The parties to this dispute were all members of a worldwide business group. Claimants were firms comprising one business unit (X) within the group, whilst Respondents were other firms constituting another business unit (Y) within the group, plus an umbrella entity (Z) created to coordinate the practice of its partners and their member firms, which included those of X and Y. Coordination between member firms was achieved by way of agreements, known as MFIFAs (Member Firm Interfirm Agreements), designed to ensure the provision of uniform, high quality services to clients with interests in more than one country. Such cooperation enabled member firms to benefit from technological expertise developed by other member firms, in return for which payments or contributions to costs might be required. Over time, as the skills and services offered by each unit evolved, they began to overlap, causing conflict between X and Y. Attempts were made to define the responsibilities of each business unit so as to avoid competition, but they proved unsuccessful. Failing a satisfactory solution, Claimants initiated arbitration proceedings, accusing Y of breaching their MFIFAs by encroaching on X's area of practice, of disrupting Claimants' business opportunities, of misappropriating X's name and goodwill, causing marketplace confusion, poaching X's personnel and trading on X's credentials and expertise. It further accused Z of breaching its obligations under the MFIFAs by failing in its duty to coordinate practice, by allowing Y to compete with X, by failing to enforce the mutual obligations between the member firms of X and Y and by failing to regulate the use of the group name. Y accused X of engaging in inequitable conduct and breaching its obligations to the Y member firms, notably by trading on their credentials and expertise, acting in bad faith and refusing to cooperate with Y member firms. In examining certain of these claims and the remedies to be granted, the sole arbitrator referred to the <b>Unidroit Principles</b> (articles 1.7, 4.1, 5.4, 7.3, 7.4).

Applicable law

'The Tribunal found that the Member Firm Interfirm Agreements (MFIFAs) entered into between [Z] and the [group] member firms, together with the [Z] Articles and Bylaws are the relevant rules of law chosen by the parties to govern the present arbitration; in interpreting the provisions of the MFIFAs the arbitrator is not bound to apply the substantive law of any jurisdiction but shall be guided by the policies and considerations set forth in the Preamble to the MFIFAs and the Articles and Bylaws of [Z]; if the MFIFAs and the [Z] Articles and Bylaws are silent or do not provide guidelines for a decision, the Tribunal shall, pursuant to article 17(1) of the ICC Rules, apply the rules of law it deems appropriate; those rules of law shall be the general principles of law and the general principles of equity commonly accepted by the legal systems of most countries.

The Unidroit Principles of International Contracts are a reliable source of international commercial law in international arbitration for they "contain in essence a restatement of those "principes directeurs" that have enjoyed universal acceptance and, moreover, are at the heart of those most fundamental notions which have consistently been applied in arbitral practice."1 '

With regard to X's claim that Y member firms disrupted its business opportunities, poached its personnel, traded on its credentials and expertise, misappropriated its name and member firms' goodwill and caused marketplace confusion.

'The [X] member firms additionally accuse the Respondent member firms of breaching their obligations under the MFIFAs on the counts described above.

The [Y] member firms deny both the factual and contractual basis of Claimants' allegations and challenge some assertions of the [X] member firms.

In the Tribunal's view, only a few situations described by Claimants can be categorized as a breach under the MFIFAs.

There are ten uncontested events prior to this arbitration of [Y] member firms' partners or personnel misleading [X] clients in order to sell their own services and 18 situations of [Y] member firms bidding on [X] member firms' existing clients for jobs similar to those performed by Claimants for such clients.

Claimants have also produced evidence of an incident involving a [Y] member firm hiring away an [X] member firm's employee. The former [X] employee later solicited work to the same client he had assisted while serving with the [X] member firm in spite of the [Y] member firm's assurance that such situation would not occur.

The MFIFAs contain no provision explicitly prohibiting that conduct; but the contractual agreements among the parties forbid the [group] member firms to engage in uncooperative acts to benefit themselves at the expense of other member firms. Such acts are contrary to the member firms' implicit obligation to cooperate and to pursue their professional practice in accordance with the principle of good faith and fair dealing inherent to international contracts. 2

On five other occasions [Y] member firms traded on Claimants' credentials and expertise, citing as [the group]'s qualifications and skills exclusively belonging to [X] member firms. That conduct is also contrary to the member firms' obligation to act in accordance with the principles of good faith and fair dealing.'

