Paris Court of Appeal, No. 16-19.913 | Rory Wheeler, avocat (Paris) & solicitor (England)

Paris Court of Appeal, First Pole, First Chamber, 11 September 2018, No. 16-19.913

Mr. Z X (Mr. X)

Vs.

SUBWAY INTERNATIONAL BV (SIBV)

On 7 November 2011, Mr. Z X entered into a franchise agreement with the Dutch company Subway International BV (hereinafter SIBV) for the operation of a restaurant in Narbonne. This agreement provided for the application of Liechtenstein law, and the resolution of disputes through arbitration in New York.

Invoking a default in the payment of fees, SIBV notified Mr. X of the termination of the contract on 1 October 2015 and the initiation of arbitration proceedings on the following 10 November.

By an award issued in New York on 3 August 2016, Mr. Y, the sole arbitrator, terminated the agreement, ordered the franchisee to pay the franchisor the sum of EUR 40,808.51 in royalties and advertising expenses, ordered the return of the advertising material and prohibited any use of the identification elements of the Subway brand subject to a daily penalty of EUR 175, and finally, prohibited the operation of a sandwich shop on the premises where this activity had been carried out under the agreement.

This award was declared enforceable by an order of the President of the Paris Trial Court of 12 September 2016, against which Mr. X appealed on 6 October 2016.

By submissions notified on 3 May 2018, Mr. X asked the court:

in limine litis, to stay the proceedings pending the outcome of ongoing commercial proceedings,
mainly, to declare the arbitral tribunal incompetent and to reform the exequatur order,
alternatively, to reform the order granting exequatur to an award issued in violation of international public policy and in violation of the adversarial principle and the principle of equality of arms,
to reject the claims of the opposing party and to order it to pay him the sum of EUR 6,000 pursuant to Article 700 of the Code of Civil Procedure.

By submissions notified on 27 April 2018, SIBV requests the court to reject the application for a stay of proceedings, to declare inadmissible or, in the alternative, unfounded the claim that the arbitral tribunal lacks jurisdiction, as the appellant did not present this ground before the arbitrator. SIBV also requests that the appeal be declared unfounded, that the exequatur order be confirmed, that Mr. X’s claims be dismissed and that he be ordered to pay the sum of EUR 3,000 pursuant to Article 700 of the Code of Civil Procedure.

UPON WHICH:

On the application for a stay of proceedings:

Mr. X claims, on the one hand, that on 22 November 2016, he had SIBV served a writ of summons before the Commercial Court of Marseille to have the arbitration clause annulled on the basis of Article L. 442-6 of the Commercial Code because of the significant imbalance it creates between the parties, and on the other hand that the Minister of the Economy and Finance also served SIBV a writ of summons before the Commercial Court of Paris on the basis of Article L. 442-6 III of the Commercial Code in order to have various clauses of the Subway franchise agreements, in particular the arbitration clause, declared null and void, also, to order SIBV to cease inserting these clauses and finally, to order it to pay a civil fine of EUR 2,000,000. The appellant claims that the court should stay the proceedings until these courts have issued their decisions as he invokes the nullity of the arbitration clause.

Whereas, first of all, under the terms of article 1448 of the Code of Civil Procedure: ‘When a dispute arising out of an arbitration agreement is brought before a court of the State, the latter declares itself incompetent unless the arbitral tribunal has not yet been seized and the arbitration agreement is manifestly null and void or manifestly inapplicable’;

Whereas the arbitration clause of the franchise contract provides that: ‘Any dispute arising out of this contract shall be submitted exclusively to arbitration organized in accordance with the Arbitration Rules of the United Nations Commission on International Trade Law (UNCITRAL)’;

Whereas the arbitral tribunal having been formed on 25 February 2016, the action brought by Mr. X in November 2016 before the Commercial Court of Marseille to set aside this clause cannot have any influence on the assessment of the jurisdiction of the arbitral tribunal;

That the question of the validity of the arbitration clause and, consequently, that of the arbitrator’s jurisdiction, can only be examined a posteriori by this court on the occasion of the review of the order of exequatur of the award on the basis of Article 1520-1° of the Code of Civil Procedure;

That there are thus no grounds for a stay of proceedings pending the decision of the Commercial Court of Marseille;

Whereas, second of all, the action brought by the Minister of the Economy and Finance against SIBV before the Paris Commercial Court under Article L. 442-6 III of the Commercial Code seeks the cessation of certain commercial practices and the imposition of a civil fine; that both by its object [which does not in itself call into question the validity of the arbitration clause but only the choice of the English language as the language of arbitration] and by its basis in pure domestic law, this court is not likely to influence the control exercised pursuant to Article 1520 of the Code of Civil Procedure over an award made abroad;

Whereas the application for a stay of proceedings shall be dismissed;

On the ground claiming the lack of jurisdiction of the arbitral tribunal:

Mr. X explains that the arbitration clause provides for arbitration in New York, which generates exorbitant procedural costs when the franchisee is no longer able to pay his royalties, that this clause therefore has the effect of depriving the franchisee of his right to take legal action. He further states that the franchise agreement as a whole creates a significant imbalance in the commercial relationship to the advantage of the franchisor.

