Agreement for the transfer of corporate shares / Action against Claimant brought by a third party before US Courts for violation of US antitrust law / Claimant in arbitration requests reimbursement of legal expenses incurred as a consequence of the antitrust suit / Lex contractus, French law / Freedom of choice of contracting parties, yes / Absence of fraud in the choice of French law, yes / No extraterritorial application of US antitrust law although the Arbitral Tribunal should take into consideration such law

'Basic Facts

In December 1982, a Protocol was signed by representatives of Claimants (Belgian and US Companies) and Defendants (Luxemburg and Italian Companies) to establish the essential elements of the transfer of Company A, a Delaware corporation, wholly owned by Claimants, to a Defendant's subsidiary, a UK corporation. This Protocol was to be later enforced through two agreements, the Venice Agreement and the Stock Purchase Agreement.

One of the provisions of the Stock Purchase Agreement implied that the Distribution Agreement between Company A, the Delaware corporation and Company B, a New York corporation, was to be terminated. Company B was at the time the exclusive distributor of the products manufactured by Company A.

About three years later, an action for violation of US antitrust law was brought by Company B against Claimants, on the one hand, and Defendants, on the other hand, before the US District Court of the Southern District of New York.

Claimants negotiated and concluded a settlement agreement with Company B, under which Claimants agreed to pay to Company B USD . . .

. . .

Under Section 4 of the Venice Agreement: "[Defendants] agrees to hold [Claimants] and any [Claimants] subsidiary, their successors and assigns, harmless and to indemnify against all claims, actions, suits or proceedings for actual or alleged violation of or non-compliance with any United States Antitrust Laws or Regulations brought against [Claimants] and/or any [Claimants subsidiary], their successors and assigns by reason of the sale of Company A to and/or the take-over by [Defendants] subsidiary."

. . .

Claimants have initiated the present arbitration to obtain, on the basis of Section 4 of the Venice Agreement, the reimbursement of their legal expenses incurred as a consequence of the Company B action.

The Venice Agreement includes an arbitration provision which reads as follows: "Any dispute which may arise between [Defendants] and [Claimants] relating to the validity, performance and interpretation of this agreement shall be finally settled by three arbitrators appointed according to the Rules of the International Chamber of Commerce (Paris). Arbitration shall be held in Paris (France). This Agreement shall be governed by the substantive law of France."

The Stock Purchase Agreement does not include any arbitration provision and is governed by New York law.

The Protocol contains neither a governing law provision nor an arbitration clause.

Governing law

Under Section 6 of the Venice Agreement, as confirmed by the Terms of Reference, the parties chose the substantive law of France as the law applicable to the Venice Agreement.

Defendants claim that the choice of French law is a "fraude à la loi", as the purpose of such choice was to evade the application of US antitrust laws; they argue that the parties tried to find a friendly legal system, in this case French law, so as to escape US antitrust laws.

They argue that the arbitrators should disregard the parties' choice of French law, as it serves no other purpose than to commit fraud with respect to US antitrust laws. Even if the arbitrators were to decide to uphold the parties' choice of French law, argue Defendants, US law would still be applicable, as French law would mandate its application as "loi de police". The result would be that the arbitrators could not enforce the provisions of the Venice Agreement which, being contrary to US antitrust laws, would be null and void. Defendants add that even if the Venice Agreement were valid, the parties' choice of French law would amount to a "fraude à la loi", making such choice improper.

Claimants' position is that the choice of French law was perfectly legitimate.

This being so, because of the antitrust issues involved, the Tribunal is faced with two questions:

- Is the choice of French law a proper choice? (fraude à la loi)

- What is the impact of US law? (loi de police)

French law

Defendants argue that French law is not applicable to the Venice Agreement because it constitutes a fraude à la loi. They add that the parties, fully aware that their transaction would violate US law, had to ensure that such law would not be applicable. They therefore confined to the Venice Agreement all antitrust-sensitive provisions and included, solely in the Venice Agreement, an arbitration clause as well as a clause providing for the application of French law.

According to Defendants: "It is obvious that the above elements were only introduced in the Venice Agreement for the exclusive purpose of circumventing the application of US law and the jurisdiction of US Courts, which, by declaring the Venice Agreement illegal and thus null and void, would have frustrated the goals that the parties intended to achieve.

The choice of law made in furtherance of the above goals clearly constitutes fraude à la loi, which, as noted by Professor Francescakis, occurs when the parties 'artificially modify the circumstances upon which the determination of the applicable law depends, for the sole purpose of escaping from the application of that law' (Encyclopédie Dalloz - Droit International Privé, Section 6).

