Paris Court of Appeal, No. 17/06397

Paris Court of Appeal, Pole 1 - First Chamber, 14 May 2019, No.17/06397

Mr. Y
vs.
Mr. X

Judicial chronology:

Award of 29 May 2006 issued in Geneva, Switzerland,
First Instance Lyon Tribunal, 4 September 2006, No. 06 / 06769.
Lyon Court of Appeal, 17 January 2008, No. 06/06769
Court of Cassation, 6 July 2011, No. 08-12.648
Grenoble Court of Appeal, 3 March 2015, No. 11/03714
Court of Cassation, 4 January 2017, No.15-19.070

In September 2000, Mr. A Y and Mr. C X incorporated a company called ARIC in Switzerland with a capital of CHF 100,000, of which the former was to hold 80 % and the latter 20 %. On 25 September 2000, they entered into a trust agreement governed by Swiss law, under which Mr. X was mandated to subscribe for 80 shares on behalf of Mr. Y and to exercise the voting rights attached thereto in accordance with Mr. Y’s instructions and in the latter’s sole interest. It was intended that Mr. Y would reimburse Mr. X for all expenses incurred in connection with the Trust Agreement. Finally, there was an arbitration clause.

In September 2000, Mr. X paid CHF 20,000 for the subscription of his own shares and CHF 80,000 for the subscription of Mr. Y’s shares.

Subsequently, he provided shareholder loans to ARIC.

Since ARIC was placed in compulsory liquidation in 2004, Mr. X claimed from Mr. Y the sum of CHF 80,000 and 80% of all payments he had made to ARIC.

On 30 September 2004, he initiated arbitration proceedings for payment of these sums.

On 29 May 2006, Mr. Z, sole arbitrator, rendered an award in Geneva condemning Mr. Y to pay Mr. X the sum of CHF 1,381,481.25 with interest at the rate of 5 % from 16 August 2004, in addition to CHF 80,500 in arbitration costs.

This award was granted enforcement (in French: Exequatur) by an order of the Lyon Tribunal judge (in French: President du Tribunal de Grande Instance de Lyon) dated 4 September 2006, against which Mr. Y appealed.

The Lyon Court of Appeal upheld the enforcement order (in French: Ordonnance d’exequatur) in a decision dated 17 January 2008, which was overturned by the Court of Cassation on 6 July 2011 on the grounds that the contested decision held that the arbitrator had referred to the common intention of the parties to determine the contractual scope of the contract, enabling it to rule, could not be considered either as the absence, even partial, of an arbitration agreement or as a breach of the obligation to comply with its mission.

Thus, since the arbitrator found that article 4 of the contract referred only to expenses in the exercise of the trustee’s mandate and that, according to the letter of the contract, that mandate referred only to the subscription of shares, the result was that the arbitrator ruled without an arbitration agreement for the surplus of claims, the court [violated] article 1502-1 of the code of civil procedure'.

The Grenoble Court of Appeal, ruling on a referral to the Supreme Court of Appeal, in a decision of 3 March 2015, held that the arbitration agreement only concerned the subscription of shares, that the arbitrator had ruled on the other claims without an arbitration agreement and that in the absence of a subsidiary application for partial reversal of the order made, it should be reversed in full.

This judgment was overturned on 4 January 2017 on the grounds that the respondent had failed to reply to the estoppel defence.

The Paris Court of Appeal, designated as the referring court, was petitioned by declaration of 1 March 2017.

By submissions notified on 7 September 2018, Mr Y requested the court to dismiss Mr X’s objections (in French: Fins de non-recevoir), to overturn the disputed order, to rule that the award of 29 May 2006 was not enforceable and to order the respondent to pay him the sum of EUR 120,000 pursuant to Article 700 of the Code of Civil Procedure. He claims the absence of an arbitration agreement and maintains that the fact of not having appeared at the arbitration cannot be analysed as a waiver of the right to invoke this complaint.

By submissions notified on 3 December 2018, Mr. X requests the court, principally, to note that the opposing party has waived the violation of international public policy and of the principle of adversarial proceedings and waived the right to have the award and the order for its enforcement declared null and void, to find that by voluntarily refusing to appear in the arbitral proceedings, Mr. Y has waived the right to challenge the validity of the award and its recognition. He also requests a declaration that Mr. Y’s challenges are inadmissible and that the order undertaken must therefore be confirmed.

In the alternative, Mr. X requests that the claims be declared inadmissible, that the arbitration clause is valid and that the conditions for appealing against the enforcement order are not met.

Finally, Mr. X requests that the enforcement order (in French: Ordonnance d’exequatur) be confirmed, that Mr. Y acknowledges that he is liable for the sum of CHF 80,000 corresponding to 80% of the amount of the subscription to the capital of the ARIC company, that the order be confirmed on this point, and that the claims of the opposing party be rejected and that it be ordered to pay EUR 200,000 in damages for improper resistance, CHF 25,800 and EUR 55,000 for legal advice, as well as the additional sum of EUR 150,000 in respect of further legal costs.

UPON WHICH:

On the complaint (in French: Fin de non-recevoir) based on estoppel:

Mr. X maintains that Mr. Y’s deliberate refusal to appear at the arbitration despite the fact that he had received all the documents of the proceedings served to preserve the grounds for annulment and to have time to organise his insolvency. Such behaviour, as well as the concealment of the curatorship to which he was subject, constitute unfair procedural behaviour, characteristic of estoppel, which renders the claimant’s claims inadmissible.

Mr. Y replied that the rule of estoppel is not opposable to the party that did not participate in the arbitration.

