Paris Court of Appeal, No. 15/21703

Paris Court of Appeal, Pole 1, First Civil Chamber, 16 January 2018, No. 15/21703

MK GROUP vs. FINANCIAL INITIATIVE SARL ONIX

The Laotian company Dao E was formed in 2003 between the Russian company MK Group, which holds 70% of the shares and the Laotian company E F G, which holds 30% of the shares. Its purpose was to implement a contract signed on 9 June 2003 with the government of the People’s Democratic Republic of E for the prospecting, exploration and exploitation of gold mines.

On 29 October 2010 MK Group entered into an agreement to sell part of its shares to the Ukrainian company Z.

On 19 July 2011, the Ukrainian bank A C declared its intention to finance Dao E’s exploration work to the amount of 20 million USD for the years 2012 and 2013.

On 6 October 2011 MK Group, E F G, Z, together with the Ministry of Planning and Investment and the Ministry of Natural Resources and Environment concluded a Memorandum of Understanding (MOU) which ratified the previous decisions and agreements.

Disputes have arisen between the parties and on 21 February 2014 MKGroup filed a request for arbitration with the C.C.I. based on the arbitration clause stipulated in the shareholders' agreement of 29 October 2010. It requested the arbitral tribunal to find that its 60% shareholding in Dao E was not transferred to Z because it failed to provide the agreed financing of USD 12.5 million and to order Z and A C to compensate Z and A C for damages resulting from the breach of their financing obligations.

The arbitration clause did not determine the law applicable to the merits of the dispute.

The award indicates that the parties agreed that it was Laotian law, and in the silence of the latter, French law (award, § 7).

By an award rendered in Paris on 13 October 2015, the arbitral tribunal composed of Messrs. X and Z, arbitrators, and Mr. Y, chairman:

  • unanimously declared that it had jurisdiction over A C,
  • declared by a majority that MK Group transferred the 60% stake in Dao E to Z in accordance with the shareholders' agreement of 29 October 2010 and that Z was therefore the rightful owner of these shares,
  • ordered MK Group by a majority to reimburse the C.C.I.’s costs of USD275,000 to the opposing parties,

On 13 November 2015, MK Group filed an action for annulment against the award.

By submissions notified on 17 November 2017, it requested the court to declare the annulment, dismiss the opposing parties' claims and order them to pay it the sum of 100,000 euros pursuant to Article 700 of the Code of Civil Procedure. It invokes, firstly, the failure of the arbitrators to comply with their mission resulting, on the one hand, from the lack of reasoning of the award on certain claims, on the other hand, from the fact that the arbitrators did not apply the Laotian law chosen by the parties. Secondly, MK GROUP alleges that the award violated international public policy, on the one hand, because the decision of the arbitrators was vitiated by the production of false documents, and, on the other hand, because the award violated Laotian police laws.

By submissions notified on 16 November 2017, Z and A C requested the court to reject the action for annulment and order MK Group to pay them 50,000 euros in damages for abusive proceedings and 90,000 euros pursuant to Article 700 of the Code of Civil Procedure.

UPON WHICH:

On the ground of annulment based on the violation of international public policy (article 1520-5 of the code of civil procedure):

MK Group submits, firstly, that the award was made on the basis of false documents. It states that on 6 October 2011, MK Group, E F G G, Z, the Ministry of Planning and Investment and the Ministry of Natural Resources and the Environment concluded a Memorandum of Understanding (hereinafter MOU) relating to the transfer of part of its shares to Z; that this document was produced before the arbitrators in two versions, one of which made the completion of an investment of USD 12.5 million by Z a condition precedent to the transfer while the other, which did not provide for it, was a forgery; that a certificate from the clerk’s office of the Ministry of Justice dated 11 January 2011 that Z owned 60% of the securities was also a forgery; that the falsification of these two documents was established by a judgment of the Vientiane court dated 22 April 2016 and by a decision of the Laotian judicial authorities dated 6 July 2016; that the decision of the arbitrators was vitiated by the production of these forged documents, and that the award is subject to annulment.

