Paris Court of Appeal, No. 17/10639

Paris Court of Appeal, Pole 1 - First Chamber, 10 September 2019, No. 17/10639

GEMSTREAM vs.
VISIONAEL CORPORATION INC

On 23 December 2006, VISIONAEL CORPORATION (Visionael) entered into a three-year contract with Mr. A X, who was in charge of promoting Visionael’s activities in France and the Benelux countries in return for remuneration. This contract was governed by the law of the State of California and included an arbitration clause. In 2007, the company Valuefirst, which became GEMSTREAM (Gemstream) after its creation by Mr. X, was assigned Mr. X’s obligations. A new contract was concluded between the parties on 5 March 2007 (the March 2007 contract) on the same terms as the original contract. Gemstream sought to perform a contract signed subsequently on 3 September and 1 October 2007 (the October 2007 contract), which Visionael disputed. On 13 November 2009, Gemstream informed Visionael of its decision not to renew the contract as of 1 January 2010 and requested payment of arrears.

Decisions were issued by the domestic courts in disputes between Gemstream and Visionael from 2010 to 2015. Among these, a decision of the 1st Civil Chamber of the Court of Cassation dismissed on 14 January 2015 the appeal (no. 13-23.806) brought by Gemstream against the Versailles Court of Appeal’s decision of 27 June 2013 which confirmed the Versailles Commercial Court’s decision of 7 November 2012 declaring that it did not have jurisdiction and referring to the arbitral tribunal.

In October 2015, Gemstream initiated the arbitration proceedings on the basis of the arbitration clause contained in the contracts, requesting the arbitral tribunal, as a principal claim, to declare that it did not have jurisdiction and, in the alternative, to order Visionael to pay it the sum of EUR 366,691.35 in damages. Visionael made counterclaims for damages.

In a decision entitled “Award regarding jurisdiction” issued on 18 October 2016, Mr. B C, sole arbitrator, stated that “The October 2007 contract was never concluded by the parties… The March 2007 contract is the contract that governs the relationship between Gemstream and Visionael. Article 9 of the March 2007 contract governs the resolution of disputes relating to this contract. This arbitral tribunal remains in charge of all future actions between the parties relating to the March 2007 contract.”

By an award of 2 May 2017, corrected by an award of 29 May 2017, the sole arbitrator, Mr. B C:

• ordered Visionael to pay Gemstream the sum of 70,000 euros by way of compensation corresponding to the unilateral reduction in monthly remuneration
• ordered Gemstream to pay Visionael the sum of 139,259 euros in respect of Gemstream’s breach of the March 2007 contract by instituting proceedings before the French courts,
• ordered Gemstream to pay to Visionael the sum of 74,656 euros for its legal fees, court costs and other expenses incurred in the arbitration,
• Ordered Gemstream to pay Visionael the principal sum of 143,915 euros, after compensation.

Gemstream filed an action for setting aside the award of 2 May 2017 registered under No. RG 17/10639 and another action for setting aside the corrected award of 29 May 2017 registered under No. RG 17/12354.

By two orders issued on 11 January 2018, the Pre-trial judge stopped the enforcement of these two awards.

In its final submissions notified on 11 April 2019, Gemstream requests the court to set aside the awards of 2 and 29 May 2017 and to order Visionael to pay it the sum of EUR 15,000 pursuant to Article 700 of the Code of Civil Procedure, in addition to the costs.

In its final submissions notified on 22 May 2019, Visionael requests the court to dismiss the claims of Gemstream, to order Gemstream to pay it the sum of EUR 10,000 pursuant to Article 559 of the Code of Civil Procedure and EUR 30,000 pursuant to Article 700 of the Code of Civil Procedure, in addition to the costs.

UPON WHICH,

On the consolidation,

It is in the interest of the good administration of justice to consolidate the cases registered under RG 17/10639 and RG 17/12354.

On the application to set aside the corrected award

It is not disputed by the parties that the arbitration is international.