With regard to X's claim that Z failed to coordinate the practices of the member firms

'Claimants accuse [Z] of disregarding "its core function to assure that the basic purpose of the 1989 restructuring is met and to act as the coordinator of all Member Firms and the implementer of guidelines and policies to ensure compatibility among and the harmonious operation of all Member Firms". (emphasis provided in text)

The [X] member firms' contention rests on one basic assumption: [Z] has the obligation to coordinate the member firms' practices. [Z] answers that with minor exceptions, the MFIFAs do not impose an obligation on [Z] to coordinate.

In the Tribunal's view, the language of the [group] organizational documents is not in accordance with [Z]'s interpretation.

Member firms coordination is the cornerstone of the MFIFAs; it is the means to ensure that the [group]'s cooperative goals are achieved. If adequate coordination were not well-founded and properly ensured in an organization such as the [group] - comprised of more than one hundred member firms worldwide - cooperation would be seriously impaired.

By entering into an MFIFA, a member firm appoints [Z] to arrange for the coordination of its professional practice on an international basis with that of the other member firms . . . and legitimately expects its professional practice to be coordinated with that of the other member firms. Conversely, [Z] accepts such appointment and the responsibilities inherent to the coordinating function.

Furthermore, one of [Z]'s guiding principles is that the members firms' practices shall be correlated and coordinated on an international basis . . .

In summary, the explicit MFIFA provisions, interpreted in light of the purposes and policies set forth in the Preamble thereto and in the [Z] Articles and Bylaws, demonstrate that [Z]'s essential obligation is to coordinate the [group] member firms' diverse professional practices subject to the purposes and policies set forth in the Preamble to the MFIFAs and in article 3 of the [Z] Articles. Indeed, since its creation in 1977, [Z]'s purpose has been the coordination of its member firms on an international basis . . .

Those coordinating duties include specific functions, among others, developing compatible policies and professional standards for the member firms; developing annual operating plans to ensure the effective coordination of the member firms' practices and determining the appropriate scope of practice for the members firms.

The Tribunal finds that the wording of these purposes, policies and functions indicates that [Z] must exercise its best efforts3 to ensure cooperation, coordination and compatibility among the member firms' practices.

. . .

[Z] neglected to address the scope of practice conflict, even after the Board of Partners and Mr . . . had admitted that the status quo was unacceptable and unsustainable.

On these grounds, the Tribunal finds [Z] did not make its best efforts to ensure coordination, cooperation and compatibility among the practices of the [Y] and [X] member firms, because it failed to take any course of action when the scope of service conflict surfaced and extended; and because it failed to develop the annual operating plans required to coordinate the practices of all the [group] member firms.

. . .

[Z]'s neglectful conduct is a breach of its obligations to coordinate the practices of the [X] with those of the [Y] member firms, to develop compatible policies and professional standards for member firms and to develop annual operating plans to assure the effective coordination of the member firms' practices . . .

[Z] contends that any such breaches are not sufficiently material to warrant termination. "The Unidroit factors - says [Z] - make is clear that there has been no material, fundamental breach."

The Unidroit criteria cited by [Z] proclaim:

"In determining whether a failure to perform an obligation amounts to a fundamental non-performance regard shall be had, in particular, to whether

a. the non-performance substantially deprives the aggrieved party of what it was entitled to expect under the contract unless the other party did not foresee and could not reasonably have foreseen such result;

b. strict compliance with the obligation which has not been performed is of essence under the contract;

c. the non-performance is intentional or reckless;

d. the non-performance gives the aggrieved party reason to believe that it cannot rely on the other party's future performance;

e. the non-performing party will suffer disproportionate loss as a result of the preparation or performance if the contract is terminated."

Several prior findings made in this award must be considered in assessing [Z]'s conduct in the light of the Unidroit criteria: . . .

In light of the above findings, [Z]'s conduct amounts to a fundamental non-performance of its obligations under the MFIFAs.

First, [Z] failed to coordinate all the [group] member firms, particularly by neglecting two of its critical functions: to develop annual operating plans for all the member firms' practices and to make its best efforts to address and resolve the scope of service issue.

[Z]'s failure to exercise its best efforts to coordinate the member firms' practices substantially deprived Claimants of the cooperation they were entitled to expect under the MFIFAs.

[Z]'s negligence led the [Y] and [X] member firms to behave essentially as two separate global partnerships, amid the internal tensions and disputes between them. Thus, as events unfolded, the benefits for Claimants under their MFIFAs became increasingly unrelated to their association with the [Y] member firms.

By any count, the [X] member firms have been substantially deprived of the cooperative benefits which the contractual bonds with the [Y] member firms were supposed to provide. In fact, the agreements between the [Y] and [X] member firms grew to be highly detrimental for Claimants, insofar as the [X] member firms have been obliged to make massive transfer payments without receiving cooperation in return.