This is precisely what the parties did in the Venice Agreement, where the choice of French law served no other transactional purpose than to prevent US antitrust laws from applying, thus amounting to a fraude à la loi."

Claimants' answer is that the choice of law provision is perfectly legitimate and does not constitute a fraude à la loi.

"La fraude réside donc dans le fait de changer l'élément dont dépend la loi applicable pour obtenir le résultat cherché, sans accepter les conséquences essentielles normalement attachées à ce changement" (Prof. Pierre Mayer, Droit International Privé, 3rd ed., p. 171). This is the so-called subjective element, i.e. the intentional illegal purpose of an act that would otherwise be perfectly legal. Professor Mayer defines the objective element as follows: « ordinairement, la fraude se manifeste extérieurement par une manœuvre conduisant à la modification de l'élément de rattachement » (id. p.172). Professor Mayer adds quite rightly that fraud is only possible if the parties are free to choose the applicable law without taking into consideration the links between a contemplated transaction and a given law.

In contractual matters, the difficulty arises from the apparent opposition between the concept of fraud (the choice of a law that is not directly connected with a contemplated transaction) and the parties' freedom to choose the law they wish to apply to their contractual relationship. Indeed, it is undisputed that party autonomy allows parties to submit their transnational contract even to a legal system with which they or the subject matter have no specific link (see Rome Convention Art. 3; French Cass. February 19, 1930 and January 17, 1931, s. 1933 1.41; Vita Foods v. Unus Shipping 1939 A.C.277)'; "l'esprit du droit positif est de laisser aux parties une grande liberté dans la localisation de leurs opérations" (Batiffol and Lagarde, Droit International Privé, 7th ed. T. 1 p. 429).

There is, however, a limit to such freedom: "l'interdiction de profiter du caractère international du contrat pour rendre applicable une loi qui ne comporte pas les dispositions impératives gênantes qui sont contenues dans les lois de tous les pays avec lesquels le contrat présente des liens objectifs" (Prof Mayer, id., p. 431).

As Prof. Francescakis similarly writes: "la désignation expresse de la loi applicable et même la localisation des éléments du contrat en prévision de la loi qui lui sera applicable, se font, non pas en considération du régime général que la loi choisie assurera au contrat, mais afin d'éviter une loi impérative qui, autrement, aurait régi le contrat" (Encyclopédie Dalloz, Droit International, Fraude à la loi, n° 71).

In the present case, the parties have chosen French law as the substantive law governing their relationship. They have reiterated such choice in the Terms of Reference.

Their freedom is confirmed by the ICC Rules ("the Rules"), which provide under Article 13(3): "The parties shall be free to determine the law to be applied by the arbitrator to the merits of the dispute. In the absence of any indication by the parties as to the applicable law, the arbitrator shall apply the law designated as the proper law by the rule of conflict which he deems appropriate." Furthermore, Article 13(5) of the Rules provides that: "In all cases the arbitrator shall take account of the provisions of the contract and the relevant trade usages."

This principle has also been recognized by Article 33 of the UNCITRAL Rules and by Article 3.1 of the Rome Convention of June 19, 1980, although it is to be noted that the Rome Convention came into force in France after the Venice Agreement was signed.

The Tribunal further notes that the choice of French law is not in itself objectionable, as it is common practice between industrial groups entering into an international transaction to apply the law of a third country. Between an Italian group and a Belgian group, French law is an obvious choice. Furthermore, because the transaction involves corporations located in Belgium, England, Luxembourg, the United States and Italy, and because the agreements were signed in Italy, in the US, the choice of a "neutral" law is a legitimate business decision.

The difficulty arises in the present case because antitrust issues are involved.

Having found that the parties are free under international law to determine the law applicable to their contract, the only exception to this principle being fraud, the Tribunal must now examine whether or not there has been fraud.

The antitrust concern is obvious in the Protocol. Section II provides: "any expenses for Claimants by reason of any antitrust action relating to deal (including legal fees) to be borne/reimbursed by Defendants" ; in the same Protocol (Section X entitled "Agreements", p. 6) it was agreed that a side letter would cover "the antitrust item mentioned under II". The Tribunal understands from this reference to Section II that it includes not only the reimbursement of the expenses resulting from a possible antitrust action but also the deduction of USD . . . from the sale price, said deduction having been made by Claimants "for antitrust risk". It is to be noted that in the Venice Agreement, this deduction of USD . . . is made under the terms "special discount" without any further qualification.

