Paris Court of Appeal, No. 15/23711 | Rory Wheeler, avocat (Paris) & solicitor (England)

Paris Court of Appeal, First Pole, First Chamber, 6 March 2018, No. 15/23711

THE AUTHORITY FOR THE ADMINISTRATION OF THE ASSETS OF THE STATE OF ROMANIA

Vs.

ARCELORMITTAL Z AG

As part of the privatisation of the Romanian company Combinatul Sidrurgic Sidex Galati SA (hereinafter the Company), the Authority for Privatisation and Management of Romanian State Property, now the Authority for Administration of Romanian State Assets (hereinafter the Authority) and LNM Z N.V., now Mittal Steel Z A, and later ArcelorMittal Z A (hereinafter AMH) entered into a contract on 25 July 2001 under which AMH acquired approximately 74% of the Company’s capital. The agreement provided for investment obligations on the part of the purchaser and a monitoring mechanism by the Authority on the basis of certification by an independent body (the Institut de recherches métallurgiques-ICEM). Compliance with the investment obligations was guaranteed by penalties and a pledge of the Company’s shares.

Considering that AMH had not fulfilled its investment obligations, the Authority filed a request for arbitration with the Secretariat of the Court of the International Chamber of Commerce (I.C.C.) on 28 December 2008 on the basis of the arbitration clause stipulated in the contract. It requested that AMH be ordered to make the investments in question and to pay the contractual penalties.

The arbitration clause and the Terms of Reference stipulated that Romanian law was applicable to the merits of the dispute, and the ICC Arbitration Rules were applicable to the proceedings.

By an award issued in Paris on 21 October 2015, the arbitral tribunal composed of Messrs. X and Y, arbitrators, and Mr. B C, chairman, decided by majority:

that AMH had fulfilled all its investment obligations and that, consequently, no late payment penalty was due,
that AMH could exercise its right to obtain the cancellation of the pledge on the shares it held,
that supervision by the independent auditors had ended,
that the plaintiff’s objections to the counterclaims were rejected,
that the Authority had to bear the costs of the arbitration, i.e. USD 990,000 and the costs incurred by its opponent, i.e. EUR 1,323,152.

On 20 November 2015, the Authority filed an appeal against the award.

By submissions notified on 6 March 2017, it asked the court to annul the decision and order AMH to pay it the sum of EUR 100,000 pursuant to Article 700 of the Code of Civil Procedure. It claims that the arbitrators disregarded their mission, failed to observe the due process and violated international public policy.

By submissions notified on 1 December 2017, AMH asked the court to dismiss the Authority’s claim and order it to pay the sum of EUR 250,000 pursuant to Article 700 of the Code of Civil Procedure.

UPON WHICH,

On the ground based on the arbitrators' failure to carry out their mission (Article 1520-3 of the Code of Civil Procedure):

The Authority claims, firstly, that the arbitral tribunal ruled ultra petita in deciding that AMH’s refusal to draw up a rider was wrongful and exempted AMH, where applicable, from the consequences of its own breaches of the contract, even though neither the Terms of Reference nor the parties' writings required the arbitrators to decide whether the Authority had breached the principle of good faith in the performance of its contractual obligations, nor did they allow the Authority to rewrite the contract.

The Authority claims, secondly, that the arbitral tribunal, in deciding, despite the clear terms of the contract, that the compliance of the investments made by AMH in accordance with its commitments should be assessed cumulatively and not separately with regard to each objective and each deadline set by the programme annexed to the contract, disregarded the clear and unequivocal will of the parties.

The Authority alleges, thirdly, that by exempting AMH from contractual penalties on the grounds of the other party’s bad faith, the arbitrators ruled as ‘amiable compositeurs’ without being instructed to do so.

