Paris Court of Appeal, No. 17/07210

Paris Court of Appeal, Pole 1 - First Chamber, 21 May 2019, No. 17/07210

Challenged decision: Paris Tribunal of Grande Instance, 13 February 2017

Decision referred to the Court: Order of Paris Tribunal of Grande Instance judge (in French: Président du Tribunal de Grande Instance de Paris) of 13 February 2017 which declared enforceable an award rendered in New York (State of New York, United States) on 8 December 2016, by the arbitral tribunal composed of Mr. C J. E F, sole arbitrator.

Mr. A X and Mr. B Y
vs.
SUBWAY INTERNATIONAL BV

On 30 November 2011, 24 April and 3 September 2014, Mr. A X and Mr. B Y concluded three franchise agreements with the Dutch company Subway International BV (hereinafter SIBV) for the operation of three restaurants located in Vandoeuvre les Nancy (nos. 45843 and 54638) and […]. The Verdun restaurant closed on 19 December 2015. These agreements provided for the application of Liechtenstein law and the resolution of disputes through arbitration in New York.

Alleging failure to operate the restaurants in accordance with the agreements and non-payments, SIBV notified them of the termination of the contracts and the initiation of arbitration proceedings on 23 February 2016.

In an award issued in New York (State of New York, United States) on 8 December 2016, the arbitral tribunal composed of Mr. C J E F, sole arbitrator, ruled, inter alia, that:

• Contracts No.45843, No.53033, No.54638 are terminated on the date of the award,
• The defendants are jointly and severally liable to pay EUR 49,213.44 to the claimant, composed of royalties in the amount of EUR 32,169.01 and advertising costs in the amount of EUR 17,044.43,
• The Defendants shall be jointly and severally liable to the Claimant for the administrative costs and expenses incurred in the arbitration in the amount of US$ 900 for the administrative costs and expenses of the Arbitration Centre and US$ 8,791 for the remuneration of the Arbitrator,
• The defendants shall cease and desist from using the SUBWAY trademark under penalty of 175 euros per day of delay and per restaurant,
• The defendants are prohibited, for a period of one year, from directly or indirectly exercising a sandwich shop activity other than that benefiting from a SUBWAY licence, under penalty.

This award was declared enforceable by an order (in French: Ordonnance d’exequatur) of the first instance judge (in French: President of the Paris Tribunal de Grande Instance) of 13 February 2017, against which Mr X and Mr Y appealed on 4 April 2017.

In their last submissions notified on 10 January 2019, Messrs. X and Y requested the court to order a stay of proceedings until the decision to be taken by the Paris and Nancy Commercial Courts, to declare that the arbitral tribunal did not have jurisdiction to rule, to overturn the order, to refuse the enforcement of the award (in French: Exequatur), to order SIVB to pay them the sum of 6,000 euros under Article 700 of the Code of Civil Procedure, in addition to costs paid by the counsels.

In its final submissions notified on 11 January 2019, SIVB requested the court, in limine litis, to reject the claimants' application for a stay of proceedings, on the merits, to uphold the order and to order Mr X and Mr Y jointly and severally to pay it the sum of EUR 64,000 pursuant to Article 700 of the Code of Civil Procedure, in addition to the costs, jointly and severally, paid by the counsels.

At the hearing on 14 March 2019, SIVB stated that it requested the sum of EUR 6,000 under Article 700 of the Code of Civil Procedure.

UPON WHICH:

On the application for a stay of proceedings (in French: Demande de sursis à statuer):

Mr. X and Mr. Y claim, firstly, that on 15 June 2017 they served SIBV with a writ of summons before the Nancy Commercial Court 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. Secondly, they claim that the Minister of the Economy and Finance also served SIBV with a writ of summons before the Paris Commercial Court on the basis of Article L. 442-6 III of the Commercial Code to declare various clauses of the Subway franchise agreements null and void, in particular the arbitration clause and to order SIBV to cease inserting these clauses and to pay a civil fine of EUR 2,000,000. The claimants claim that the court shall stay the proceedings until such time as these courts issue their decisions insofar as they claim the nullity of the arbitration clause.

But, first of all, according to article 1448 of the Code of Civil Procedure: “When a dispute subject to an arbitration agreement is brought before a court, such court shall decline jurisdiction, except if an arbitral tribunal has not yet been seized of the dispute and if the arbitration agreement is manifestly void or manifestly not applicable”.

The arbitration clause of the Franchise Agreement provides that: “unless otherwise agreed in this Agreement, any dispute arising out of this Agreement shall be submitted exclusively to arbitration organised in accordance with the Arbitration Rules of the United Nations Commission on International Trade Law (UNCITRAL) and under the supervision of the International Centre for Dispute Resolution (ICDR)”.

As the arbitral tribunal was appointed on 7 June 2016, the action brought by Messrs. X and Y on 15 June 2017 before the Nancy Commercial Court for the annulment of this clause cannot have any influence on the appreciation of the jurisdiction of the arbitral tribunal.