. . .

It therefore appears to the Tribunal that it is because of fear of antitrust that the parties sliced a global economic deal into two agreements, the Venice Agreement and the Stock Purchase Agreement.

Indeed, the Protocol, the Venice Agreement and the Stock Purchase Agreement are three elements of a single economic transaction.

To fully understand the situation, it is necessary to examine in detail the sequence of events and the respective roles attributed by the Tribunal to the three agreements organizing the transaction.

The basic document is the Protocol, which is a business decision between the senior executives of the two groups involved. It contains all of the essential elements of the transaction.

As the negotiators realized that antitrust issues were involved and that antitrust problems might thus be raised by the US authorities, they decided to split the transaction into two agreements:

- the Venice Agreement, which dealt on the one hand with an antitrust problem and on the other hand with the sale price, including the financial consequences between the parties of possible costs resulting from any legal action based on antitrust concerns that might arise; and

- the Stock Purchase Agreement, which organized the transaction.

Thus the Venice Agreement and the Stock Purchase Agreement were only consequences of the business decision made in the Protocol. Logically, the Stock Purchase Agreement should have been signed before the Venice Agreement, and the fact that it was not reinforces the view that these two agreements represent two aspects of the same transaction. The Venice Agreement does not organize anything; it simply sets forth the consequences of a possible antitrust action.

The transfer of Company A was organized and legally effected by the Stock Purchase Agreement. The transaction and its effects took place in the US; US law was therefore the natural choice for the applicable law, and indeed US law was chosen. In fact, the antitrust laws were applied to the extent that Defendants eventually had to divest.

The Venice Agreement (except possibly Section 5, which will be dealt with below) does not induce the parties to commit an antitrust violation, nor does it organize such violation. It only sets forth in its Section 4, on which the claims before this Tribunal are based, the consequences of a pre-existing transaction. In other words, it deals a posteriori with the indemnification consequent to a pre-existing transaction between a Belgian corporation and an Italian corporation.

Section 4 did not induce antitrust violations. It was only to be applied at a time when Claimants had completely withdrawn from the US market. Section 4 is a consequence of past negotiations; it does not address future action and therefore cannot constitute an inducement to violate the law.

However, the Tribunal should determine whether the Venice Agreement includes antitrust provisions that would be contrary to US antitrust law.

. . .

The Tribunal therefore rules that even though Section 5 may be a violation of US antitrust law, it does not affect the other provisions of the Venice Agreement and, in particular, Section 4, the save-harmless provision.

At this point it should be emphasized once more that Section 4 only provided for the indemnification of a party and that its purpose was not to induce the parties to commit a violation.

If the Venice Agreement had gone beyond these narrow limits, the Tribunal could have considered that recourse to French law was a "fraude à la loi".

Finally, the Tribunal notes that it is undisputed that in this overall transaction, Defendants have obtained a discount for "antitrust risks" of USD . . . The Tribunal also notes that Claimants, while arguing that they should be reimbursed for their legal expenses in connection with the antitrust risk, never claimed reimbursement of the "special discount", although it could have been argued that it was part of the "antitrust deal". The other aspect of the financial consequences of such antitrust risk is the save-harmless clause of Section 4. Defendants are not in a good position to now argue the nullity of an agreement from which they benefited. The principle of estoppel does not entitle them to do so.

For the above reasons, the Tribunal determines that French law is the proper law of the Contract and that the parties' choice was not illegal.

U.S. Law

The question now is to determine whether the Tribunal, having determined that French law is applicable to the Venice Agreement, should apply US law as foreign "loi de police".

Defendants argue that even if the Tribunal were to uphold the parties' choice of French law, such law would mandate the application of US law to the Venice Agreement as "loi de police".

Defendants add that for a law to qualify as a "loi de police", it must be so regarded by the laws of the country where it was enacted and that there is no doubt that US law regards antitrust legislation as "loi de police". The Tribunal agrees with such analysis. Defendants add that the fact that the Venice Agreement would have no reason or basic to exist without the Stock Purchase Agreement providing an essential connecting factor between the two, thus warranting the application of US antitrust law to the Venice Agreement despite the parties' choice of French law. They assert that this Tribunal has the power to apply the "loi de police" of a different country even in the presence of a lex contractus chosen by the parties.