That kind of arrangement could not have been the result expected by the [X] member firms or the result any reasonable party would expect from a contractual relationship.

Second, strict compliance by [Z] [with] its obligation to coordinate the practices of the [X] and the [Y] member firms is of the essence of the MFIFAs.

As stated above, coordination among the member firms' practices provides the means to ensure the cooperative goals set forth in the Preamble thereto are achieved. If the member firms are not adequately coordinated, cooperation among them is seriously impaired.

Also, by entering into an MFIFA, each [X] member firm appointed [Z] to provide such coordination and legitimately expected its professional practice to be coordinated with that of the other member firms, including the [Y] member firms.

Third, [Z]'s non-performance gives Claimants reason to believe that they cannot rely on [Z]'s future performance.

[Z] failed to coordinate the practices of the [Y] and [X] member firms despite Mr . . . and the business unit leaders' admittance that the scope of service issues needed to be addressed. [Z] equally failed to define an overall operating framework for all the member firms and to comply with its obligations albeit its Board of Partners declared fifteen months prior to the initiation of this arbitration that the status quo was unacceptable.

Nothing indicates that the [X] member firms can rely on [Z]'s future performance of its obligations, particularly in light of the internal division among most of its leaders along business units lines.

Fourth, Respondents will not suffer a disproportionate loss as a result of the preparation or performance if Claimants' MFIFAs are terminated.

[Z] cannot possibly suffer any harm from the termination of its contractual relationship with the [X] member firms because [Z] is an instrumentality for the purpose of coordinating the member firms' professional practice. In fact, [Z] is only paid for the services rendered to the member firms as long as Claimants' MFIFAs remain in force. . . .

Moreover, the [Y] member firms' past performance to the [X] member firms has been more than compensated by the significant amounts received from the [X] member firms as transfer payments.

Respondents' reliance on paragraph 17.2 of the MFIFAs to determine the damages suffered as a result of Claimants' departure from the [group] is unfounded. The MFIFAs explicitly state that those liquidated damages are to be presumed as a valid measure of actual damages suffered by the party entitled to payment. Among them are the increased costs of establishing a relationship with other suitable practice entities or those associated with the inability to establish such replacement relationships, and the related decrease in revenues.

Respondents have neither right to termination payments nor the apparent need to establish new relationships with other suitable practice entities. The [X] and [Y] member firms virtually operate as two separate global partnerships . . .'

With regard to X's alleged refusal to cooperate with Y

'The Respondent member firms accuse Claimants of systematically failing to cooperate since the early 1990s, by refusing to team with them and declining to share resources including common support structures and personnel.

The Tribunal found eleven instances, prior to this filing of this arbitration, of [X] member firms acting uncooperatively by, inter alia, halting previous joint industry studies; excluding [Y] member firms from engagements for clients introduced by [Y] partners to [X] member firms; excluding [Y] personnel previously committed to work on certain [X] member firm engagements and backing out of joint proposals with [Y] member firms.

That conduct is contrary to the member firms' implied obligation to cooperate under the MFIFAs and to the explicit obligation to pursue their professional practice with respect to one another in accordance with the principle of good faith and fair dealing, inherent to international contracts. 4

Nevertheless, the events portrayed by the [Y] member firms are not a material breach of the MFIFAs, particularly if those events are placed in the context of a long-standing relationship involving thousands of potentially conflicting situations.

Contrary to the Respondent member firms' assertion, the Tribunal found no documentary support showing that Claimants had issued a "directive" forbidding the [X] member firms to cooperate with the [Y] member firms.'

With regard to remedies

(i) Claimants' release from its obligations under the MFIFAs

'While [Z] breached its obligations to the [X] member firms under Claimants' MFIFAs and was responsible for a fundamental non-performance thereunder, Claimants did not engage in inequitable conduct or breach their contractual or fiduciary obligations.

It is a well established rule of law that a fundamental breach of a contract gives the aggrieved party the right to terminate the contractual relationship. This general rule is reflected in the MFIFAs which provide that the effect of a material breach thereto entitles the wronged party to terminate its MFIFA . . .

Under the Unidroit Principles of International Commercial Contracts, a party may terminate a contract when the failure of the other party to perform an obligation under the contract amounts to a fundamental non-performance. The consequence of termination is to release the parties from their obligation to effect and to receive further performance. 5

On account of [Z]'s fundamental non-performance, the [X] member firms' MFIFAs are terminated. Consequently, Claimants are released from all their obligations to [Z] and the [Y] member firms under the MFIFAs as of the date the present award is notified to the parties.'

