ICC Rules: 1988

Claimants: Italian and Dutch companies

Defendants: Four corporate entities and one natural person (Mexico)

In connection with a telecommunications project in a Central American State, Defendant 2 entered into a share purchase agreement with corporation Y. Pursuant to this agreement, the former was to acquire from the latter 49% of the shares of corporation X. Subsequently, in order to acquire an interest in corporation X, Claimant 1 entered into an agreement (the 'Subscription Agreement') with Defendants 1 and 2, according to which Claimant 1 was to acquire 25% of the enlarged share capital of Defendant 2. Defendant 3 committed itself to bear joint and several liability for Defendant 1's obligations under the Subscription Agreement. This liability was subsequently assumed by Defendant 5 as the majority shareholder of Defendant 3. The involvement of Defendant 4, a company controlled by Defendants 3 and 5, resulted from a letter agreement between the Claimants and the other Defendants stating that any reference in the Subscription Agreement to Defendants 1 and 2 should be deemed to refer jointly and severally to Defendants 3 and 5 and any entity through which the latter owned the former. An additional agreement (the 'Shareholders Agreement') was entered into by Claimant 1 and Defendant 1 concerning their reciprocal rights and obligations as shareholders of Defendant 2. Corporation Y applied to the state courts for cancellation of Defendant 2's acquisition of corporation X's shares, on the ground of a breach of payment obligations. The application was granted and an agreement was signed providing for repayment by corporation Y to Defendant 2 of the sum paid for the shares in corporation X, after deduction of the amount corresponding to the sale of the corporation X shares to Claimants under the Subscription Agreement. Prior to this, Claimants had acquired an equity interest in the shares of corporation X, which, according to Defendants, included the interest in said corporation's shares acquired by Claimants through their interest in Defendant 2. Claimants considered themselves to be victims of fraud due to Defendants' wilful failure to pay and their secret negotiations to release the corporation Y shares being held as security for payment to corporation Y of the purchase price for them. Claimants filed a Request for Arbitration, pursuant to the arbitration clause contained in the Subscription Agreement. According to said clause, the Agreement was governed by Mexican substantive law.

Claims:

'According to the Terms of Reference, the Claims are as follows:

"Preliminary matter: Jurisdiction of the Arbitral Tribunal over the Parties to this arbitration

Claimants maintain that pursuant to the Subscription Agreement all the Defendants are subject to the jurisdiction of the Arbitral Tribunal. This is denied by Defendants 3, 4 and 5 on the ground that they are not bound by the Subscription Agreement. Furthermore, the Defendants contend that since the Claimants have not relied on the arbitration clause in the Shareholders Agreements and have not followed the procedure laid out therein for bringing claims arising out of it, the Arbitral Tribunal lacks jurisdiction to hear such claims against any of the Defendants.

Consequently, the Defendants request the Arbitral Tribunal to render an interim award denying jurisdiction over Defendants 3, 4 and 5 and over claims arising out of the Shareholders Agreement.

Claims on the merits

(1) Breach of Subscription Agreement and related agreements

Position of the Claimants

The Claimants maintain that as a result of the Defendants' fraudulent conduct and breaches of various representations and warranties, they have incurred damages and been deprived of the material benefits of the transaction with Defendant 2. Had they known the true facts, the Claimants would not have entered into this transaction.

Position of the Defendants

Notwithstanding the fact that the Defendants maintain that any action for civil fraud is prescribed under the relevant substantive Mexican law which expressly governs all the terms of the Subscription Agreement, the Defendants deny any allegations of actionable civil fraud as well as all other imputations made by the Claimants against them. Furthermore, the Defendants maintain that they have complied with all their obligations under the Subscription Agreement and ask the Arbitral Tribunal to dismiss all claims made against them.

(2) Loss of profits

Position of the Claimants

The Claimants allege that as a further consequence of the Defendants' conduct, the Claimants failed to receive, through Defendant 2, payments based on dividends declared by [corporation X] which were seized because of the failure of Defendant 1 to comply with the payment obligations it assumed from Defendant 2.

Position of the Defendants

The Defendants reject this claim as they maintain that they have complied with all their obligations under the Subscription Agreement."'