Whereas the contract of 25 July 2001 by which AMH acquired approximately 74% of the Company’s capital required the purchaser to invest, on the one hand, for environmental protection, the sum of $76.1 million over the period 2001 to 2006, and, on the other hand, for technological development, that of $175 million over the period 2001 to 2006, and that of $100 million over the period 2007 to 2011, in accordance with a schedule set out in Appendix 32 of the contract;

Whereas Article 11.2.2 stated: ‘The seller accepts that, on the basis of justified reasons, the buyer is entitled to require the modification of certain parts of the investment programme by the conclusion of a rider. Such submissions must not be unreasonably refused by the seller’;

Whereas, before the arbitral tribunal, the Authority criticized AMH for failing to observe or for having partially observed the objectives, the amounts to be invested per objective and the investment deadlines set by Annex 32 for environmental and technological investments in 2005 and 2006; whereas the Authority initiated arbitration proceedings seeking an award requiring AMH, on the one hand, to perform its obligations under the penalty payment system and, on the other hand, to pay the contractual penalties (Award, § 21 to 24);

Whereas AMH disputed that it had failed to fulfil its contractual obligations, claiming that in 2005 and 2006 it had invested four times and three times more than the amounts provided for in the contract, respectively, that the investment amounts set out in Appendix 32 were mere estimates for the achievement of unspecified objectives, and that it was possible under Romanian Government Ordinance No. 25/2002 to modify, for justified reasons, the investment programme initially provided for (Award, §§ 27 to 30); that, for example, as its environmental permit had been amended by the Ministry of Water, Forestry and Environmental Protection during the performance of the contract, the investment programme had been amended accordingly by an amendment of 14 November 2002 and that the environmental investments made in 2005 and 2006 were in conformity with that amendment, as certified by the ICEM (Award, § 33 and 34); that the other investments made in 2005 and 2006 were rational and justified in the light of the technical constraints and the market conditions, in particular in the light of the performance requirements imposed by Romania’s accession process to the European Union, so that the Authority’s unreasonable refusal to conclude an addendum represented a breach of the contract (Award, § 40 and 41); that AMH applied for the rejection of the opposing claims and counterclaimed that the arbitral tribunal should find that it had fulfilled its obligations and, consequently, to release the pledge, alternatively, if the tribunal found that certain investment obligations were not met, to order the Authority to conclude an amendment to the contract in order to replace the unfulfilled obligations by the investments actually made, taking into account the reality of technical constraints and the market conditions (Award, § 65 and 66);

Whereas in finding that AMH had fulfilled its obligations, in ordering the release of the pledge, and in rejecting all of the Authority’s claims, the arbitral tribunal ruled on the claims submitted before it; that, while it based this decision on the fact that AMH had justified reasons, within the meaning of the aforementioned Article 11.2.2, to obtain an amendment to the investment programme, such that the Authority’s refusal to consent to an amendment was unreasonable in the light of the same stipulation, the arbitral tribunal did not impose the modification of the contract, but merely drew, within the limits of its jurisdiction and on legal grounds, the conclusions that the Authority had breached the principle of good faith in Contract Law as set out in Article 970 of the Romanian Civil Code;

It therefore did not rule ultra petita or rule as an amiable compositeur, and in considering that the conformity of the investments with the provisions of Annex 32 could be assessed cumulatively, it gave an interpretation of the contractual stipulations that the annulment judge does not have the power to review;

That the ground of appeal in its three branches must be rejected;

On the ground based on the violation of substantive international public policy (Article 1520-5 of the Code of Civil Procedure):

The Authority claims, firstly, that by sanctioning it for breaching its obligation of good faith, while refraining from sanctioning AMH for its own contractual breaches, the arbitral tribunal violated, on the one hand, the constitutional principle of freedom of contract, which includes the right of the parties to freely determine the content of their obligations and thus bind the arbitrators, who cannot rewrite a clear contract, and, on the other hand, the principle of performance of agreements in good faith, i.e., in accordance with clear and non-ambiguous stipulations.

