The respondent manufactured and sold to A propulsion devices to be installed on machines manufactured by A. These devices included engines, which were to be inserted into casing manufactured by B pursuant to a contract between B and the respondent. A fire broke out in the engine of a machine supplied by A to C, which was equipped with such a propulsion device. C claimed damages from A and the two companies came to a settlement. A was subsequently indemnified by its insurer, for part of the settlement amount. The insurer then initiated this arbitration as A's subrogee, in order to seek indemnification from the engine manufacturer.

Interim Award

'3. Place of Arbitration

The place of arbitration and the making of this Interim Award, is Paris, France, as agreed between the parties and as confirmed by the International Court of Arbitration of the ICC (the "ICC Court").

4. Jurisdiction of the Arbitral Tribunal

The Arbitral Tribunal derives its jurisdiction from Article XXXIII of the "Basic Agreement" made between . . . (hereinafter referred to as [A]) and [Defendant] . . . (herein called "The Basic Agreement") which states :

In the event of a dispute between the parties hereto with respect to the interpretation, performance, or breach of this Agreement and if the parties are unable to resolve the dispute by mutual agreement, the matter shall be finally settled under the Rules of Conciliation and Arbitration of the International Chamber of Commerce by three arbitrators appointed in accordance with the said Rules. The place of arbitration shall be Paris, France.

[Claimant] is an insurance company and asserts that it is acting under a right arising under such Basic Agreement to which it has succeeded by way of subrogation as result of the indemnification of a loss to its insured, [A].

. . . . . . . . .

7. Preliminary Issues

7.1 Based on the claims of the Parties, as reflected in the Terms of Reference, and the respective written Submissions of the Parties . . ., a number of Preliminary Issues are to be determined. Those Preliminary Issues, as identified in the Terms of Reference and in Procedural Order No. 1, are the following:

- Jurisdiction: Does the Arbitral Tribunal have jurisdiction with respect to [Claimant]'s claim?

- Basis for Claim: Does [A] have a claim against [Defendant] arising out of the supply of the propulsion system and the Basic Agreement?

- Subrogation: Does [Claimant] have a right of subrogation to any claim which [A] may have or had against [Defendant]?

- Applicable Law: Is the applicable law governing the substance of the dispute (and/or the Preliminary Issues) the law of New York, or should some or all aspects be governed by French law?

- Limitation: Are any or all of [Claimant]'s claims by barred by Statute of Limitation?

7.2 It is these Preliminary Issues which this Preliminary Award now addresses, although, for ease of comprehension, in a somewhat revised sequence.

8. Subrogation

Does [Claimant] have a right of subrogation to any claim which [A] may have or had against [Defendant] arising out of the above events?

8.1 It is uncontested that [Claimant]'s only right, if any, to bring this action is as an insurer, subrogated to the rights, if any, of its insured. As such, [Claimant] has no independent rights against [Defendant], and has no rights greater than or different from those of its insured.

8.2 Moreover, it does not appear to be contested that, if [Claimant] was bound to [A] under a valid insurance contract and indemnified [A] for a claim under such insurance contract, [Claimant] has a right by way of subrogation under French law to any related claims which its insured may have had against third parties (Insurance Code, Art. 121-12, para. 1). French law must control the rights and obligations as between a French insurer and a French insured.

. . . . . . . . .

8.4 The Arbitral tribunal concludes that, under French law, as applicable between a French insurer and a French insured, the indemnifying insurer is subrogated to such claims as the insured may have, if any, against third parties up to the amount of any indemnity paid (See Code des Assurances, Art. 121-12; and see para. 8.5 below). The Arbitral Tribunal further concludes that, in the present circumstances, the existence of the payment "Quittance" (receipt) . . . even though it does not specifically refer to [Claimant] as such, is adequate evidence of the payment of an indemnity . . . by [Claimant] as the lead underwriter for the co-insurers under the policy . . . referred to. The Arbitral Tribunal further accepts the copy of the insurance policy between [A] and the group of co-insurers, of which [Claimant] is shown as lead . . . as adequate evidence of the existence of such insurance coverage. While the copy of the policy attached as an exhibit is not executed, the Arbitral Tribunal recognizes, as argued by the Claimant, the common practice in the insurance field, whereby coverage is frequently and automatically continued while final negotiations and formalities for annual policies are still pending. The Arbitral Tribunal also notes that the insurance policy . . . specifically refers to the same policy number . . . as does the Quittance and that the policy specifically confirms the right of subrogation . . . up to the amount paid.