Estoppel is an unfair procedural behaviour of a party that contradicts itself to the detriment of its opponent.

The estoppel shall be assessed on the basis of the grounds invoked.

Contrary to what the respondent claims, there is no contradiction between deliberately refusing to participate in the arbitration - which is a way of denying the jurisdiction of the arbitral tribunal - and appealing the order for enforcement of the award based on a ground that the arbitrator exceeded the terms of the arbitration agreement.

The claimant’s organisation of its insolvency, if it is proved, is a circumstance external to the arbitral proceedings which cannot be upheld under the estoppel.

As to the fact that Mr. Y concealed the fact that he was under guardianship (in French: Curatelle), it is irrelevant, since the claimant does not rely on that incapacity as a basis for his appeal.

Moreover, Article 1466 of the Civil Procedure Code, which presumes that a party which, knowingly and without a legitimate reason, fails to object to an irregularity before the arbitral tribunal in a timely manner shall be deemed to have waived its right to avail itself of such irregularity.

Consequently, it is appropriate to dismiss the ground (in French: Fin de non-recevoir) based on estoppel or on Article 1466 of the Code of Civil Procedure.

On the sole ground alleging the absence of an arbitration agreement (Article 1502-1 of the Code of Civil Procedure in its then applicable wording, now 1520-1):

Mr. Y maintains that the trust agreement in which the arbitration clause was inserted mandated Mr. X only to subscribe for 80 shares of the ARIC company on his behalf and not to provide shareholder loans to the company, that, therefore, for the counts of condemnation exceeding CHF 80,000, the award was made without an arbitration agreement.

Mr. X replied that under Swiss law, in respect of which the arbitration clause must be interpreted, the search for the common intention of the parties prevails over the letter of the contract and that, in this case, the purpose of the fiduciary-surety contract was to create a company whose profits and losses would be distributed according to the 80/20 ratio, so that the real will of the parties was to go beyond the mere acquisition of shares and also to cover the management of the company on behalf of Mr. Y.

The enforcement judge (in French: Juge de l’exequatur) reviews the decision of the arbitral tribunal on its jurisdiction, whether it has declared itself to have jurisdiction or not, by looking for all the elements of law or fact that make it possible to assess the scope of the arbitration agreement and to deduce the consequences on the respect of its mission entrusted to the arbitrators.

The arbitration clause is legally independent of the main contract containing it, so that the existence and effectiveness of the clause can be assessed, subject to the mandatory rules of French law and public international policy, according to the common intention of the parties, without the need to refer to a State law.

In the present case, the trust agreement concluded on 25 September 2000 provides that Mr. X will exercise, on the 80 ARIC shares subscribed for on behalf of Mr. Y, the ownership rights for the account and at the risk of the latter, and that he will exercise the voting rights in accordance with the instructions of the trustee. The latter undertakes to reimburse the trustee for the costs and expenses incurred in the exercise of its mandate. It is provided that ‘Any dispute arising out of this Agreement shall be submitted to arbitration in accordance with the rules of the Chamber of Commerce and Industry of Geneva. The seat of the arbitral tribunal shall be in Geneva’.

The sole arbitrator ruled on its jurisdiction in the following terms:

“The arbitration clause covers disputes ‘arising out of this contract’. The term ‘arising out of’ is restrictive, so the clause does not cover disputes which are peripheral to the contract. If the parties’ agreement on a general distribution of profits and risks in the 80-20 ratio were considered as a related agreement (which would have been the subject of a separate side letter), the dispute relating to this agreement would not be covered by the arbitration clause.

The arbitrator considers, however, that such a construction would be rather artificial and that it is more natural to consider that the parties are bound by a single global contract, with the tacit agreement of the parties constituting a supplement remaining an integral part of the written contract. Consequently, the jurisdiction of the sole arbitrator, based on the written clause, extends to disputes arising from the agreement of the parties which have not been recorded in the written contract, and therefore to the present dispute.”

Consequently, the arbitrator accepted the claims presented by Mr. X corresponding to 80%:

• of the capital subscription (CHF 100,000),
• an advance granted for the constitution of the initial stock (CHF 1,592,152),
• CHF 4,778, CHF 40, CHF 2,636.20 and CHF 7,284.95 in advances granted in July-August 2004.

It follows, however, from the clear and precise terms of the contract, which expresses the common will of the parties without any need for interpretation according to national law, that the trust agreement only gave Mr. X a mandate to subscribe for the shares, so that the arbitrator ruled without an arbitration agreement on claims relating to the expenses incurred in running the company.

It is therefore appropriate to overturn the order undertaken, but only in so far as it renders enforceable the damages ordered by the award in excess of CHF 80,000.

On the claim for damages for abusive resistance:

In view of the meaning of the judgment, this claim will be dismissed.

On the claims made pursuant to Article 700 of the Code of Civil Procedure:

Mr. X, who is unsuccessful, cannot benefit from the provisions of Article 700 of the Code of Civil Procedure and on this basis will be ordered to pay Mr. Y the sum of 10,000 euros.

FOR THESE REASONS:

Confirms the order of the First Instance Lyon Tribunal judge (in French: Président du Tribunal de Grande Instance de Lyon) dated 4 September 2006 in that it conferred enforcement (in French: Exequatur) to the order to pay the sum of 80,000 CHF pronounced against Mr. Y in favour of Mr. X by the sentence handed down in Geneva on 29 May 2006.

The remainder of the award is annuled.

Dismisses the claim for damages for improper resistance.

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, and to pay Mr. Y the sum of 10,000 euros pursuant to Article 700 of the Code of Civil Procedure