Scope of the arbitration clause signed by a parent company as regards facts alleged against one of its subsidiaries / French law / Literal application of the agreement to arbitrate / Principle of the immutability of the dispute / Nonextension to a third party of the consequences of the agreement to arbitrate / The subsidiary as a legal entity separate from the parent company / Lack of legal identity of a group of companies

The dispute involves two French companies, ABA (Claimant) and ZLZ France (Defendant). ABA had obtained front a subSaharan African country the permits needed to operate there on a permanent basis. To develop its activities in that country, ZLZ France, represented by Mr. X, manager of ZLZ South America, a subsidiary of ZLZ France, initiated discussions with the management of ABA on closer commercial and industrial cooperation. These negotiations led in 1985 to the creation of a joint venture. The latter's articles of association were signed only by ABA and ZLZ France. ZLZ South America, though having an interest in all future activities of the joint venture, was not a party to it. As a result of numerous difficulties that arose shortly after its creation, the joint venture was dissolved. ABA then claimed from ZLZ the payment of the amounts due on account of the dealings of both ZLZ France and ZLZ South America. Conversely, ZLZ France claimed from ABA the payment of the sums due on account of the losses suffered by it and by its subsidiary ZLZ South America.

'Article 17 of the articles of association of the joint venture provides for the settlement of disputes through arbitration, as follows:

"This agreement is governed by French law.

"Any dispute in connection with the present contract shall be finally settled under the Rules of Arbitration of the International Chamber of Commerce by one or more arbitrator(s) appointed in accordance with these Rules. The arbitrator shall have his seat in Paris. The arbitrator will be empowered to act as amiable compositeur and he shall make a final decision without appeal, without having to comply with French substantive or procedural law."

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Reply to question No. 1 of the Arbitrator's terms of reference

What is the scope of the arbitration clause included in the articles of association of the joint venture?

Which counts of the claim come within its field of application?

The provisions of an arbitration clause should be applied literally and interpreted strictly.

As stressed by the Cour de Cassation in its decision of May 6, 1956, Coutant v. Coterel, whenever a clause submits to arbitration only disputes related to the articles of association "arising either between the partners, or between the latter and the management, or between the management and the board", such a clause does not cover actions instituted by the company itself against its former manager, an entity distinct from the partners.

The arbitrators' jurisdiction is exclusively determined by the agreement to arbitrate drawn up between the Parties.

As defined by Mr. Ph. Level, it is "limited to what the parties to the dispute have jointly decided to withdraw from the jurisdiction of the courts".

Furthermore, under French law, the arbitrator must, even when he is empowered to act as amiable compositeur, like an arbitrator ruling in accordance with the law, uphold the principle of the immutability of the dispute.

He cannot, on his own authority, extend his terms of reference to issues not submitted to him in the agreement to arbitrate.

The immutability of the dispute, a consequence of the mandatory nature of the agreement to arbitrate, prevents the arbitrator from ruling either infra or ultra petita, or from taking the initiative to amend in any way the agreement to arbitrate, arbitration clause or compromise.

Similarly, the arbitrator cannot change the Parties to the arbitration, the claims submitted within the framework of the arbitral agreement, or the object or the grounds on which the claims are based.

The Parties must in the agreement to arbitrate, whether or not ex aequo et bono, specify clearly the contents and limits of the arbitrator's jurisdiction.

According to Article 1448, para. 1, of the Code de procédure civile, the arbitral agreement must, to avoid being declared null and void, identify the subject of the dispute.

To determine the subject of the dispute, the arbitrator must rely exclusively on the wording of the arbitral agreement.

The power to act as amiable compositeur does not affect the subject of the dispute.

The arbitral agreement which vests the arbitrator with his or her authority can affect only the signatories of the arbitral agreement (Cassation, Chambre commerciale, Nov. 15, 1978).

Ignoring these fundamental principles of arbitration could only lead to the award being declared null and void for having violated public policy as defined in Articles 1442, 1448 para. 1 and 14486 of the Code de procédure civile.

ZLZ South America is a limited liability company incorporated under the law of [South American country] and headquartered in [city of South American country].

The private agreement of March 9, 1978 creating the company and establishing its articles of association was signed by Messrs. Pierre ZLZ, Paul ZLZ and Jacques ZLZ.

These articles were drawn up by Notary ... and legalized on ... by the XIth Office of authenticated deeds in [city of South American country].