The Authority claims, secondly, that the rules relating to the control of foreign investments pertain to political, economic and social organization and development and that they therefore fall within the French concept of international public policy, including when they result from foreign mandatory rules applicable to the substance of the dispute before the arbitral tribunal. The Authority argues that the provisions of order No. 25/2002 of 30 January 2002 as amended on 14 July and 8 December 2005 relating to the measures of a posteriori control of the privatization operations of shares held by the Romanian State fall into this category. It claims that by considering that the Authority had breached its obligation of good faith by refusing to conclude a rider whereas order 25/2002 made the conclusion of riders a mere option, and by refusing to apply the penalties incurred by AMH for not having fulfilled its investment obligations whereas the same Ordinance did not allow the investor to be exempted from the penalties for delay, the arbitral tribunal violated international public policy.

Whereas, first of all, as has been said, by inserting Article 11.2.2 into the contract the parties undertook to conclude amendments to modify certain parts of the investment program ‘on the basis of justified reasons’; whereas in drawing the consequences of the Authority’s ‘unreasonable’ refusal to perform this obligation, the arbitrators merely interpreted and applied the contract;

Whereas, second of all, the international public policy with regard to which the annulment court’s review is carried out must be understood in the light of the French legal system’s conception of it, that is to say, in the light of the values and principles which the French legal system cannot disregard even in an international context; whereas it is only to this extent that foreign overriding mandatory rules may be regarded as falling within the scope of international public policy;

Whereas the Authority refers, as a mandatory law, to order No. 25/2002 of 30 January 2002, as amended, on the measures for the control of the privatisation operations of the assets held by the Romanian State, Article 26 (2) of which stipulates that: ‘when the investment objectives provided for in the contract, except for environmental objectives, no longer meet the market requirements, and the buyer justifies the need to modify the said objectives, provided that the price remains the same, the seller may accept the modification by an amendment, and the buyer will not be required to pay penalties for delay’. Article 26.2 reads as follows: ‘when, before the last due date prior to the entry into force of this order, it is established that the investment obligations have been partially fulfilled or not fulfilled, the buyer shall, as of the same date, pay contractual penalties calculated on the basis of the uninvested value, without taking into account the non-fulfilment by objectives’;

Whereas, however, the first of these articles gave the Authority the power to conclude, as it did, a contract for the sale of public shareholdings defining the circumstances in which it undertook to accept changes to the initial investment programme; whereas this text, which is not mandatory, cannot be regarded as being a matter of international public policy; whereas the same applies, therefore, to the second article, which the Authority notes that it is dependent on the first;

Whereas, therefore, the award does not give rise to any actual, concrete and manifest violation of international public policy;

On the ground based on the violation of procedural international public policy (Article 1520-5° of the Code of Civil Procedure):

The Authority claims that the arbitral tribunal disregarded the requirements of a fair trial by ratifying two expert reports drawn up by IDOM, which was neither impartial nor independent. The Authority states that IDOM, which filed an EWS-1 report as an expert jointly appointed by the parties, was in fact appointed by AMH alone under a contract dated 22 October 2013, the existence of which was not disclosed to the Authority when it signed a tripartite contract between itself, AMH and IDOM on 10 February 2014; that IDOM never disclosed this conflict of interest and, on the contrary, declared itself independent of the parties, whereas the bipartite contract of 22 October 2013 continued until 18 February 2014 and IDOM’s fees were paid by AMH. The Authority adds that IDOM was again commissioned by AMH alone to draw up a second report on the review of penalties (EWS-2 report) without informing the Authority.