Defendants conclude that the Tribunal must disregard the parties' choice of French law as it is its duty to protect the integrity of the international arbitration process and the notion of party autonomy, which would not be done if the Tribunal were to condone the parties' fraudulent scheme.

In response, Claimants argue that Defendants are incorrect in stating that the arbitrators must apply US antitrust law as foreign "loi de police" and that the possibility of arbitral tribunals to apply a "loi de police" foreign to the lex contractus is much disputed and questioned in international arbitration.

The positions of the parties being clear, what is the tendency of modern arbitration?

Arbitrators tend to take into consideration foreign "loi de police".

As rightly stated by Mr X's opinion: "International Arbitrators are not concerned with any particular lex fori or, for that matter, any particular national set of conflicts of laws rules. They are free in their determination of the applicable law (see, e.g. Art. 13.3 of the ICC Rules of Arbitration and Art. 33.1 of the UNCITRAL Arbitration Rules) in accordance with what they feel is appropriate and guided only by any contractual choice of law made by the parties."

Defendants argue that this Tribunal should apply US antitrust legislation as "loi de police", because the Venice Agreement serves no other purpose than to commit fraud upon US law.

Such is not the Tribunal's opinion. US antitrust legislation, as "loi de police", is not applicable in this case.

In the first place, Section 4, the save-harmless provision, does not induce the parties to violate US antitrust law. It is solely an indemnification provision, not an agreement to take action that would violate US antitrust legislation.

Furthermore, the Tribunal is of the opinion that if it were to apply US law as "loi de police", it would give an extra-territorial effect to US legislation. As seen above, the save-harmless provision provides for indemnification between a Belgian group and an Italian group, both outside the United States.

US law is certainly applicable to the transaction itself, i.e. the sale of Company A, which took place in the United States; indeed, as noted above, US antitrust laws were applied. However, although US policy is in fact to give its antitrust legislation an extra-territorial effect, the Tribunal is not bound by such philosophy. France, whose law is applicable to the Venice Agreement, has reacted strongly against the extra-territorial effect of US legislation in the antitrust field. In 1980 (law n° 80-538 dated July 16, 1980), it enacted a law prohibiting its citizens, as a matter of principle, from co-operating with US authorities in antitrust matters. So did the United Kingdom. Therefore, in the present case, the Tribunal sees no possibility of integrating US antitrust laws into the French public policy system. The objective of US law is to prevent antitrust activities and their effects within the United States. The indemnification, an outcome of the transaction agreed to in the Stock Purchase Agreement, takes place outside the United States. Section 4 stipulates that Defendants "shall reimburse Claimants"; this reimbursement could only be made at the address given by Claimants in the Venice Agreement, i.e. in Belgium.

The Tribunal is therefore of the opinion that, although it should take into consideration US law as a "loi de police", such antitrust legislation is not applicable to the Venice Agreement.

This approach conforms not only to the present trend in international arbitration (note JJA in Clunet 1991 at 1053) but also to that of modern legislation, such as Article 7 of the Rome Convention, entered into force on April 1, 1991, and Article 19 of SPILA (Swiss Private International Law), which states as follows:

1. If, pursuant to Swiss legal concepts, the legitimate and manifestly preponderant interests of a party so require, a mandatory provision of a law other than that designated by this Code may be taken into account if the circumstances of the case are closely connected with the law.

2. In deciding whether such provision must be taken into account, its purpose is to be considered as well as whether its application would result in an adequate decision under Swiss concepts of law' (translation in Loi Fédérale Suisse sur le Droit International Privé, éd. Payot, Lausanne 1989 at 31).

It should be stated once again that both parties were fully aware of the antitrust problem and, both being important international groups, the Defendants cannot now argue that it came as a surprise to them to find out that Section 4 could have raised an antitrust problem.

Furthermore, because the other provisions of the Contract had been fully complied with by both parties, Defendants could not invoke the nullity of the Contract. As stated by Claimants: "Nemo auditor turpitudinem propriam allegans, which is especially applicable when otherwise a party to a contract would be unjustly enriched (J.C.P, Droit Civil, App. Art. 1131 à 1133, Nemo auditur, nr. 85-87)." It is not disputed that Defendants were an active party in the elaboration of the agreements and, whatever the reasons for their acceptance of Section 4, cannot invoke their own "turpitudo".

The Tribunal therefore decides that:

- French law is applicable to the Venice Agreement

- the choice of French law is not a "fraude à la loi", and

- US antitrust legislation is not to be applied.'