Secondly, MK Group maintains that the transfer of Dao E’s shares was subject to a prior investment by the Laotian authorities of US$12.5 million by Z. Its opinion is based on, on the one hand, the Laotian law on foreign investment of 8 July 2009, which provides in general terms that such investments are managed centrally by the Government and that the implementation of investment agreements is subject to inspection. On the other hand, the opinion of MK GROUP is based on its version of the Memorandum of Understanding of 6 October 2011; that by disregarding this condition and by imposing a partner on the Laotian State in defiance of its regulations on foreign investment, the award disregards the principles necessary for the balance of Laos' economic and financial relations with the outside world, and infringes the sovereignty of that State over its natural resources; that, in so doing, it violates international public order; that, moreover, the Laotian courts refused to grant it enforcement (in French Exequatur) on this ground.

On the ground taken in its two parts:

Considering that if the mission of the court of appeal, referred to pursuant to article 1520 of the code of civil procedure, is limited to the review of the defects listed by this text, there is no limitation on the power of this court to investigate in law and in fact all the elements concerning the defects in question;

Considering that the international public policy with regard to which the review of the annulment court is based on the conception of the French legal system, i.e. the values and principles which cannot be disregarded even in an international context; that it is only to this extent that foreign mandatory rules may be regarded as falling within the scope of international public policy, so that it is in principle irrelevant whether the award submitted to the French court has been refused enforcement (in French Exequatur) on the ground of a breach of public policy in the State whose mandatory rules apply to the contract at issue;

Whereas on 14 December 1962, the General Assembly of the United Nations adopted a resolution which provides :" 1. The right of peoples and nations to permanent sovereignty over their natural wealth and resources must be exercised in the interest of their national development and of the well-being of the people of the State concerned.
2. The exploration, development and disposition of such resources, as well as the import of the foreign capital required for these purposes, should be in conformity with the rules and conditions which the peoples and nations freely consider to be necessary or desirable with regard to the authorization, restriction or prohibition of such activities.
3. In cases where authorization is granted, the capital imported and the earnings on that capital shall be governed by the terms thereof, by the national legislation in force, and by international law. The profits derived must be shared in the proportions freely agreed upon, in each case, between the investors and the recipient State, due care being taken to ensure that there is no impairment, for any reason, of that State’s sovereignty over its natural wealth and resources.
4. Nationalization, expropriation or requisitioning shall be based on grounds or reasons of public utility, security or the national interest which are recognized as overriding purely individual or private interests, both domestic and foreign. In such cases the owner shall be paid appropriate compensation, in accordance with the rules in force in the State taking such measures in the exercise of its sovereignty and in accordance with international law. In any case where the question of compensation gives rise to a controversy, the national jurisdiction of the State taking such measures shall be exhausted. However, upon agreement by sovereign States and other parties concerned, settlement of the dispute should be made through arbitration or international adjudication.”

Considering that this resolution expresses an international consensus on the right of States to make the exploitation of natural resources situated on their territory subject to prior authorisation and to submit foreign investment in this field to their control; that the provisions by which, in accordance with international law, States express their sovereignty over their natural resources are therefore a matter of international public policy;

Considering that in the present case, it follows from the award that the exploration of the gold resources of the Sanakham district was the subject of a first contract on 9 June 2003 between the Laotian Government and the Russian company, MK Group, and the Laotian company, E F G, associated within a joint venture under Laotian law, Dao E, in which the first held 70% of the capital and the second 30%. On 24 November 2009, a new gold prospecting and exploration contract was concluded between Dao E and the Laotian Government, which provided for a prospecting phase in 2010/2011, an exploration phase in 2011/2014 and a feasibility study phase in 2014/2015;

Considering that on 21 July 2010, MK Group, which had already invested USD 4.5 million in the project, concluded a memorandum of understanding for the sale of 60% of Dao E’s shares to a Polish company F Expert which undertook to invest USD 12.5 million over three years; as F Expert had sold its rights to the Ukrainian company Z, a shareholders' agreement was concluded on 29 October 2010 between MK Group and Z which provided that the former would sell 60% of Dao E’s share capital to the latter on condition that the latter would pay USD 100 (one hundred US dollars) to the seller, that it would finance the exploration work during the 2010/2011 season, that, in the event that it decided to finance the next phase, the amount of its investment would not be less than 12. 500,000 and that, if it decides not to finance the project in2012/2015, it would undertake to return the Dao E. shares;

Considering that on 17 June 2011, Dao E filed with the Ministry of Planning and Investment, on the one hand, a request for authorisation to cooperate with Z on the basis of 60% of its capital in Z, 30% in EF and 10% in MK Group, on the other hand, a work plan for 2011/2014 estimating the cost of the works over this period at USD 22,018,000;