. . . . . . . . .

9. Jurisdiction and Basis for Claim

Does the Arbitral Tribunal have jurisdiction with respect to [Claimant]'s claim; and does [A] have a claim against [Defendant] arising out of the supply of the propulsion system and the Basic Agreement . . .?

9.1 The Arbitral Tribunal considers these two issues, while stated separately in the Terms of Reference, to be so closely inter-related that they must be considered together.

9.2 The position of the Defendant . . . can be summarized as follows:

The Defendant asserts that if there is a claim (initially by [A]) to be brought against [Defendant], and if the Arbitral Tribunal is to have jurisdiction over any such claim, it can only be on the basis of the Basic Agreement, which contains the arbitration clause.

- to the extent such claim involves a design or manufacturing effect, Defendant maintains it must be based on Art. XVI.1 of the Basic Agreement, setting out various warranty provisions;

. . . . . . . . .

9.3 The Claimant contends, to the contrary, that its claims (formerly those of [A]) are based on the Basic Agreement but not only on the warranty provisions of Art. XVI.1. In particular, the Claimant argues that Art. XX expressly foresees the possibility of a buyer, here [A], bringing a claim against [Defendant] for damages paid by [A] to a customer. That, Claimant maintains, is precisely the case at hand and gives rise to a claim subject to arbitration. The Claimant also alludes to some more general principles of liability . . . although it does not go into detail and does not explain how such principles would lead to an arbitrable claim.

. . . . . . . . .

9.4 Having reviewed the submissions of the Parties, and the applicable exhibits, the Arbitral Tribunal concludes as follows:

9.4.1 The Basic Agreement is less than clear in the intended relationship between Arts. XVI.1 and XX.1.1. To some degree, at first blush, those Articles seem contradictory.

The Defendant has attempted to offer an explanation, in arguing that Art. XX.2, at least, is intended to relate only to liability for delays in delivery by [Defendant] as contemplated in Art. XXIV . . . While such an interpretation cannot be excluded, the Arbitrators believe, on balance, that such interpretation is not warranted by the wording of Art. XX and that it is not logical or reasonable to give such a narrow reading, either to Art. XX.1.1 or to Art. XX.2.

The Arbitrators note that Art. XX.1.1 refers expressly to liability for damages paid by the buyer (i.e., [A]) to one of its customers because of "inexcusable failure" by [Defendant] to meet its "obligations, warranties or guaranties" under the Basic Agreement (emphasis added). Such language is broad, and can hardly be intended to refer to delays only. Instead, the Arbitrators conclude, such language must be read to cover all "inexcusable failures" by [Defendant], which result in a damages claim by a customer, and thus to override or provide an exception to the pure warranty provisions of Art. XVI.1.

9.4.2 The precise basis of [Claimant]'s claim is also not as clear as it might be, and has evolved in the course of the submissions. [Claimant] has clearly stated that its claim is based on the Basic Agreement, and on Art. XVI.1 thereof . . . But [Claimant] has also relied on Art. XX.1.1.

The Arbitrators conclude that [Claimant] has based its claim on Art. XVI.1 and on Art. XX.1.1 of the Basic Agreement, as well as some general theories of liability . . . or some combination of all three. For largely the same reasons as set out in the preceding section, the Arbitrators conclude that [A]-and thus [Claimant] as its subrogee-does have a basis for a claim against [Defendant] primarily under Art. XX.1.1. of the Basic Agreement. Such claim is a claim for damages paid by [A] to its customer, allegedly because of an inexcusable failure by [Defendant] to meet its "obligations, warranties or guaranties". In referring to, e.g., "warranties" this provision necessarily refers back to Art. XVI.1, which may explain [Claimant]'s repeated references to that Article as well.

. . . . . . . . .