Relief requested:

'According to the Terms of Reference, the relief requested is as follows:

"Claimants

Interim relief

1. To protect their interest in the proceeds to be returned to Defendant 2 as a result of the . . . courts' decisions, the Claimants seek interim relief in the form of orders or awards in conformity with the U.N. Convention for the Recognition and Enforcement of Foreign Arbitral Awards by the arbitrators:

(a) requiring that those of the Defendants that have ownership, custody, possession or control of, or any other rights with respect to, shares of Defendant 2 subject those shares to sequestration and/or place those shares in an escrow or similar account or safekeeping arrangement under the control of the arbitrators or otherwise, said shares to be held as security for an award of damages to the Claimants and to be made available pursuant to orders or an award by the arbitrators;

(b) requiring that those of the Defendants that have beneficial ownership with respect to any other assets take the necessary steps to subject those assets to sequestration and/or to place those assets in an escrow or similar account or safekeeping arrangement under the control of the arbitrators, said assets to be held as security for an award of damages to the Claimants and to be made available pursuant to orders or an award by the arbitrators or otherwise;

(c) requiring that any portion of the consideration paid to [corporation Y] in exchange for the [corporation X] shares that is to be refunded to any of the Defendants as a result of decisions in the . . . lawsuit be placed and held in an escrow or similar account or safekeeping arrangement under the control of the arbitrators or otherwise, to be held there as security for an award of damages to the Claimants;

(d) requiring that any proceeds that are to be returned to Defendant 2 as a result of the judgment in the . . . lawsuit be placed and held in an escrow or similar account or safekeeping arrangement pending the issuance of a final award by the Arbitral Tribunal.

The total value of the shares and other assets to be the subject of the actions to be taken pursuant to paragraphs (a), (b), (c) and (d) above should be a minimum of US$ . . .

2. That in the event that any of the Defendants should fail to comply fully with an order or award issued by the arbitrators or otherwise, a sanction will be imposed against such Defendant or Defendants in the form of a monetary penalty of US$ 1 million for each full day during which each such Defendant shall fail to comply with such order or award.

Final award on the merits

The Claimants request an award from the Arbitral Tribunal as follows:

1. Rescission of the transactions pursuant to which the investments described herein were made, including repayment with interest . . . and costs, of all of the amounts paid by Claimant(s) . . ., plus lost profits against the surrender by Claimant 2 of its interest in the shares of Defendant 2.

2. In addition, the Claimants request that the award provide for payment to them by the Defendants of all of the costs of both the . . . lawsuit and this proceeding and any other proceeding to obtain precautionary measures over the assets of the Defendants, including, but not limited to the legal fees and related costs incurred by them, the arbitrators' fees and ICC costs in this proceeding and the costs, including but not limited to legal fees, of enforcing the award in Mexico and elsewhere.

Defendants

Jurisdiction

The Defendants request that the Arbitral Tribunal render an interim award:

a. denying jurisdiction of the Arbitral Tribunal over Defendants 3, 4 and 5;

b. dismissing any claim by the Claimants that arises out of the Shareholders Agreement;

c. declaring that the Claimants' claim for civil fraud, and relief sought thereunder, are prescribed according to substantive Mexican law; and

d. rejecting Claimants' request for interim relief.

Final award on the merits

The Defendants request the Arbitral Tribunal to render a final award:

a. dismissing all of the Claimants' claims over which the Arbitral Tribunal decides that it has jurisdiction; and

b. ordering that all the costs of the arbitration, including ICC administrative expenses and the arbitrators' and attorneys' fees, be borne entirely by the Claimants."'

Issues to be determined:

'According to the Terms of Reference, the issues to be determined are as follows:

"I. Preliminary Issues

(1) Are Claimants entitled to the interim relief requested?

II. Jurisdiction of the Arbitral Tribunal

(2) Has the Arbitral Tribunal jurisdiction over Defendants 3, 4 and 5 . . . pursuant to the Subscription Agreement and all amendments thereto relied upon by the Claimants?

