In 1983, Claimant, a French company, was given an exclusive licence to manufacture, sell and distribute Respondent's products in Europe. A similar agreement was made at the same time between Respondent and an American firm (X) for the North American market. Respondent retained exclusive distribution in Asia for itself and gave Claimant and Respondent non-exclusive rights for other countries. The licence agreement between Claimant and Respondent provided for an exception to exclusivity in order to allow the products bought by Original Equipment Manufacturers in the territory of one exclusive licensee to be distributed in another licensee's exclusive territory. In 1996, Respondent entered into a new agreement with X and submitted a new draft contract to Claimant, which was never executed. Claimant contended that the new contract between Respondent and X infringed its exclusivity in Europe, as Europe had been omitted in a clause defining limitations upon the extent of X's distribution. The arbitral tribunal therefore had to decide whether the second contract between Respondent and X was to be deemed to violate the exclusivity in the European market granted to Claimant in its original agreement with Respondent. In its partial award, the arbitral tribunal decided that <b>lex mercatoria</b> should be applied to the merits of the case, noting that the <b>Unidroit Principles</b> were a reflection of the rules of law and usages of international trade. In its final majority award, the tribunal referred to the rules of interpretation contained in article 4 of the <b>Unidroit Principles</b> and the practice of good faith and fair dealing expressed in article 1.7.

Partial Award

'Applicable Rules of Law

The Agreements between the parties do not include provisions concerning the rules of law applicable to their contractual relationship.

Claimant argues French law should be applicable. The choice of Brussels, a place with no substantial link with the dispute, cannot lead to the application of Belgian law. The most appropriate law should be determined through the "méthode de la voie directe", involving the examination of different factors. The place of the characteristic performance, in a licence agreement, is often considered as that of the licensor; however, the issues submitted to this tribunal are wider than questions related to the Defendant's industrial property rights. The "proper law of the contract" can only be French law, for several reasons. France is the country from which all operations included in the territorial exclusivity were conducted; it is the country where the formulas and know-how allegedly misappropriated by Defendant were developed; it is in France that the consequences of the breach of the licence contracts were felt and the ensuing prejudice must be compensated.

While agreeing with Claimant that Belgian law should not govern the issue, Defendant considers Japanese law should apply, not French law. In the absence of a common intent of the parties, Japanese international private law applies the law of the place where the contract was executed, that is Japan in this case. Under French international private law, the 1980 Rome Convention would apply. Article 4 of that Convention provides that in the absence of an express choice, the agreement "shall be governed by the law of the country with which it is most closely connected", it being "presumed that the contract is most closely connected with the country where the party who is to effect the performance which is characteristic of the contract has, at the time of conclusion of this contract, his … central administration". The characteristic performance, in a licence contract, is that of the licensor, i.e. [Defendant], which would also lead to the application of Japanese law. Refuting some of Claimants' arguments, Defendant points out that the territory of the licence agreements was not limited to France, that the choice of the law of the place where the alleged prejudice was suffered might be relevant in a tort case, but not in a contractual dispute and that the alleged breaches (conclusion of the second [X] agreement, registration of patents in Japan and the United States) have no link to France.

According to article 17(1) of the ICC Rules, in the absence of an agreement between the parties upon the rules to be applied to the merits of the case, "… the Arbitral Tribunal shall apply the rules of law which it determines to be appropriate". Article 17(2) adds: "In all cases the Arbitral Tribunal shall take into account the provisions of the contract and the relevant trade usages."

The provisions of the contract are not decisive. It contains references to France and other European and non-European countries as well as to Japan. The Sales Territory described in Exhibit II covers "All countries of the world, other than Canada, USA, Mexico and Asian countries east of Iran, except French Territories". The licence is granted for patents held by Japanese companies (Exhibit III). Technical assistance will be provided by the Defendant at the Claimant's factory in France (art. 4) or at the Defendant's offices and production facilities in Japan (art. 5). The Claimant has agreed to pay royalties in Japanese currency (art. 6). An important provision, much at the centre of this dispute, deals with improvements invented by the Claimant, normally in its premises in France (art. 9).

The tribunal does not consider the neutral choice of Brussels as the seat of the arbitration to imply a choice of Belgian law as the law applicable to the contract.

In licence agreements, the appropriate law is sometimes considered to be that of the country where the licensor is located (in this case, Japan), assuming the most characteristic performance of such contracts would be that of the licensor. However this is not an absolute rule. For example, the law of the licensee is sometimes preferred. The Rome Convention of 1980 also provides that the link to the characteristic performance can be discarded when such characteristic performance cannot be determined or when circumstances indicate that the contract is more closely connected with another country (art. 4) (cf. J. M. Mousseron, J. Raynard, R. Fabre and J. L. Pierre, Droit du commerce international, 1997, no. 136 et seq.).