On the first ground for annulment based on the fact that the arbitrator wrongly stated that he had jurisdiction (Article 1520-1 of the Code of Civil Procedure):

Gemstream claims that the arbitral tribunal wrongly ruled that it had jurisdiction, firstly, because only the Paris Commercial Court should have been aware of the claims made by Visionael for costs incurred before the French courts, which were unrelated to the arbitration clause and the October 2007 contract and, secondly, because the arbitral tribunal failed to apply the provisions of the contract of 3 September 2007, which did not contain an arbitration clause.

Visionael replied that this ground of appeal is inadmissible because it disregarded the res judicata effect of the arbitrator’s award on jurisdiction issued on 18 October 2016 against which Gemstream did not file any application to set aside the award.

On the first part of the ground,

Gemstream asserts that this ground of appeal is admissible in because it could not know before the arbitrator of a judgment of this court (Paris Court of Appeal, Pole 1 ' First Chamber, 13 November 2018, No. RG16/16608, “Shackleton judgment”) which held that the arbitrator did not have jurisdiction to hear claims relating to legal costs arising, not from the contract, but from the various court proceedings in which they were incurred.

However, Article 1466 of the Code of Civil Procedure, which is applicable to international matters under Article 1506(3) of the same Code, provides 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”.

Far from claiming that the arbitrator lacked jurisdiction to hear claims relating to costs incurred before the domestic courts, Gemstream brought its own claim for damages before the arbitral tribunal for legal costs incurred before the French courts as soon as it filed its request for arbitration and upheld this claim in its statements on the merits.

Moreover, it was possible for Gemstream to raise such a ground before the arbitrator, even if the court of appeal only had the opportunity to rule expressly on this issue after the award.
The ground, in its first part, is therefore inadmissible.

On the second part of the ground,

According to Article 1484, paragraph 1, of the Code of Civil Procedure, made applicable to international arbitration by reference to Article 1506, 4° of the same code, “As soon as it is made, an arbitral award shall be res judicata with regard to the claims adjudicated in that award”.

Arbitral awards are the acts of arbitrators who decide definitively, in whole or in part, the dispute submitted to them, whether on the merits, on jurisdiction or on a procedural matter which leads them to terminate the proceedings.

In a decision entitled “Award regarding jurisdiction” issued on October 18, 2016, Mr. B C, sole arbitrator, held that “The October 2007 contract was never concluded by the parties. The March 2007 contract is the contract governing the relationship between Gemstream and Visionael. Article 9 of the March 2007 contract governs the resolution of disputes relating to this contract. This arbitral tribunal remains in charge of all future actions between the parties relating to the March 2007 contract.”

This decision, which definitively settled the points on the merits, i.e., the applicable contract between the parties and the jurisdiction of the arbitrator, has the force of res judicata.

Since Gemstream was served with the award, it was entitled to bring an action for setting aside the award within one month of service, i.e. by 18 November 2016 at the latest, which it failed to do. This award is therefore final.

The ground of appeal in its second part is inadmissible.

On the second ground, claiming that the arbitrator failed to comply with his mission (Article 1520-3 of the Code of Civil Procedure):

Gemstream asserts that the arbitral tribunal ruled without complying with its mission by ruling ultra petita on the costs incurred before the French domestic courts, whereas the arbitration agreement limited the subject matter of the dispute to the sum of 370,000 euros, that the proceedings before the French courts concerned only the October 2007 contract and not the March 2007 contract for which the arbitrator had declared himself to have sole jurisdiction, that the arbitration agreement provided that each party would bear its own costs and legal fees and that Article 10 of the March 2007 contract excluded any compensation for damages.

Visionael replied that this ground of appeal was not admissible before the court hearing the action for setting aside the award because it had not been raised before the arbitrator and that, in any event, the arbitrator had complied with his mission.

According to Article 1466 of the Code of Civil Procedure, applicable in international cases under Article 1506, 3° of the same code, “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”.