On the EWS-1 Report:

Whereas, following a meeting held on 18 June 2013, the Authority and AMH agreed, through an exchange of official notes on 28 June and 29 July 2013, to jointly appoint the Spanish engineering company IDOM to carry out the technical assessment of the implementation of the contract’s investment program over the period 2001-2011;

That on 10 February 2014 the tripartite contract was signed whereby the Authority and AMH entrusted this task to IDOM;

Whereas, on 22 October 2013, AMH concluded a bipartite contract with IDOM for the same mission, which the Authority claims was concealed from it and which characterised the lack of independence and impartiality of the expert, who was, moreover, remunerated solely by AMH;

Whereas, however, it has been shown that the expertise operations, which were contradictory to the Authority, had begun well before the signing of the tripartite contract of 10 February 2014;

That in fact, the Authority was invited to visit the plant with the IDOM experts on 5 and 6 November 2013 but was not represented; that, however, on 7 November 2013, the Authority took part in a meeting with AMH and IDOM during which the expert indicated the information already available to him and that the parties still had to provide, presented a timetable for the conduct of the expert assessment operations and, lastly, submitted a draft tripartite contract designating him, the necessity of which was recognized by the parties (Authority Exhibit No. 28: minutes of the meeting of 7 Nov. 2013, bearing the signatures of all those present); that the minutes of the meeting further stated: ‘the price of the agreement concluded for the preparation of the expert report will be paid solely by Arcelor, but this point will be discussed again with the management of the institution’ (minutes, § 14);

Whereas, however, the decision to carry out an expertise entrusted to IDOM was taken jointly by the parties on 18 June 2013, but the formalisation of this agreement was delayed due to AMH’s reluctance to share the costs; Whereas, however, IDOM began its operations - with the consent of both parties - before the tripartite contract was materially signed; that the bipartite contract between AMH and IDOM was only intended to enable the expert to begin his work without the risk of not being paid; that he was deprived of purpose by the conclusion of the tripartite contract, as noted in the rider of 18 February 2014, which, contrary to the Authority’s contention, did not terminate a bilateral contractual relationship between AMH and IDOM but found that the bipartite contract had never been effective;

That this bipartite contract therefore in no way characterises a lack of independence and impartiality on the part of IDOM, nor the fact that the expert’s remuneration was, by agreement between the parties and because of the Authority’s refusal to commit its finances, paid in full by AMH;

On the EWS-2 Report:

Whereas following the submission of the EWS-1 joint expert report concerning the investments, AMH commissioned IDOM to produce a second report on its behalf covering the calculation of penalties (the so-called EWS-2 report);

Whereas, firstly, the fact that the expert who had acted in the context of a joint expertise was, for the same case, called upon to draw up an additional technical study for a single party is not sufficient to show that the first report lacked independence and impartiality;

And whereas, secondly, the objections made to the EWS-2 report are irrelevant to the action for annulment of the award, since the arbitral tribunal which found that AMH had fulfilled its obligations did not consider the question of penalties which was the subject of said report;

Whereas it follows from the foregoing that the ground based on the failure to respect the principles of a fair trial must be rejected;

On the ground based on the violation of the principle of contradiction (Article 1520-4 of the Code of Civil Procedure):

The Authority claims, firstly, that the arbitral tribunal endorsed expert reports that were drawn up in disregard of the principle of contradiction. The Authority further claims that these reports are based on documents that were not provided to it while they were provided to AMH, that the expert refused to provide it with the documents listed in the report, such as the minutes of discussions with the plant personnel, that meetings with the expert were held in the Authority’s absence, that the report was drawn up by a person who had not actually visited the site, and that AMH refused to provide the documents relevant to the drafting of the report and did not comply with the procedural order requiring such communication, limiting itself to providing brief summaries of the documents in question. The Authority adds that observations and cross-examinations before the arbitral tribunal cannot remedy the non-adversarial nature of the conduct of the expert appraisal.

Secondly, the appellant claims that the arbitral tribunal denied it the right to comment on AMH’s claim relating to the costs of the arbitration and lawyers' fees.