The validity of the arbitration clause and, consequently, that of the arbitrator’s jurisdiction, can only be examined post facto by this court during the review of the order of enforcement of the award (in French: Ordonnance d’exequatur) on the basis of Article 1520-1 of the Code of Civil Procedure.

There is therefore no reason to stay the proceedings until the decision of the Nancy Commercial Court.

Secondly, 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 aims at the termination of certain commercial practices and the imposition of a civil fine. Both by its object, which does not call into question the validity of the arbitration clause but only the choice of English as the language of arbitration and the applicable law, and by its basis in pure domestic law, this instance is not likely to influence the review made pursuant to Article 1520 of the Code of Civil Procedure with respect to an award issued abroad.

The application for a stay of proceedings will be dismissed.

On the ground that the arbitral tribunal lacks jurisdiction:

Messrs. X and Y argue that the arbitration clause provides for arbitration in New York, which gives rise to exorbitant procedural costs when the franchisee is no longer able to pay its royalties, and that the clause therefore has the effect of depriving the franchisee of its right of action. They add that the franchise agreement as a whole creates a significant imbalance in the commercial relationship to the advantage of the franchisor.

SIBV replies that Messrs. X and Y, who did not raise this ground before the arbitrator, are not admissible to raise it for the first time before the court. On the merits, it argued that the cost of the arbitration is moderate and that the allegation of imbalance of the contracts, if proven, will have no effect on the arbitration clause because of the autonomy of the latter.

Firstly, under the terms of Article 1466 of the Code of Civil Procedure: “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.”

However, a party’s waiver to raise an irregularity must be judged in the light of its behaviour during the arbitration proceedings. In the present case, Mr. X and Mr. Y did not take any part in the arbitration proceedings. It cannot be inferred from their failure that they waived their right to invoke the lack of jurisdiction of the arbitral tribunal. The ground is therefore admissible.

Secondly, the significant imbalance in the commercial relationship which, according to Mr X and Mr Y, results from the economy of the franchise agreement, assuming that it is contrary to international public policy, has no effect on the validity of the arbitration clause because of its autonomy from the contract containing it.

Thirdly, the arbitration proceedings were initiated by SIBV, which advanced the costs of the arbitration, and it is common ground that the cost of the arbitration proceedings amounted to US$ 9,691.

On the one hand, while Mr. X and Mr. Y claim that they should have paid between 20,000 and 80,000 Euros to defend themselves, they do not produce any evidence to support this claim, nor any denial of SIBV’s allegation that the proceedings could have been conducted in writing without the need for counsel to travel, which is the result of the rest of the award’s own statements.

On the other hand, the appellants do not provide any information about their financial situation at the time of the arbitration, i.e. in the course of 2016.

In the absence of any factual basis, the ground, in that it alleges deprivation of the right of access to the judge, cannot be established.

It follows from the foregoing that the ground alleging the lack of jurisdiction of the arbitral tribunal must be dismissed.

On the ground that the principles of due process and equality of arms have been violated:

Mr X and Mr Y claim that those principles were violated insofar as all the procedural documents were notified to them in English without translation, with the exception of a letter dated 31 August 2016.

The fact that the arbitration took place in English, even though it is not the claimants' mother tongue, cannot be regarded as a failure to comply with the principles of due process and equality of arms since it was chosen by the parties in a commercial relationship of an international nature and reasonable procedural time limits in view of the complexity of the case were set for the hearing of the case. In the present case, the award states that Messrs. X and Y were notified on 26 February 2016 of the filing of the Request for Arbitration and were notified on 7 June 2016 of the appointment of the arbitrator by the Arbitration Centre and on 1 July 2016 of a procedural timetable.

The ground must therefore be dismissed.

On the ground alleging a violation of international public policy:

Mr X and Mr Y claim that the principle of international public policy of good faith in the performance of agreements is violated by the recognition of an award issued in favour of SIBV when the latter acted unfairly, in particular by failing to implement mediation prior to arbitration, by allowing 15 to 18 months to elapse, depending on the contract, between its termination and the suspension of supplies and by continuing during that period to monitor compliance with contractual obligations.

However, this ground questions the interpretation and performance of the contract. Under the guise of an allegation of a violation of international public policy, it aims at a review of the merits of the award, which is not possible for the enforcement judge (in French: Juge de l’exequatur). It must therefore be dismissed.

It follows from all the foregoing that the enforcement order (in French: Ordonnance d’exequatur) must be confirmed.

On Article 700 of the Code of Civil Procedure:

Equity does not require that Article 700 of the Code of Civil Procedure be applied to any of the parties.

FOR THESE REASONS,

Dismisses the application for a stay of proceedings.

Upholds the enforcement order (in French: Ordonnance d’exequatur).

Orders in solidum Messrs X and Y to pay the costs which may be recovered in accordance with the provisions of Article 699 of the Code of Civil Procedure.

Dismisses all other applications.