In this case, part of the issues deal with the way the Defendant handled technical improvements invented and transferred to the former by the Claimant, casting doubts on a solution that would exclusively consider the licensor's transfer of technology to the licensee as the most characteristic performance of the contract. Insofar as the licensee's own performance can be considered as characteristic of the contract, this would lead to the application of French law. Another significant factor consists in the geographical scope of the rights licensed to the Claimant, which do not exclusively lead to French law, but would eliminate Japanese law.

The arbitral tribunal considers that the difficulties to find decisive factors qualifying either Japanese or French law as applicable to the contract reveal the inadequacy of the choice of a domestic legal system to govern a case like this. A contract concluded between Japanese and French companies concerning a licence to manufacture products and to sell them in various parts of the world is not appropriately governed by the national law of one of the parties, failing agreement on such a choice.

The most appropriate "rules of law" to be applied to the merits of this case are those of the lex mercatoria, that is the rules of law and usages of international trade which have been gradually elaborated by different sources such as the operators of international trade themselves, their associations, the decisions of international arbitral tribunals and some institutions like Unidroit and its recently published Principles of International Commercial Contracts.

Nevertheless the tribunal will take into account any relevant national laws concerning intellectual property rights issues raised during this procedure.'

Final Award

'Interpretation principles

[1] Since the main problem here is one of interpretation, the tribunal has invited the parties to express their views of the principles to be applied under the lex mercatoria, which the partial award of January . . . 1999 declared to be applicable to the case.

[Claimant] refers to two provisions of the Unidroit Principles of International Commercial Contracts. According to article 4.1(1): "A contract shall be interpreted according to the common intention of the parties." Article 4.3 states that in applying article 4.1 . . . "regard shall be had to all the circumstances, including (a) preliminary negotiations between the parties; (b) practices which the parties have established between themselves; (c) the conduct of the parties subsequent to the conclusion of the contract; (d) the nature and the purpose of the contract; (e) the meaning commonly given to terms and expressions in the trade concerned; (f) usages". Such principles correspond to jurisprudence and arbitral practice. [Claimant] claims its interpretation of article 2 e of the second [X] contract is confirmed by the parties' common intention and subsequent conduct.

[Defendant] also invokes art. 4.3 of the Unidroit Principles, but additionally refers to art. 4.4 ("Terms and expressions shall be interpreted in the light of the whole contract or statement in which they appear.") and 4.5 ("Contract terms shall be interpreted so as to give effect to all the terms rather than to deprive some of them of effect."), as well as to art. 8 b of the Vienna Convention on Contracts for the International Sale of Goods ("In determining the intent of a party or the understanding a reasonable person would have had, due consideration is to be given to all relevant circumstances of the case including the negotiations, any practices which the parties have established between themselves, usages and any subsequent conduct of the parties."). More generally, the lex mercatoria invites the tribunal to take into account elements such as, inter alia, the principle of good faith, the rule of effectiveness, the reference to the contract as a whole and the behaviour of the parties. . . .

[2] The tribunal considers the parties have rightly identified the interpretation principles to be applied, with one exception. It does not think [Respondent]'s reference to the rule of effectiveness (as expressed in art. 4.5 of the Unidroit Principles) is relevant in this case. Art. 2 e of the second [X] agreement would have effect under either interpretation submitted. Otherwise, the dominant principle is to consider the intention of the parties, which can be determined having regard to all the circumstances. Of particular importance in this case are on one side the contractual set-up as a whole, and on the other side the conduct of the parties subsequent (but also previous) to the conclusion of the contracts. . . .

(a) Intention of the parties

[3] In the interpretation of art. 2 e of the second [X] contract, the intention of the parties should first be determined in the full context of the whole contractual set-up between [Defendant] and its two licensees, as it was organized in 1983 and as it may have evolved in 1996. The contractual relationships between [Defendant] and [Claimant] on one side, and between [Defendant] and [X] on the other side, should not be analyzed separately. The system set up in 1983 reflected [Defendant]'s worldwide planning with two licensees, each of the three participants receiving its own exclusive territory and agreeing to engage in a regular exchange of know-how. The main issue is to determine whether [Defendant]'s and [Claimant]'s intention, in 1996, was to allow [X] to enter the European market though this would be in violation of [Defendant]'s obligations towards [Claimant] under their still applicable 1983 agreement. In this respect, the controversial provision of article 2 e of the second [X] contract cannot be read by itself, nor even only in connection with art. 1 of the same agreement. The two 1983 contracts and the 1996 contract and draft contract have to be fully compared in their sensitive provisions.