The said contract was also registered on ... by the Commercial Court of the State of [in South American country] under No. ... and with the signature of the Secretary General of that Court.

Though the stock was entirely purchased by Messrs. Pierre ZLZ, Paul ZLZ and Jacques ZLZ, and though Paul ZLZ is the Managing Director and has the broadest possible powers, ZLZ South America is nevertheless a legal entity totally separate from ZLZ France.

The latter, in fact, is a public company under French law, with its main office in ... and registered in the Registre du Commerce et des Sociétés of ...

The excerpt from the registration of ZLZ France in the abovementioned Registre du Commerce does not mention any subsidiary establishment operated either under or outside of its jurisdiction.

Although ZLZ South America is a subsidiary of ZLZ France presented as such in the publicity and "identity card" of ZLZ France, and although, as such, it is part of the ZLZ Group, it is still under French law a separate legal entity distinct from each of the other companies in the group, and the group itself cannot claim to be a separate legal entity.

The separate legal identity of the subsidiary, as defined by Article 354 of the law of July 24, 1966, is summed up in the Encyclopédie DALLOZ "Sociétés" Vème, Subsidiaries and Shareholdings, No. 23, as follows:

"The subsidiary is a separate company having all the properties of a legal entity, on the same footing as a civil or commercial company under French law.

It owns assets exclusively earmarked as security for the company's creditors.

It is represented in all its legal activities by its own managers or administrators. This autonomy forms the basis of the distinction between subsidiary and agency."

The Cour de Cassation draws a clear distinction between subsidiaries and branches that are not separate legal entities (Civ/ 28.6.1957, Revue trimestrielle de droit civil, 1958, page 159).

The subsidiary, being a legal entity, is subject to all the rules of corporate law.

The result of this legal individuality of the subsidiary, distinct from that of the parent company, is that a third party who would be both creditor of the subsidiary and debtor of the parent company cannot set off credit and debt.

Similarly, there can be no mingling of the assets of the parent company and of the subsidiary, to the extent that in the event of a winding up of one of the companies the parent firm can prove claims against the subsidiary, or vice versa.

Therefore the legal independence of the two companies, ZLZ France and ZLZ South America, is and remains unquestioned.

ZLZ France is the sole signatory of the agreement establishing the joint venture in 1985, including its Article 17, which is a valid agreement to arbitrate:

"Arbitration: this agreement is governed by French law. Any dispute arising out of this contract shall be settled etc."

ZLZ South America is not a party to this agreement.

This arbitration has as its only subject the settlement of disputes arising out of the contract creating the joint venture.

The Arbitrator whose jurisdiction is determined by the abovequoted terms of reference, cannot at his discretion alter the scope and limits of the said terms.

It is true that the arbitration clause and the terms of reference empower the arbitrator to act as amiable compositeur, a power he intends to use in this award, as subsequent paragraphs will show.

However, these powers of amiable compositeur can only be used within the framework of public policy provisions which no arbitrator, whether or not acting as amiable compositeur, can ignore without risking having his award set aside.

Mr. Jean Robert, in his fundamental book on arbitration, writes:

"Any intervention by third parties in the arbitration is impossible, for the reason that they were not parties to the arbitration agreement. They cannot therefore intrude into the arbitration except by taking action against the award if it is rendered unlawfully against their rights..."

Consequently, whatever the relationship may have been between ZLZ France and ZLZ South America, a relationship to be discussed in the following paragraphs, the Arbitrator can state only that he has no jurisdiction to rule on the payment of the invoices of ... francs claimed by ABA.

These invoices, concerning ZLZ South America, correspond to actions completed outside the joint venture and thus alien to the arbitration clause included in the articles of association of the joint venture.

However, the Arbitrator will make an exception for invoice No. ...

This invoice has indeed been acknowledged by ZLZ South America in its letter dated ... as concerning ZLZ France:

"When you present to us again your invoices duly established in light of the above, they will have to be issued in the name of ZLZ South America for Nos ... and in the name of ZLZ France for No. …", signed X with a copy to ZLZ France.

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On the same ground of lack of jurisdiction, the Arbitrator will have to state that he is not empowered to rule on the respective claims of ABA and ZLZ concerning the ... francs representing the invoices addressed to ABA by ZLZ South America...

These claims are indeed alien to the present arbitration and it is up to ABA and ZLZ South America to submit their dispute to the competent forum.'