9.4.3 On the basis of the foregoing the Arbitral Tribunal finds that [A]-and hence [Claimant]-does have a basis for a claim, primarily based on Article XX.1 of the Basic Agreement. Because such claim is founded on the provisions of the Basic Agreement, which contains the Arbitration clause (Art. XXXIII), the Arbitrators also conclude that they have jurisdiction to determine the merits of the claim.

10. Applicable law

10.1 Article XXXII of the Basic Agreement provides that the Agreement, and purchase orders issued pursuant thereto, shall be construed, interpreted and applied in accordance with the laws of the State of New York. However, Art. XX.2 provides an exception to this, in excluding from the application of New York law any "claim for damages paid by [A] to [A's] customer . . .".

For the reasons already set out in sections 9.4.1 and 9.4.2 above, the Arbitrators believe that Art. XX.2, as well as Art. XX.1.1, must applied to claims resulting from claims for damages by customers of [A], based on alleged failures of [Defendant] to meet its obligations under the Basic Agreement generally.

Neither Art. XX.1.1 nor Article XX.2 can, by their very language, be limited only to claims by customers for delay under Art. XXIV, as [Defendant] would contend. Had the Parties intended so to limit Art. XX.2, one would have expected them to have made an express reference to Art. XXIV.

The present case falls squarely within this exception. As a result, by the express language of Art. XX.2, New York law does not necessarily apply. Nor is this surprising; the parties to the agreement no doubt recognized that such a damage claim might be based on some other law-notably the law applicable to relations between [A] and its customer-and did not want to create an inevitable conflict.

10.2 Art. XX.2 does not specify which law should apply in such circumstances. The Arbitrators find that the appropriate applicable law should be the law of the place having the greatest contact with the transaction involved. Here that place is France-the place of business of [A], the place where the propulsion system was installed, and the place where the [machine] was delivered to [C].

10.3 Accordingly, the Arbitral Tribunal holds that the applicable substantive law to be applied in determining the present dispute is the law of France.

11. Limitations (or Time bar)

. . . . . . . . .

11.3 According to the most widely held view in conflict of laws today, questions of time limitations (or "prescription") are governed by the substantive law applicable to the contract or tort action involved (here between [A] and [C]) (see, e.g., EC Convention of Rome, Art. 10). The arbitrators have previously determined that the proper substantive law to be applied is the law of France (section 10.3 above). The Arbitrators simply note that, even if procedural law were applied, it would also be the law of the situs of the arbitration, i.e., France, leading to the same result. The Defendant does not appear to contest the conclusions that, if French law is indeed applicable, the relevant period of limitations is 10 years, and that, under the present circumstances, the claim has properly been brought within such 10 year period however measured. In view of the above, there is no need to determine the various questions relating to limitation periods under New York law raised by the Parties.

11.4 The Arbitral Tribunal accordingly holds that the claims of the Claimant are not time-barred.

. . . . . . . . .

On the basis of the foregoing, and by way of an Interim Award, the Arbitrators hold as follows with respect to the Preliminary Issues:

- The Arbitral Tribunal does have jurisdiction with respect to [Claimant]'s claim;

- [A] does have a basis for a claim against [Defendant] arising out of the supply of the propulsion system under the Basic Agreement;

- [Claimant] has a right of subrogation to any claim which [A] may have or had against [Defendant] up to the amount actually paid by [Claimant] under the insurance policy;

- the applicable law governing the substance of all aspects of the dispute is French law;

- [Claimant]'s claims are not barred by a Statute of Limitations.'

Final Award

'6. Factual Background

The following is a summary only of the factual background to the present dispute, intended to put the Preliminary Issues into context, and is not intended to be complete or exhaustive recital of all the relevant facts:

6.1 The Claimant is an insurance company organized and existing under the laws of France, with its principal place of business in France. . . .

6.2 The Defendant is a Swiss company . . . It is engaged, inter alia, in the manufacture and supply of . . . propulsion systems.

6.3 The Claimant brings this action claiming a right of subrogation under the French Insurance Code, Art. L 121-12 para. 1, to any rights which [A] may have against the Defendant as a result of the events summarized hereafter.