The corrected award of 29 May 2017 states that, in addition to claims Nos. 1 to 4, which total EUR 132,361.67, “Claimant [Gemstream] also submitted a request for costs. This includes a claim of EUR 30,316.98 relating to this arbitration and a claim of EUR 34,974 relating to the earlier French dispute” (corrected award p. 7 §§ 3 and 4).

Contrary to the claim of Gemstream that Visionael did not submit any counterclaim before the arbitrator, Visionael indicated as early as 25 March 2016 in its Answer to the Request for Arbitration that it would request damages “to cover the legal costs incurred by Visionael before the French courts as a result of Gemstream’s breach of the arbitration clause, for an amount yet to be determined”, which constituted a breach of the March 2007 contract (Answer to Visionael’s Request for Arbitration p. 7 §34).

The corrected award of 29 May 2017 adds that " Visionael also submits a counterclaim for breach of the arbitration agreement contained in the March 2007 Contract. The argument of Visionael is that Gemstream violated the arbitration agreement contained in the March 2007 Contract by submitting a series of claims before the French courts. This breach would in turn entitle Visionael to recover the attorney’s fees, court costs and related expenses it incurred in opposing Gemstream’s claims before the French courts. The amount claimed is 139,258.97 euros" (corrected sentence p. 8 §3).

As a result, the mission of the arbitrator relating to the legal costs incurred before the French courts has never been challenged before him, so that Gemstream cannot claim this ground under Article 1466 of the Code of Civil Procedure.

The third ground alleging a violation of due process (in French: Principe de contradiction) (Article 1520-4 of the Code of Civil Procedure):

Gemstream argues that the arbitral tribunal failed to comply with due process (in French: Principe de contradiction) by ruling on the claims for costs of the proceedings before the French courts which were only submitted by Visionael shortly before the closing order, without the arbitral tribunal sanctioning this breach of the duty of loyalty.

Visionael asserts that this ground, which was not raised before the arbitrator, is not admissible and that in any event it is unfounded.

The arbitrator, who had no obligation to first submit his reasons to an adversarial debate between the parties, based his belief only on the grounds and evidence submitted to him by the parties in order to grant the application made by Visionael for the costs of the proceedings before the French courts.

Contrary to the assertion of Gemstream, the counterclaim made by Visionael for costs incurred before the French courts was not submitted late, just a few days before the closing date. Indeed, as early as 25 March 2016 in its Answer to the Request for Arbitration, Visionael indicated that it would request damages to “cover the legal costs incurred by Visionael before the French courts as a result of the breach of the arbitration clause by Gemstream, for an amount yet to be determined”, which constituted a breach of the March 2007 contract (Answer to the Request for Arbitration by Visionael p. 7 §34). Although the amount claimed in this respect was determined by the statement of claim filed by Visionael on 24 February 2017, Gemstream was aware of the existence of this claim as early as 25 March 2016.

Gemstream was granted by Procedural Order No. 6 of 7 March 2017 to reply to the statement of claim of 24 February 2017 but refrained from alleging any violation of the contradiction relating to this counterclaim in its statement of reply addressed to the arbitrator on 20 March 2017.

On the fourth ground alleging violation of international public policy (Article 1520-5 of the Code of Civil Procedure)

Gemstream argues that the award, in so far as it awarded EUR 139,259 to Visionael as compensation for the procedural costs incurred by Visionael in proceedings prior to the arbitration, is contrary to international public policy because, on the one hand that it would be incompatible with French court decisions ruling on counsel and procedural costs in respect of compensation awarded on the basis of Article 700 of the Code of Civil Procedure and, on the other hand, that it would be contrary to the principle of good faith and the right to fair trial established by the European Convention on Human Rights and the Covenant on Civil and Political Rights.

On the first part of the ground:

Gemstream argues that the decisions of the French courts ruled on legal and procedural costs relating to actions prior to arbitration and that the arbitrator could not, without making an incompatible award with decisions ruling on compensation under Article 700 of the Code of Civil Procedure, award compensation for such costs.