Considering that on 29 June 2011 the articles of association of Dao E were amended to reflect the shareholders' agreement;

Considering that on 27 September 2011, a mineral resources exploration licence expiring on 25 November 2014 was issued to Dao E by the Ministry of National Resources and Environmental Protection, which included the terms of the June 2011 work plan and the amount of USD 22,018,000 to be invested over this period;

Considering that on 6 October 2011 MK Group, E F G,Z, together with the Ministry of Planning and Investment and the Ministry of Natural Resources and the Environment concluded a Memorandum of Understanding (hereinafter MOU) relating to the transfer of the shares of MK Group to Z;

Considering that as from September 2012, Z, which until then invested approximately 1,800. 000 in the exploration work, made the contribution of new funds conditional on the submission of a report on the profitability of the project and the appointment of a financial controller of its choice, which was refused by its partners; whereas a dispute arose as to the voting rights of the various parties in the general meeting and, consequently, to the reality of the transfer of the shares of MK Group to Z, a dispute which was brought before the arbitral tribunal;

Considering that the latter decided, by a majority, to hold 60% of the capital of Dao E, withholding:

  • that the contribution of funds was not a condition precedent to the transfer of the shares, which was made by the sole payment of the sale price of one hundred dollars,
  • that this transfer did not contravene Laotian law,
  • that Z complied with its obligation to finance exploration work, or more precisely, prospecting, for the 2010/2011 season to the amount of USD 750,000,
  • that Z also met its investment obligations for the 2011 to 2013 exploration period, so that there could be no return of the securities,
  • finally, the changes in control of Z had no effect on the ownership of the shares;

Considering that, in interpreting the will of the parties, the arbitral tribunal relied essentially on the shareholders' agreement of 29 October 2010; that it examined the subsequent acts only to ensure that they did not contradict this analysis; with respect to the MOU of October 6, 2011, it was aware of the two versions of this document produced by the parties and that, from an analysis of the general scheme of the document, it inferred that this act did not have the effect of modifying the provisions of the shareholders' agreement;

But considering that it follows from the award (§ 94) that the version produced by MK Group was drafted in this way:

  • “Pursuant to the Prospecting and Gold Exploration Contract in Sanakham District, Vientiane Province, concluded between F G and MK Group, dated 26 November 2009;
  • Pursuant to the Joint Venture Agreement between Z D Ukraine and Dao E Co, Ltd, dated 29 October 2010;
  • In accordance with Government Cabinet Announcement No. 502/GO, dated 29 September 2011;

On 06/10/2011, the Department of Investment Promotion, Ministry of Planning and Investment, and the Department of Geology, Ministry of Natural Resources and Environment, and three shareholders: Z D Ukraine, EH G Ltd. and MK Group Co. Ltd (Dao E Co., Ltd) concluded this Memorandum of Understanding to confirm the recognition of the arrival of a shareholder in the capital of Dao E Co., Ltd and the modification of the shareholders' share in the Gold Prospecting and Exploration Project in Sanakham District, Vientiane Province, as well as the points detailed below :

I. Transfer of shares

1. MK Group Co, Ltd. (Russia) is authorised to transfer a 60% stake it holds in the capital of Dao E Co., Ltd. to Z D Ukraine (once the latter fulfils its obligation to invest USD 12,500,000 / twelve and a half million USD in this project, in accordance with the Articles of Association dated July 2011).

II. Shareholders of the Company

Previous shareholders of Dao E Co, Ltd :

  1. E F G Ltd (Lao limited liability company) held 30% of the shares;

  2. MK Group (Russia) held 70% of the shares.

Current shareholders of Dao E Co, Ltd: 1. E F G Ltd (Laotian limited liability company) holds 30% of the shares;

  1. MK Group Ltd. owns 10% of the shares;

  2. Z D Ukraine holds 60% of the shares.

III. Effectiveness of the MOU :

This Memorandum of Understanding is signed in Laotian and English, in four originals. All parties have read it, understand its contents and consider this MOU to be an integral part of the Prospecting and Gold Exploration Contract in Sanakham District, Vientiane Province, signed between the Government of the People’s Democratic Republic E and the Laos-Russia Joint Venture (Dao E Co., Ltd.) on November 26, 2009”;