6.4 Pursuant to the provisions of the Basic Agreement . . . Defendant sold to [A] certain . . . propulsion systems designed to equip [machines] manufactured by [A]. The propulsion systems comprised, inter alia, engines which were to be inserted into [casing]. The [casings] were manufactured by [B] in accordance with a contract made between the Defendant and [B] . . . The Basic Agreement contained provisions relating, inter alia, to warranties (Art. XVI), liability limitation (Art. XX) and applicable law (Art.XXXII).

6.5 [A] subsequently supplied [a machine] equipped with such . . . propulsion systems to [C].

6.6 In . . . a fire broke out in the right engine of a [machine belonging to C]. The fire was extinguished by the . . . fire services. As a consequence of the fire the . . . engine and the [casing] sustained damage.

6.7 [C] claimed damages from [A] and the claim was settled in . . . upon the payment of . . . by [A] to [C].

6.8 In . . ., [A] was indemnified by its insurers, [Claimant], in the amount of . . .

6.9 Having paid monies to [A] by way of insurance indemnification the Claimant . . . now seeks indemnification from [Defendant] by way of subrogation to [A]'s rights against [Defendant] allegedly stemming from the above-described engine incident.

. . . . . . . . .

The Issues to be determined in this Award

9.1 The Preliminary Issues involved in this dispute have been disposed of by the Interim Award . . .

9.2 The remaining substantive issues to be determined in this final Award are the following:

9.2.1 Liability

(i) Was [Defendant] in breach of any obligation to [A] in the supply of the propulsion system to [A]? If so, in what respects?

(ii) If [Defendant] was in breach of any obligation, did that breach or those breaches cause the damage alleged? If so, were there any other causes of this damage? If so, what were those causes and what is or are the consequence/consequences of that fact?

(iii) If [Defendant] was in breach, and if such breach caused the alleged damage, is [Defendant] liable to [A] (or [Claimant]) for such damage?

(iv) In so far as [Claimant]'s claim is based upon the fact that [A] settled [C]'s claim against it, is [Defendant] bound by the amount of that settlement?

9.2.2 Damages

In so far as [Defendant] is liable to [Claimant], what is the amount of damage for which it is liable? Is interest to be added to such amount, and, if so, for what period and at what rate?

9.2.3 Costs

How should the costs of this Arbitration, including costs of any experts and legal costs, be apportioned between the parties?

10. Discussion

10.1 The Status of [Claimant]

10.1.1 The question of [Claimant]'s status in this arbitration was decided as part of the Interim Award . . . it was determined that [Claimant], as an insurer, was subrogated as a matter of law to any rights which its insured (here [A]) had or might have had against any third party (here including [Defendant]) arising out of the covered events. Accordingly, [Claimant] has a right to bring this claim in arbitration against [Defendant], but in doing so it can rely only on those rights which [A] itself would have had, and it is subject to the same defenses which [Defendant] would have had against [A]. In other words, [Claimant] stands in the shoes of [A] for all purposes.1

10.1.2 Nonetheless, whatever may have been the amount of any possible claim by [A], [Claimant] as the insurer is limited in its subrogated claim to the amount which it actually paid to its insured . . .

10.1.3 The detailed reasoning and conclusions contained in the Interim Award with respect to [Claimant] and its rights of subrogation will not be repeated here, but are incorporated and confirmed by reference.

10.2 The Technical Aspects:

Having carefully considered the evidence, including both the documentary evidence and the testimony presented at the Hearing, the Arbitrators have unanimously reached certain conclusions concerning the factual background, the technical aspects involved, and the probable circumstances at the time of the engine fire, as follows:

10.2.1 The fire wall installed on the . . . engine contained two small holes. Such holes were not foreseen in the engine specifications (as referred to in the Basic contract) and apparently did not exist on the initial prototype of the engine which was tested by [A]. Such holes could and did permit the passage of fine jets of liquid and/or vapour between the forward, relatively cool section of the engine and the center core zone which had very hot operating temperatures. Such holes therefore compromised the fire proof integrity of the fire wall, and constituted a technical manufacturing and/or design defect, which did not conform to the specifications of the Basic Contract.