However, only the recognition or enforcement of the award is examined by the annulment judge with regard to the compliance of its solution with this public policy, whose review is limited to the manifest, effective and concrete nature of the alleged violation.

The incompatibility of the disputed award with another decision may constitute a manifest, effective and concrete violation of international public policy. Decisions are incompatible when they entail legal consequences which are mutually exclusive.

Before the arbitral tribunal, Visionael claimed, on the basis of the breach by Gemstream of its obligation to initiate arbitration resulting from the March 2007 contract, the difference between the legal costs it had to incur before the French courts in the amount of approximately 150,000 euros, and the sums already awarded by the French courts for an amount of 10,500 euros.

In its award, the arbitral tribunal held that “The provisions of the March 2007 Contract clearly require that all disputes be settled through arbitration. Gemstream breached this arbitration agreement contained in the March 2007 Contract by initiating proceedings before the French courts. Visionael claimed 139,258.97 euros in relation to this dispute in addition to the amounts awarded by the French courts (10,500 euros). Visionael would not incur these costs in the absence of a breach of the March 2007 Contract by Gemstream. The Arbitral Tribunal examined the corresponding invoices and found them to be reasonable. 139,259.97 is awarded to Visionael as damages for the breach of the March 2007 Contract by Gemstream” (Award p14 §1).

The financial penalty awarded by the arbitrator for the breach of the March 2007 Contract by Gemstream does not entail any legal consequences that would exclude the legal consequences of Gemstream’s convictions by the French courts under Article 700 of the Code of Civil Procedure.

In fact, under the guise of incompatibility, the ground alleges that the award disregarded the res judicata effect of the decision of the domestic courts, even though this rule is not of international public policy, except in the context of the same proceedings.

Consequently, the award does not result in any manifest, effective and concrete violation of international public policy.
The ground must be set aside.
The ground is unfounded.

On the second part of the ground:

Gemstream claims that the award is contrary to the principle of good faith and procedural fairness since Visionael made a claim in the amount of 139,250 euros after twenty months of arbitration proceedings and two months before the award was issued, even though it was fully aware from the outset of the arbitration proceedings of the procedural costs it had incurred between 2010 and 2014.

However, since Visionael filed this claim in its statement of defence to the Request for Arbitration and set the amount in its statement of defence of 24 February 2017, to which Gemstream was allowed to reply in accordance with Procedural Order No. 6, no breach of the principle of good faith or procedural fairness is found to have occurred. The ground is in fact lacking.

On the third part of the ground:

Gemstream argues that the court violated the principle of a fair trial by failing to consider a written expert opinion, by dismissing an application for delay and by failing to take into account the faults committed by Visionael which it nevertheless found.

But the arbitration in question was issued in law and not in equity. This ground challenges the reasoning followed by the arbitrator in holding that only the March 2007 contract was applicable between the parties according to a final award, that a claim by Gemstream had to be dismissed as late and that the breaches alleged against Visionael did not lead to an award against him. Under the allegation of a violation of international public policy, it seeks a review of the merits of the award, which is not permitted by the annulment judge. It must therefore be set aside.

It follows from the foregoing that the appeal must be dismissed.

On the civil fine

There is no civil fine.

On Article 700 of the Code of Civil Procedure

The claimant cannot benefit from the provisions of Article 700 of the Code of Civil Procedure and will be ordered to pay Visionael the sum of EUR 30,000 on that basis.

FOR THESE REASONS,

Orders the consolidation of the file registered under No. RG 17/12354 with the file registered under No. RG 17/10639,

Dismisses the application to set aside the award,

Orders the company VALUEFIRST operating under the brand name Gemstream to pay the costs and to pay the company VISIONAEL CORPORATION the sum of 30,000 euros in application of article 700 of the code of civil procedure,

Dismisses all other requests.