SIBV retorts that Mr. X, who did not raise this ground before the arbitrator, is not admissible to raise it for the first time before the court. As to the merits of the case, it argued that the cost of arbitration was moderate and that the allegation of imbalance of the contract, if proven, would have no effect on the arbitration clause because of the autonomy of the latter.

Whereas, firstly, under Article 1466 of the Code of Civil Procedure: ‘A party who, knowingly and without legitimate reason, fails to raise an irregularity before the arbitral tribunal in good time shall be deemed to have waived the right to rely on it’;

Whereas, however, a party’s failure to raise an irregularity must be assessed in the light of its conduct during the arbitration proceedings; whereas in the present case, Mr. X did not take any part in the arbitration proceedings; whereas it cannot be inferred from his default that he waived his right to claim that the arbitral tribunal lacks jurisdiction; whereas the ground of appeal must therefore be upheld;

Whereas, secondly, the significant imbalance in the commercial relationship which, according to Mr. X, results from the overall structure of the franchise contract, even assuming that it is contrary to international public policy, has no effect on the validity of the arbitration clause by reason of its autonomy vis-à-vis the contract that contains it;

Whereas, thirdly, the arbitration proceedings were initiated by SIBV, which advanced the costs of the arbitration, and whereas it is constant that the cost of the arbitration proceedings amounted to USD 2,860;

Whereas, on the one hand, although Mr. X claims that he should have paid between EUR 20,000 and EUR 80,000 for his defense, he does not produce any evidence in support of this claim, nor does he deny SIBV’s allegation that the proceedings could have been conducted in writing without the need for counsel to travel, which is apparent from the rest of the award itself;

Whereas, on the other hand, although the company created by Mr. X to operate the sandwich shop was, upon Mr. X’s request, placed in judicial liquidation by a judgment of the Commercial Court of Narbonne of 28 February 2017, the appellant does not produce any information on its financial situation at the time of the arbitration, i.e., at the end of 2015;

Whereas, in the absence of factual substantiation, the ground of appeal, claiming the deprivation of the appellant’s right of access to the judge, cannot be upheld;

Whereas it follows from the foregoing that the ground claiming that the Arbitral Tribunal lacks jurisdiction must be rejected;

On the ground alleging the violation of the adversarial principle and the principle of equality of arms:

Mr. X claims that those principles have been violated inasmuch as all the written documents in the proceedings were notified to him in English without translation.

Whereas the fact that the arbitration took place in English, although it is not the appellant’s mother tongue, cannot be regarded as a breach of the adversarial principle and the principle of equality of arms since it was chosen by the parties in a commercial relationship of international character and since reasonable procedural time-limits in view of the complexity of the case were fixed for the hearing thereof. That in the present case, it follows from the award that Mr. X received, on 1 December 2015, the notification of the filing of the arbitration request, on 25 February 2016, the notification of the appointment of the arbitrator by the Arbitration Centre, and on 14 April 2016, a procedural timetable inviting the claimant to produce his documents before 9 May and the defendant to produce its defence and documents before 30 May;

That the ground must therefore be rejected;

On the ground alleging the violation of international public policy:

Mr. X claims that the principle of good faith in the performance of agreements, which is a principle of international public policy, would be violated by the recognition of an award issued in favour of SIBV when the latter conducted itself in an unfair manner, in particular by refusing mediation prior to arbitration. SIBV also acted unfairly by refraining from responding to the offer to defer payment of the debt made on 15 October 2015, by ordering Mr. X on 31 August 2016 to remove the sign and distinctive signs of the Subway brand within 14 days, and by ordering its exclusive supplier to cease supplies even before the expiry of this period, by allowing 11 months to elapse between the termination of the contract and the suspension of supplies and by continuing during this period to monitor compliance with contractual obligations.

Whereas the ground discusses the interpretation of the contract and the manner in which it is to be performed; whereas, under the cover of an allegation of a violation of international public policy, Mr. X seeks a revision of the substance of the award which is not permitted to the judge granting exequatur; whereas the ground must be dismissed;

Whereas it follows from the foregoing that the exequatur order must be confirmed;

On Article 700 of the Code of Civil Procedure:

Whereas it is not equitable to apply Article 700 of the Code of Civil Procedure to any of the parties;

FOR THESE REASONS:

DISMISSES the application for a stay of proceedings.

CONFIRMS the exequatur order.

ORDERS Mr. X to pay the costs which may be recovered in accordance with the provisions of Article 699 of the Code of Civil Procedure. Rejects all other applications.