. . . . . . . . .

10.2.5 On balance, the Arbitrators are prepared to accept the scenario advanced by the Claimant . . ., namely that hydraulic fluid leaked in the forward section of the engine, that it leaked or sprayed into the core zone by the way of the two holes in the fire wall, and that it ignited in the core zone and flashed back via the holes into the forward zone, causing fire damage in both the forward and core zones of the engine. There was more than enough evidence to support such scenario, including traces of burnt hydraulic fluid in both zones, and no other, more plausible chain of events has been shown. [Defendant] . . . accepted that such a scenario was not unreasonable, although at an early stage in the investigation and before any dispute had arisen.

10.2.6 Apart from the above factors relating to the origin of the fire, there can be little doubt that, once the fire began, the actions, or nonactions, of the, [C] crew in not following the prescribed safety procedures, caused the damage to be greater than it would otherwise have been. The Arbitrators have taken note in this respect of [Defendant]'s submission, comparing the elapsed times of the fire warning alarms and the failures to respond by the [C] crew; while such time comparisons cannot pinpoint the precise moment of the flashback, and hence of the main damage, they do support the proposition that the crew's failure to act at several intervals allowed, or contributed to, the resulting damages.

10.2.7 Taking all the above into consideration, the Arbitral Tribunal concludes that all those factors, attributable to three different organizations, caused or contributed to the damage resulting from the engine fire:

(i) The holes in the fire wall, which unquestionably constituted a technical defect, attributable to [Defendant] or its subcontractor [B]. [Defendant]'s responsibility in this respect is enhanced because it changed the design, after the testing of the prototype engines, and without informing [A].

(ii) The faulty tightening of the hydraulic fluid connection which allowed the leak, and which is attributable to [A] . . .

(iii) The inexplicable failure of the [machine] crew to follow prescribed safety regulations, clearly attributable to [C].

Consequently, from the standpoint of a technical analysis and based on the evidence before the Tribunal, all three entities must bear a portion of the responsibility for the damage caused.

10.3 The Contractual Aspects:

. . . . . . . . .

10.3.4 Having carefully considered the arguments advanced by both Parties on this issue, the Arbitrators conclude that [A], and hence [Claimant], are subrogated as a matter of law to such rights as [C] may have had against [Defendant]. At the time [A] made its settlement payment to [C], it did so in the belief that it was primarily responsible. Only after a full investigation, and after many months, did it become clear that part or even most of the fault was that of [Defendant] (or its subcontractor) in having delivered a defective part. The Arbitrators take cognizance of the fact that [A], as . . . manufacturer, must stand behind its products and provide prompt assistance and relief to its customers, in cases where there has been some equipment failure, even under circumstances where a full investigation has not yet been completed. Here, [A] made a settlement with the customer (who had no active contacts with [Defendant]) under urgent circumstances, and only later discovered that part at least of that settlement was to cover [Defendant]'s responsibility. Under such circumstances, and under applicable French law, a party ([A]) which, having obligations along with others to a third party, has an interest in discharging such obligations and does so, is subrogated as a matter of law to the rights of the obligee against the others.2 Such a right of subrogation arises as a matter of law; it is not a form of assignment or other contractual transfer (which [C] would have been precluded from doing by the terms of its warranty). [A] therefore acquired the rights under warranty, if any, which [C] had against [Defendant], and [Claimant], as [A]'s insurer, succeeded to such rights.

10.3.5 The standard form of warranty from [Defendant] to the [machine] operators apparently does not contain an arbitration clause as such.3 In any event, the present arbitration has not been brought under such warranty directly (or under any such arbitration clause if one existed). Instead, the claims of [A] which [Claimant] now seeks to enforce, and the dispute to which they have given rise, are clearly "with respect to the interpretation, performance or breach" of the Basic Agreement, since such claims are the very ones which [Defendant] asserts were transferred from [A] to [C] pursuant to the Basic Agreement, but have now become vested in [A] once again by way of subrogation (see para. 10.3.4). Claims or disputes between [A] and [Defendant] which are "with respect to" the Basic Agreement are subject to the arbitration clause in the Basic Agreement (Art. XXIII). As such, these claims are properly within the jurisdiction of this Arbitral Tribunal.4 The fact that these claims are based on warranties originally extended to [A], but which were assigned to [C] at the time the [machine] was delivered, and that those warranties have now come [A] by way of subrogation, may be a coincidence, but one which emphasizes the close connection between the several contractual obligations and the parties involved.