Considering that, according to the award (§ 95), the version of Z did not contain the sentence which appears in brackets in paragraph I of the above-mentioned document, namely: “MK Group Co., Ltd. (Russia) is authorised to transfer a 60 % share in the capital of Dao E Co., Ltd. to Z D Ukraine (once the latter fulfils its obligation to invest USD 12,500,000 / twelve and a half million USD in this project in accordance with the Articles of Association dated July 2011)”;

Considering that, contrary to what MKGroup maintains, the offence of forgery is not established either by the Vientiane Court’s judgment of 22 April 2016, handed down in commercial matters, which merely annulled the shareholders' agreement of 29 October 2010, as well as the investment permit and the registration of the concession, or by the warrant to appear on the charge of forgery, issued on 6 July 2016 by the Vientiane People’s Procurator’s Office against M. B, the manager of Dao E, and former manager and owner of Z before the change of ownership of this company during the years 2011/2012;

Considering that it is inferred from the award that the two versions of the MOU of 6 October 2011 do not contain any false material - i. e. interpolation for one or obliteration for the other - of the sentence relating to the prior investment of USD 12.5 million; that in reality, the MOU was, from the outset, drawn up by the directors of Dao Een two originals written in different terms,one in English, reflecting the reality of the agreement between the parties, which, in accordance with the shareholders' agreement, did not make this investment a condition precedent for the transfer of shares, the other, in Laotian, intended to accredit the opposite thesis with the Laotian authorities;

Moreover, it should be pointed out that the same discrepancy should be noted between the two originals of the Dao E statutes amended on 29 June 2011, the English version of which, according to the award, states (award, § 79):

“7.2 In accordance with the Agreement on the Transfer of Shares in the Share Capital of the Company dated 29.10.2010 between MK Group (Moscow, Russian Federation) and Z Ltd. (Kiev, Ukraine), MK Group (Moscow, Russian Federation) transfers its shares representing 60% of the share capital to Z Ltd. (Kiev, Ukraine).

Z Ltd. (Kiev, Ukraine) has the obligation, on the other hand, to finance the other phases of geological prospecting work for an amount of at least USD 12,500,000 in 2012-2015.

Thus, the Company’s shares are currently distributed as follows:

  • Z Ltd. (Kiev, Ukraine) - 60% of the shares in the Company’s capital;

  • E F G (Vientiane, Laos) - 30% of the shares in the share capital of the Company;

  • MK Group (Moscow, Russian Federation) - 10% of shares in the share capital of the Company”;

while the Laotian version states (Award §79):

“7.2 Z Ltd (Z) (Kiev, Ukraine) shall invest its capital in geological prospecting works - studies, for an amount of at least 12,500,000 USD above all - (in accordance with the Agreement on the transfer of shares in the share capital of the Company, dated 29 October 2010, signed between MK Group (Moscow, Russian Federation) and Z Ltd. (Z) (Kiev, Ukraine) and approved by E F (Vientiane, People’s Democratic Republic of E) before allowing Z Ltd. (Z) (Kiev, Ukraine) to hold 60% of the shares.

The shares will be distributed as follows: Z Ltd. = 60% E F Ltd = 30% MK Group = 10%”;

Considering that the manoeuvres employed by the leader of Dao E - who was then also the leader of Z - to convince the Laotian Government that the financing of prospecting and exploration work up to at least USD 12,500,000 was a suspensive and not a resolutory condition for the arrival of Z into the capital of Dao E, demonstrate that this was a substantial condition for the Laotian authorities;

Considering that the award, which has the effect of conferring on Z a legal protected title in the international order on an investment made through the fraudulent granting of an administrative authorisation to which the legislation of the Republic of Laos subordinated the exploitation of natural resources on its territory, violates in a manifest, effective and concrete manner the international public order and must therefore be set aside;

On the claim for damages for abusive procedure:

Considering that, according to the meaning of the judgment, this application will be rejected;

On Article 700 of the Code of Civil Procedure:

Whereas Z and A C, who are unsuccessful, cannot benefit from the provisions of Article 700 of the Code of Civil Procedure and will be ordered in solidum on that basis to pay the sum of 100,000 euros;

FOR THESE REASONS:

Sets aside the award handed down in Paris between the parties on 13 October 2015.

Rejects the claim for damages for abusive proceedings

Orders in solidum the companies Z and A C to pay the costs and to pay the company MK Group the sum of 100,000 euros in application of article 700 of the code of civil procedure.