, the sellers) have undertaken under conditions precedent to sell all the shares of the Spanish company Grupo Guascor SL to the Delaware-based company Dresser-Rand Group Inc. On 29 April 2012, Dresser-Rand Group Inc. transferred all of its rights under this agreement to the Spanish company la Dresser-Rand Holdings Spain SLU.

The sale of Grupo Guascor shares was completed on 4 May 2011.

The acquisition agreement, governed by French law with the exception of the mandatory provisions of Spanish and Delaware law, provided that the basic purchase price of 375,493,000 euros would be subject to adjustment at the time of completion of the transaction in accordance with certain accounting parameters and that in the event of disagreement, ﬁxing would be done by expert opinion pursuant to Article 1592 of the Civil Code.

As the parties were unable to agree on the elements of the price, Dresser Rand Holdings Spain summoned the assignors before the President of the Commercial Court on 13 July 2012 at the purpose of appointing an expert. An order of 16 October 2012 appointed Mr. Z-A B in this capacity.

At the same time, on 9 October 2012, the assignors filed a request for arbitration with the Secretariat of the International Court of Arbitration of the International Chamber of Commerce against the two Dresser-Rand companies under the arbitration clause stipulated in the purchase contract.

In an award rendered in Paris on 11 February 2015, the arbitral tribunal composed of Ms. Nunez-Lagos and Mr. Hendel, arbitrators, and Mr. Garaud, President, decided:

unanimously, that the Mercapital loan was included in the potential constitutive elements of the debt and that it should therefore be examined by expert B,
The majority of the Board of Directors ruled that the sellers breached their obligation to provide true and complete accounting documents in respect of the Eletrobras debt, but that the Dresser-Rand companies would nevertheless not be entitled to rely on the liability guarantee in this respect insofar as they had effective knowledge of this breach prior to the date of completion of the sale.

Dresser Rand companies filed an action for partial annulment of this award on 19 March 2015.

By submissions signed on 17 January 2017, they requested the court to set aside the provisions ﬁguring in paragraphs 286 to 296 and the seventh indent of the operative part of the award (provisions relating to the Eletrobras debt), to reject the claims of the opposing parties and to condemn them jointly and severally to pay the sum of EUR 75,000 pursuant to Article 700 of the Code of Civil Procedure. They raise the fact that arbitrators did not comply with their mission (Article 1520-3 of the Code of Civil Procedure), as well as the violation of due process (in French Principe de la contradiction) and the rights of defence (Articles 1520-4 and 1520-5 of the Code of Civil Procedure).

By submissions filed on 12 January 2017, the assignors requested the court to dismiss the action, to state that this dismissal would have the effect of granting enforcement (in French Exequatur) to the award at issue and to order the Dresser-Rand companies to pay them the total sum of 150,000 euros pursuant to Article 700 of the Code of Civil Procedure.

UPON WHICH:

On the first ground of annulment alleging the arbitrators did not comply with their mission (Article 1520-3 of the Code of Civil Procedure) and on the second and third grounds alleging violation of due process (in French Principe de la contradiction) and the rights of the defence (Articles 1520-4 and 1520-5):

The claimants argue, first, that the arbitrators failed to carry out their mission by implementing a principle derived from the IBA (International Bar Association) Rules on the unfavourable presumption based on the failure to produce documents, without first consulting the parties on the application of these rules, which they were required to do for any procedural provision other than those ﬁgurant to the I.C.C. rules and to the Terms of Reference.

Secondly, they raise a violation of due process (in French Principe de la contradiction) and of the rights of defence, arguing that the arbitral tribunal relied on the unfavourable presumption derived from the failure to produce the UBS and KPMG reports without having at any time ordered the production of these reports, nor having invited the parties to explain themselves on the non-production of these documents or on the application of the presumption, and without the sellers having specifically requested these documents, nor having formed an incident of production of documents, nor having requested the application of the presumption.

Considering that article 9 of the contract for the acquisition of the shares of Grupo Guascor provided for a liability guarantee in particular in the event of inaccuracy of the financial information provided by the sellers during the audit prior to the completion of the sale;

Considering that in May 2012 the Dresser-Rand companies implemented this stipulation with regard to the prejudice that could result from the obligation of Guascor do Brasil, Brazilian subsidiary of Grupo Guascor, to repurchase the shares of its capital held by Eletrobras; that the debt corresponding to this commitment finally amounted to the sum of USD 20,312,381 following a transaction that took place on 21 November 2012 between Guascor do Brasil and Eletrobras;

Considering that the assignors requested the arbitral tribunal to rule that the Dresser-Rand companies were not entitled to avail themselves of the liability guarantee clause insofar as they had effective knowledge of the existence of this commitment, and it did not ﬁgure on Guascor do Brasil’s balance sheet;