10.4 Conclusions

10.4.1 Based on the foregoing, the Arbitral Tribunal concludes that [Defendant] (either directly or by way of its subcontractor [B]) is responsible, for a manufacturing defect in the engine fire wall, which caused, at least partly, the fire and the resulting damage. Such defect constituted a breach of the warranty provisions, which were initially in the Basic Contract [sic] (Sec. XVI) and were thereafter transferred to [C]. [A] became the beneficiary under such warranties, by way of subrogation (and [Claimant], in turn, was subrogated to [A]'s rights). Therefore, [Defendant] is responsible to [Claimant] for the damages by its breach.

10.4.2 [Defendant] is not, however, liable for all the damages caused by the fire in the engine, because a number of other factors, outside [Defendant]'s control, contributed to or increased the damage. As set out more fully above, the holes in the fire wall, attributable to [Defendant] (or its subcontractor) are only one of the causes of the fire and the resultant damage. Two other factors contributed to the fire:

a. The leak in the hydraulic fluid system, allowing the combustible fluid to be present, attributable to [A];

b. The negligence of the [C] crew in not following prescribed safety procedures when the alarm was triggered (on two occasions), allowing the fire to continue and/or spread, attributable to [C].

Having considered the evidence, including the analysis by [Defendant] of the elapsed times during which the fire continued (see, e.g., Expert Report . . .), the Tribunal concludes that each of these three factors contributed equally to the damages, and that each of the three responsible entities must bear one third of the responsibility therefore.

. . . . . . . . .

10.4.8 . . . . . . . . .

The Arbitrators recognize that both of the factors referred to above [circumstances surrounding negotiations prior to the arbitration and the bringing of the arbitral proceedings] are difficult to establish or to quantify with any precision. Nevertheless, the Arbitrators are persuaded that [Defendant]'s position has been prejudiced to some degree, and that some adjustment should be made in the amount to be paid by [Defendant] to [Claimant]. Applying their judgment, the Arbitrators find that an aggregate amount of . . . should be deducted, to reflect such prejudice.

10.4.9 Accordingly, the Arbitrators determine that [Defendant] is liable to pay to [Claimant], standing in the shoes of [A], a net amount . . ., representing its share of responsibility for the damages cause[d] by the engine fire as adjusted.'

1
See, Code Civil, Art. 1249-1251; Cour de Cassation, Comm. 13 May 1966 ; Revue de l'Arbitrage (1988) L'Arbitrage et les Tiers, p. 446.

2
See French Code Civil, Art. 1251 "La subrogation a lieu de plein droit ... (3) au profit de celui qui, étant tenu pour d'autres ou avec d'autres au paiement de la dette, avait intérêt de l'acquitter ... " Such rights of subrogation, under Art. 1251(3) have been applied, inter alia, among joint tort feasors precisely in the case of a settlement agreement by one of them (see, e.g., Cass. Civ. 2d, 23 Oct. 1984, Bull. Civ. 1 No. 276, p. 235).

3
The actual form of warranty between [Defendant] and [C], if any was specifically exchanged, has not been submitted in this proceeding. Reference is made, however, to the standard form, attached as Ex. C to the Basic Agreement . . .

4
See, generally, Craig, Paulsson, Park, ICC Arbitration, 2d Ed., pp. 108-110, 194-201. Indeed, applying the precise language of the arbitration clause in the Basic Agreement, this dispute, even if part of the claim has its genesis in the derivative warranty from [Defendant] to [C], seems clearly to be "with respect to the interpretation, performance or breach" of the Basic Agreement. Had [Claimant] (ie, [A]) sought to pursue its claim before a national court, it is more than likely that [Defendant] would have invoked the existence of the arbitration clause, which governs [Defendant]'s relationship with [A], in defense.