(3) Have the Claimants relied on the arbitration clause in the Shareholders Agreement and were they required to do so? To the extent that they relied on it or were required to do so, have they followed the procedure set out in this agreement? If not, does this fact deprive the Arbitral Tribunal of jurisdiction over claims arising out of this agreement?

III. Merits

(4) In the present case is civil fraud, if proved, prescribed by Mexican law?

(5) If not, has actionable civil fraud through false and misleading misrepresentations, omissions and actions been perpetrated upon the Claimants in order to induce Claimants to enter into the transaction and transfer . . . for the payment of Defendant 2 shares and thus acquire an indirect interest in [corporation X] according to Mexican law?

(6) Have the Defendants breached the Subscription Agreement, the Shareholders Agreement, or other undertakings found in various letters, certificates and other documents related to the transaction according to Mexican law?

(7) If fraud upon the Claimants and/or breaches of the agreement, representations, warranties, covenants, and conditions arising from the transaction are established, are Defendants liable whether as primary wrongdoers or as a result of their contractual assumption of liability, guarantees and indemnities according to Mexican law?

(8) On the merits, are Claimants entitled to the final relief claimed partially or in totality according to Mexican law?

(9) If sums of money are awarded to the Claimants should they bear interest and if so, at what rate and from what date according to Mexican law?

(10) Which of the parties shall bear the costs of this arbitration including the arbitrators' fees, the ICC administrative expenses and the arbitrators' expenses, or in which proportion shall they be borne by the parties?

(11) Which of the parties shall bear the costs of attorneys' fees, and other related legal costs, or in which proportion shall they be borne by the parties?"'

An initial hearing took place which led to an order for interim and conservatory measures and an interim award concerning issues 2, 3 and 4.

Order for interim and conservatory measures:

'With respect to Issue No. I, on . . ., the Arbitral Tribunal issued an Order for Interim and Conservatory Measures, directing inter alia that:

"(1) any funds that have been paid or transferred or are to be paid or transferred to any one or more of the Defendants and/or to any other entities directly or indirectly controlled by Defendant 5, pursuant to the Payment Acknowledgement Agreement and Release, or to any other agreement related thereto and/or (ii) any other assets relating directly or indirectly to the dispute which is the object of this Arbitration or traceable to transactions related directly or indirectly to this dispute be placed and held in an escrow or similar account or safekeeping arrangement in a Canadian bank under the joint control of the Claimants and the Defendants, pending the issuance of an award in this Arbitration."

The Order further directed that the Defendants deposit all shares of the capital stock of Defendant 2 that are within the possession, custody or control of any one or more of them in an escrow or similar account or safekeeping arrangement in a Canadian bank under the joint control of the Claimants and the Defendants, pending the issuance of an award in this Arbitration.

Counsel for the Defendants objected to this order on jurisdictional, procedural and substantive grounds. Specifically, the Defendants filed an "Opposition and Objection to Interim and Conservatory Measures" . . . detailing their objections and seeking revocation of the measures. The Tribunal considered these objections and the request for revocation, and, by letter of . . . communicated its determination that the order was proper in all respects and would be maintained. The Defendants have subsequently taken no steps to comply.'

In the interim award, the Arbitral Tribunal found that it had jurisdiction over Defendants 1, 2, 3 and 5 and reserved judgment on jurisdiction over Defendant 4 to a later stage of the proceedings, ordering such Defendant to conduct itself as a party to the proceedings in the meantime. It further found that it could take account of the Shareholders Agreement to the extent that it had a bearing on the Subscription Agreement. As far as the time bar is concerned, it found that commercial law, not civil law, was applicable and that under commercial law the time allowed for bringing a claim had not expired.

In its final award, the Arbitral Tribunal first affirmed its jurisdiction over Defendant 4. It further found no reason to conclude that, assuming Defendants committed fraud, such fraud induced Claimants to enter into the Subscription Agreement. With respect to issue 6, it recorded several breaches of the Subscription Agreement by Defendants, which/who were all jointly and severally liable for the full amount due on account of such breaches. Indemnification was awarded to Claimants, which were ordered to surrender to Defendant 1 their stake in the shares of Defendant 2. Lastly, Defendants were ordered to pay interest at 6% on the sums due, in accordance with Mexican law, and to bear the entire arbitration costs.