Whereas the arbitral tribunal reminded that, prior to the signing of the contract on 3 March 2011, an audit of Grupo Guascor had been carried out from November 2010, with the opening of a physical data room for 12 days and an electronic data room throughout the negotiation period and up to the signing of the contract (Award, § 66); that information relating to the commitment of Guascor do Brasil to repurchase the stake taken in its capital by Eletrobras ﬁgured in the auditor’s report for the financial year 2008 and the audit report for the financial year 2009 (Award, §§ 69 and 70); that in parallel with the audit, the parties agreed on guarantee declarations by the assignors supplemented by ‘assignor information annexes’ (AICs) prepared jointly by the assignors and the assignee; that Article 3 of the guarantee statement provided that there was no obligation on the transferred company or its subsidiaries to repurchase their shares, subject to what was listed in AIC 3.4 (e); that this appendix referred to the obligation to repurchase Eletrobras' shareholding in Guascor do Brasil in accordance with the shareholders' agreement of 10 December 1998 and its amendments (Award, § 77 and 78); finally, that AIC 3.14 (a), which contained a list of the contracts of the company and its subsidiaries, identiﬁed four agreements relating to Eletrobras, one of 10 December 1998, one of 2006 and two of June 2009, and indicated the path to find them in the electronic ‘data-room’ (Award, § 80);

Whereas the arbitral tribunal found that this information disclosed the existence of a liability but was not sufficiently precise in its amount or clear enough in its accounting presentation to state that the statement made by the assignors in article 3.5 of the contract was sufficient. Under this statement, the ﬁnancial statements were correct and complete and gave a faithful picture of the net debt (Award, § 260);

Considering that in order to state that the assignors were nevertheless not obliged to guarantee the liabilities resulting from Guascor do Brasil’s commitments towards Eletrobras, the arbitral tribunal relied on article 4.10 of the contract, which provided that the assignee could not raise the guarantee if it had ‘effective knowledge’ of the facts or circumstances constituting a material breach by the assignors (Award, § 286);

That the award states:'

In the case in point, in view of the level of information regarding Eletrobras (Information File, provisions in the AICs, provision by the auditors in the reports ﬁnanciers of Guascor do Brasil that the balance sheet was not correct regarding Eletrobras), a majority of the arbitrators of the Arbitral Tribunal consider that the Assignee had effective knowledge of the facts or circumstances constituting a material breach.
In fact, a majority of the arbitrators of the arbitral tribunal considered that the Assignee had analysed the elements present in the audit and related to Guascor do Brasil, which was one of the Company’s most important subsidiary, and in particular the holding of its shares by third parties.
The obligation to repurchase shares was expressly mentioned in AIC 3.14. A majority of the arbitrators of the arbitral tribunal considered that this proved that the Assignee thought about the repurchase price by consulting the accounts of Guascor do Brasil and the attached auditors' reports. The reports of the auditors of Guascor do Brasil expressly indicate the existence of a violation by pointing out that the Eletrobras debt was not accounted for.
A majority of the arbitrators of the arbitral tribunal considered that both the acknowledgement of the violation with regard to the accounts of Guascor do Brasil and the knowledge of the violation of Article 3.5 of the Share Transfer Agreement with regard to the Company’s consolidated accounts are established, since a debt that is missing from the accounts of a subsidiary would necessarily be missing from the consolidated accounts.
In addition (moreover) Procedural Order No. 1 provides that the arbitral tribunal shall rely on the 2010 IBA Rules on the Taking of Evidence in International Arbitration.

Article 9.5 of these Rules provides that “If a Party fails without satisfactory explanation to produce any Document requested in a Request to Produce to which it has not objected in due time or fails to produce any Document ordered to be produced by the Arbitral Tribunal, the Arbitral Tribunal may infer that such document would be adverse to the interests of that Party”. In the present case, the Defendants were requested to produce and did not produce the audit reports of UBS and KPMG. A majority of the arbitrators of the arbitral tribunal concluded that these documents would be prejudicial to the interests of the Defendants, in particular to the extent that they could show that the Defendants had effective knowledge of the violation of Articles 3.5 (b) and (c) by the Assignors with respect to Eletrobras. 292. In conclusion, a majority of the arbitrators of the arbitral tribunal considered that the Assignee violated Article 4.10 with respect to Eletrobras';

Considering that, contrary to what the claimants argue on the basis of the dissenting opinion of the minority arbitrator, the majority of the arbitral tribunal did not find that the references to the Eletrobras debt in the documents provided to the assignee and in the AICs were “scattered, incomplete and old”, so that the adverse deduction mechanism would have been “central” to the resolution of the dispute; that the majority arbitrators in fact based their decision on the documents submitted to the audit and referred to Dresser-Rand’s failure to produce the UBS and KPMG reports only in an overabundant manner;