(ii) damages or compensation

'Claimants seek an award of US$ . . . for damages caused to the [X] brand and reputation, originated in marketplace confusion caused by [Y]. Those damages stem from the time Claimants devoted to clarifying existing or prospective clients' perceptions; from lost accounts; from the cost of developing a new logo and identity, increased advertising and marketing communications; and from reputation effects on brand image and equity.

The Tribunal found that the [Y] member firms did not breach their obligations under the MFIFAs by causing confusion in the marketplace. For this reason, the [X] member firms cannot claim any harm from the alleged breach and are not entitled to any compensation (article 7.4.2 of the Unidroit Principles).

[Z] on the other hand, breached its material obligations under the MFIFAs by failing to coordinate the practices of the [X] and [Y] member firms. However, [Z] was not under the duty to coordinate the practices of the member firms by drawing clear distinctions among the member firms' marketplace images. Thus, none of the damages alleged by Claimants are a consequence of [Z]'s non-performance.

Claimants also seek restitution of the transfer payments made to the [Y] member firms since 1994, including the transfer payments placed in escrow, plus interest thereon.

The Tribunal has ruled that Claimants' MFIFAs are terminated as of the date this Award is notified to the parties.

Under general principles of law, upon termination of the contract either party may claim restitution of whatever it has supplied, provided that such party concurrently makes restitution of whatever it has received (see article 7.3.6(1) of the Unidroit Principles). Thus, restitution necessarily entails that both parties return what they have received under the contract.

Performance of Claimants' MFIFAs has extended over a period of more than ten years. During that time and even after 1994, Claimants have received several benefits from their association with the [Y] member firms, e.g. the use of the [group] name and client referrals by the [Y] member firms. Albeit these benefits have decreased in the course of time they are by no means immaterial.

Restitution of the benefits received by Claimants is impossible. In fact, the [X] member firms do not even offer to do so.

If the Tribunal were to grant the restitution of transfer payments made by Claimants, they would be unjustly enriched.

The Tribunal shall not grant Claimants the restitution they requested.'

(iii) use of common technology

'The next question is what determination should the Tribunal make in case all the member firms which jointly developed and collectively own [group] Technology depart the [group]. Neither the MFIFAs, nor any other [group] governing document known to the Tribunal provide an answer. Therefore, the general principles of law are the appropriate rules to decide this matter.

Under general principles of law, contracts must be interpreted according to the common intention of the parties. 6 If the intention cannot be established, the contract should be interpreted in light of the meaning reasonable persons of the same kind as the parties would give to it in the same circumstances. 7

It would not be reasonable to hold - and reasonable persons of the same kind as the parties to this arbitration could not possibly claim - that the member firms not paying for or participating in the development of [group] Technology are common owners of such technology or that the entities which funded and developed it are bound to forfeit their rights to those who have no title thereto.

Equity would not dictate a different solution. Indeed, the Tribunal found that the Respondent member firms established a broad-based . . . practice that competes with Claimants' activities. For this reason, it would be unfair to compel the [Y] member firms to surrender their technology which would capacitate the competing [Y] member firms in Claimants' core activities.

The final question is what disposition should the Tribunal make in connection with [group] Technology, if any, jointly developed and commonly owned by [X] and [Y] member firms.

The Tribunal has found no evidence among the myriad of documents submitted in this arbitration, of the extent to which any [group] Technology was jointly developed by member firms from both business units.

In any case, that Technology must remain within the [Y] member firms as provided in paragraph 17.2(D) of the MFIFAs.'

1
June 5, 1996 Award on Preliminary Issues in ICC case no. 7375/CK.

2
Unidroit Principles of International Commercial Contracts, article 1.7.

3
Unidroit Principles of International Commercial Contracts article 5.4(2). "To the extent that an obligation of a party involves a duty of best efforts in the performance of an activity, that party is bound to make such efforts as would be made by a reasonable person of the same kind in the same circumstances."

4
Unidroit Principles of International Commercial Contracts, article 1.7

5
Unidroit Principles of International Commercial Contracts, articles 7.3.1(1) and 7.3.5(1).

6
Unidroit Principles of International Commercial Contracts, article 4.1(1) and Principles of European Contract Law, article 5:101(1).

7
Unidroit Princples of International Commercial Contracts, article 4.1(2) and article 5:101(3) of the Principles of European Contract Law substantially contains the same provision.