The alleged violations of [Claimant]'s European territory came through direct . . . and indirect . . . sales by [X]. The relevant issue is not whether such sales occurred, but whether the second [X] contract permitted them.

Direct and indirect sales have to be distinguished.

Direct sales

[4] . . .

As far as direct sales are concerned, the 1996 (draft) contracts are not different in their principles from the 1983 agreements: each contract protects the other licensee's territory. The second [X] contract does not contain any provision which would amount to a violation of [Defendant]'s obligations towards [Claimant].

Indirect sales

[5] Indirect sales are another matter. Apart from the OEM exceptions mentioned above, they were not explicitly referred to in the 1983 agreements. They were certainly permitted for each partner in its exclusive or non-exclusive territory. Were they permitted or prohibited in each other's territories?

The tribunal believes that in the absence of any explicit prohibition, such sales are not allowed outside one's territory. "Each party must act in accordance with good faith and fair dealing in international trade." (Unidroit Principles, art. 1.7) It would be contrary to this principle to do indirectly what the contract prevents from doing directly. Good faith prevents from selling to an entity which one knows or should reasonably know intends to resell in another licensee's territory. (This is an obligation towards the licensor, not towards the other licensee.)

This interpretation is confirmed by the OEM exceptions, which would not be necessary if indirect sales were freely permitted.

[6] Significantly, the 1996 (draft) contracts introduce specific provisions concerning indirect sales: . . .

[7] Remarkable differences from the 1983 agreements are apparent. Indirect sales are now subject to express provisions, in [Defendant]'s contractual relationships with both its licensees. With [Claimant], the prohibition which formerly derived from the good faith principle is now stated in the contract, and made applicable to the American and Asian markets. Between [Defendant] and [X], on the contrary, there is reciprocal prohibition of indirect sales in each other's territories, but Europe is significantly omitted.

It is also relevant to note that while the 1983 [Claimant] contract stated that "[b]oth [Defendant] and its US Licensee(s) are restricted from selling directly to the European market even to the European subsidiary or agent of an OEM located in their own respective countries" (art. 1), such provision was omitted in the 1996 draft contract.

Obviously, as far as indirect sales are concerned, the 1996 (draft) agreements are no longer identical. Considering the parties' legal expertise, the tribunal believes this new contractual set-up is not the result of bad drafting but of a deliberate intent, at least on [X]'s side, to alter the symmetry between [Claimant] and [X]'s positions on the world markets. Either [Defendant] shared that intent, or it can be reproached with oversight of [Claimant]'s interests when negotiating the second [X] contract.

(b) Parties' conduct

This interpretation is confirmed by the parties' respective conduct before and after the execution of that contract.

[8] The fact that the 2½-year-long renegotiation of the [X] agreement was not disclosed to [Claimant] is in itself probably no breach of [Defendant]'s contractual obligations towards [Claimant]. However, the tribunal finds it surprising as the three firms had been working together for many years on the basis of a worldwide cooperation and met regularly to exchange information. . . . Considering the significant modifications which were to appear in the 1996 contracts concerning indirect sales, this discretion suggests that [Defendant] was indeed playing a new game with [X] it did not want to reveal to its other licensee. . . .

[9] . . . [X]'s conduct after the conclusion of its second contract with [Defendant] casts some light on the American licensee's intentions. . . . [An internal memorandum] demonstrates [X]'s preoccupation with entering the European market and [X]'s conviction that they were able to do it through indirect sales.

[10] Such conviction is confirmed by . . . [X]'s . . . letter to [Defendant]: "[X] needs to offer products and services in Europe to remain competitive with . . . Today, we are accessing Europe through sales channels consistent with our . . . agreement" (emphasis added).

[11] [Respondent] argues that [X] was referring to the OEM exceptions, which permitted some indirect sales into each other's territories . . . The tribunal does not follow this restrictive interpretation in a context where [X] proclaims its "intent to open up territories between [Claimant] and [X] in Europe" and its need "to offer products and services in Europe to remain competitive …".

Conclusion

[12] The tribunal concludes that by entering into a contract that opened [X]'s door for indirect sales in Europe, [Defendant] breached the exclusive licence it had granted to [Claimant] by article 1 of their 1983 contract.'