That the grounds directed against the implementation of the unfavourable deduction are therefore not such as to lead to the annulment of the award;

Considering, moreover, in the first place, that the arbitration clause of the purchase contract (art. 10.11) provided for ‘arbitration in accordance with the applicable Arbitration Rules of the International Chamber of Commerce’; and that the Terms of Reference stated that: ‘For any questions not resolved by these rules, the arbitral tribunal, after consultation with the parties, shall adopt and apply such rules as it deems appropriate’; that the chairman of the arbitral tribunal submitted to the parties by e-mail of 14 February 2013 a draft “Procedural Order No. 1” which provided in Article 11: “Not provided topics. With regard to procedural matters not provided for in this procedural order, the arbitral tribunal undertakes, after consultation with the parties, to determine the applicable procedure.

The arbitral tribunal may refer to the 2010 IBA Rules on the Taking of Evidence in International Arbitration without being bound by these rules; that it follows from these terms, reproduced in the final text of the Order as approved after several exchanges with the parties, that the case-by-case consultation of the parties on procedural provisions, not provided for, did not concern the 2010 IBA Rules on the Taking of Evidence in International Arbitration which the parties allowed the arbitrators to apply in advance;

That in implementing the unfavourable deduction mechanism resulting from these rules the arbitral tribunal did not therefore disregard its mission;

Considering, secondly, that Article 9.5 of the 2010 IBA Rules on the Taking of Evidence in International Arbitration states: “If a Party fails without satisfactory explanation to produce any Document requested in a Request to Produce to which it has not objected in due time or fails to produce any Document ordered to be produced by the Arbitral Tribunal, the Arbitral Tribunal may infer that such document would be adverse to the interests of that Party”;

Considering that in the phase of exchange of exhibits, the assignors requested the purchaser to produce the following documents (request No. 4): ﬁnal and interim (even partial) versions of any audit report or presentation prepared (i) internally at D-R [Dresser-Rand], and or (ii) any service provider that participated in the audit work for D-R (including Baker & Mckenzie, KPMG and UBS) in connection with the acquisition of GG [Grupo Guascor]. Period of time covered by this application: from 1 July 2010 to 31 August 2011”;

Whereas Dresser-Rand replied: ‘D-R objects to the production of the audit report and draft audit reports prepared by Baker & McKenzie on the basis that the report contains information covered by attorney-client privilege. D-R also objects to the production of any parts of the audit reports prepared internally and covered by the privilege. Subject to such objections, D-R will provide the documents responding to the request which are in its possession, custody or control’; considering that Dresser-Rand did not produce the audit reports of KPMG and UBS and that the majority of the arbitral tribunal found that these documents were unfavourable to the purchaser;

Considering, on one hand, that the parties having accepted that the arbitrators refer to the IBA Rules on the Taking of Evidence in International Arbitration, the mechanism of the unfavourable deduction was necessarily in the proceedings without it being necessary for the assignors to make express use of it or for the tribunal to specifically invite the parties to explain themselves on this point;

Considering, on the other hand, that, contrary to what the Dresser-Rand companies maintain, the request for the production of the audit reports of KPMG and UBS was perfectly clear and precise, that the defendant was able to comment on it and made no objection to it and that, therefore, it was not necessary for the arbitral tribunal to order the production of the documents in question in order for the conditions for the adverse inference to be fulfilled; that the arbitrators cannot therefore be accused of disregarding the due process (in French Principe de la contradiction) or the rights of the defence;

Whereas it follows from the foregoing that the three grounds must be dismissed and the action for partial annulment rejected; whereas the this rejection have the eﬀect to grant enforcement (in French Exequatur) to the award according to Article 1527 of the Code of Civil Procedure;

On Article 700 of the Code of Civil Procedure:

Considering that the Dresser-Rand companies, which succumb, cannot benefit from the provisions of article 700 of the code of civil procedure, and will be ordered on this basis to pay to the assignors the global sum of 100,000 euros;

FOR THESE REASONS:

Rejects the action for partial annulment of the award rendered between the parties in Paris on 11 February 2015.

Holds that this rejection confers exequatur on the award.

Orders Dresser-Rand Group Inc and Dresser Rand Holdings Spain SLU to pay the costs which may be recovered in accordance with the provisions of Article 699 of the Code of Civil Procedure and to pay, on the basis of Article 700 of the Code of Civil Procedure, the aggregate sum of EUR 100,000 to Centauro Capital SLU, XXX, XXX, Diana Capital I FCR, Fond-ICopyme FCR, E-Novating Venture SL, XXX