On the first branch of the ground:

Whereas, firstly, the fact that IDOM began work before the tripartite agreement was formalized does not in itself affect the adversarial nature of the proceedings carried out since, as stated, it is settled that the Authority was involved;

Whereas, secondly, it is established that a visit to the plant took place on 5 and 6 November 2013 during which IDOM experts met with the employees;

Whereas the Authority claims (Submissions § 71) that minutes of the hearings were drawn up, that they were included in the list of documents listed in the EWS-1 report and that they were not communicated to the Authority; whereas, however, the Authority does not produce this report or its annexes and therefore does not show that minutes were drawn up and were withheld from the Authority’s knowledge;

Whereas, however, the Authority was invited to the visit on 5 and 6 November 2013 but was not represented, although it did not object to the date and merely suggested that the meeting be held at AMH’s headquarters instead (letter from the Authority to AMH dated 1 November 2013 cited in the Award, note 28);

Whereas the Authority, which provides no justification for its failure, cannot complain that it was not aware of the statements made by the plant’s employees to the experts during that visit;

Whereas, thirdly, the Authority claims, without providing the slightest evidence and, in particular, without producing the EWS-1 report, that other expert meetings had taken place without it being invited;

Whereas, fourthly, at the adversarial meeting held on 7 November 2013, the parties took stock of the documents which had already been submitted to the expert and those which had yet to be provided to him; that neither in the minutes of that meeting, signed by its representatives, nor in subsequent exchanges with AMH and IDOM did the Authority complain that the documents - on which it knew that the expert’s work was based - had not been transmitted to it, so that, having requested them only after the submission of the report, it cannot complain that the arbitral tribunal ordered their production only at that stage of the proceedings;

Whereas, fifthly, the Authority claimed before the arbitrators and still maintains before the court that AMH had submitted excessively succinct summaries of the documents which AMH had been ordered to produce; whereas, however, the principle of procedural good faith implied that this objection should be raised in good time, by submitting to the arbitral tribunal a request to compel AMH to provide more detailed summaries or the entirety of the documents, and not by criticising the submissions in the brief on the merits of the case;

Whereas, finally, the claim that the report was drawn up by a person who did not have sufficient knowledge of the site calls for a review of the substance of the arbitrators' assessment of the seriousness of the expertise, an assessment which is not permitted to the judge of annulment;

On the second branch of the ground:

Whereas, following the hearing on the merits held on 9-12 March 2015, the parties were invited to submit simultaneously their briefs on arbitration and defense costs and fees, which they did on 13 July 2015;

Whereas it is agreed that on 15 July, the Authority requested the rejection of the opposing brief (Award § 214) on the grounds that it was not accompanied by supporting documents and, moreover, that it contained considerations on the merits of the dispute in violation of the procedural guidelines of the arbitral tribunal;

Whereas it appears, therefore, that, contrary to what it claims, the Authority has been given the opportunity to comment on the opposing submission;

And whereas, on the one hand, it does not specify what was contained in the certificates attached to the statement of costs, which it sought to have rejected; whereas, therefore, it does not show that these documents or the statements in the statement of costs were relevant to the merits of the case;

Whereas, on the other hand, regarding the arbitral tribunal’s refusal to order the production, as requested by the Authority, of proof of costs, the Authority simply challenged before the court, which is not permitted to revise the award, the assessment by which the arbitrators considered that no additional documents were necessary to decide on the merits of the requests for costs and fees - in particular those for expertise -, since the procedure was not governed by Romanian law, but by the ICC Rules of Arbitration, to which the parties had agreed to submit the judgment of their dispute, and since the Rules did not lay down any principle other than that of taking into account the ‘reasonable costs’ incurred by the parties;

Whereas it follows from the foregoing that the ground in its two branches can only be rejected;

On Article 700 of the Code of Civil Procedure:

Whereas the Authority, which is unsuccessful, cannot benefit from the provisions of article 700 of the Code of Civil Procedure, and will be condemned on this basis to pay AMH the sum of EUR 100,000;

FOR THESE REASONS:

Rejects the action for annulment of the award handed down in Paris between the parties on 21 October 2015.

Rejects the appeal for annulment of the award issued in Paris between the parties on 21 October 2015.

Orders the Authority for the Administration of State Assets of Romania to pay the costs and the sum of EUR 100,000 to ArcelorMittal Z A. pursuant to Article 700 of the Code of Civil Procedure.