Factual Background
In 2012, Mr. X bought a catamaran put up for sale by Mr. Y, who owned this catamaran through a British Virgin Islands company called Song Saigon Ltd.
Mr. X acquired the catamaran for EUR 1.22 million through two agreements successively signed with Song Saigon Ltd in the form of a memorandum of agreement (MoA) and a share sale and purchase agreement (SSPA), under which Mr. Y transferred all of his shares in Song Saigon Ltd to Mr. X.
Clause 41 of the MoA contained an arbitration clause providing for arbitration in London in the event of a dispute. It provided as follows:
Any dispute in connection with the interpretation and fulfillment of this Agreement unless the same can be settled amicably, shall be referred to arbitration in London in accordance with the provision of the Arbitration Act of 1996 and as subsequently amended (unless the Parties agree upon a sole arbitrator) each party appointing an arbitrator and the two arbitrators in the event of a disagreement appointing an umpire whose decision shall be final and binding upon both Parties hereto. This Agreement shall be governed by and construed in accordance with the laws of England.
Mr. X claims that he had suffered technical incidents and several damages as soon as the catamaran was used at sea and that he had been misled about its value by means of a false expertise established by an expert, Mr. K. Mr. X filed a complaint against Mr. Y and Mr. K for fraud, forgery and use of forgeries before the Economic and Financial Division of the Regional Service.
Following an order of partial dismissal and referral to the criminal court by the investigating judge, Mr. Y and Mr. K appeared before the Marseille Criminal Court respectively for forgery, use of forgeries, and swindling and complicity in forgery and use of forgeries.
In parallel, before the same court, Mr. X filed a compensation claim for his loss resulting from the criminal offence (s’est constitué partie civile). This amounted to EUR 1.22 million (the purchase price of the catamaran), considering that the false expertise valuing the catamaran at EUR 2.5 million incited him to purchase it.
On 4 April 2018, the Marseille Criminal Court acquitted Mr. Y of the offences concerning Mr. X for lack of evidence and, therefore, dismissed the compensation claim.
The initiation of the arbitral proceedings
On 13 February 2018, Mr. Y instituted arbitration proceedings in London based on Article 41 of the MoA. He asked the tribunal to order an anti-suit injunction to prevent Mr. X from proceeding in any way other than before the arbitral tribunal, and for compensation for the legal costs and various expenses incurred during the criminal proceedings. Mr. Y argued that Mr. X brought claims for compensation related to the sale of the catamaran before a French court in violation of the arbitration clause which gave the arbitral tribunal jurisdiction to resolve any dispute related to the interpretation and fulfilment of the agreement.
Mr. X made a counterclaim asking for the annulment of the SSPA. He also asked the tribunal to dismiss Mr. Y’s claim, arguing that Mr. Y’s claim for compensation was not covered by the arbitration agreement, which related to any dispute in connection with the interpretation and fulfilment of the SSPA.
On 22 February 2021, the tribunal, seated in London and constituted by a sole arbitrator, rejected Mr. X’s counterclaim and ordered Mr. X to pay Mr. Y EUR 483,636.20 plus the arbitration costs corresponding to the reimbursement of the sums that Mr. Y had to pay during the criminal proceedings.
The tribunal observed:
Mr. Y’s claims were manifestly for breaches of the memorandum of agreement and, in particular, breaches of Clause 41 [the Arbitration Agreement contained in SSPA]. An alleged failure to comply with a clause or clauses of a contract manifestly relates to the proper ‘fulfilment’ of that contract. Clearly the claims fell within the ambit of Clause 41 of the memorandum of agreement.
The award was granted exequatur in France. On 21 June 2021, Mr. X lodged an appeal before the Paris Court of Appeal.
Grounds for appeal of the exequatur order
Among other grounds, Mr. X invoked the ground for annulment based on the arbitral tribunal’s lack of jurisdiction. He argued that Mr. Y’s claim for compensation was not covered by the arbitration clause.
In this respect, he pointed out that Mr. Y’s claim was unrelated to the sale of the catamaran as it concerned the reimbursement of legal fees and various expenses incurred during the criminal proceedings before the French courts. He added that this claim should in any event have been brought before the French courts according to the rules of conflict of jurisdiction in criminal matters and not before an arbitral tribunal.
In turn, Mr. Y contends that his claim was covered by the arbitration agreement as it related to the loss that resulted from the proceedings instituted by Mr. X to obtain reimbursement of the price of the catamaran, the subject of the agreement.
The Paris Court of Appeal’s decision
The court of appeal quashed the exequatur order by a decision dated 13 September 2022. In its reasoning, the court noted that Mr. Y’s claims for compensation did not result from the performance of the agreement of sale of the catamaran but from the proceedings initiated in 2012 by the public prosecutor’s office before the French criminal court.
The court observed that even if the acts of forgery, use of forgeries and fraud that gave rise to the criminal proceedings were revealed during the sale of the catamaran, Mr. Y’s claim for reimbursement of the legal costs and expenses is not a dispute relating to the performance of the agreement but to the proceedings brought by the public prosecutor’s office in respect of the criminal acts allegedly committed.
The court therefore found that Mr. Y’s claim did not fall within the scope of the arbitration clause and that the arbitral tribunal extended its jurisdiction to matters that were not covered by the clause.
Commentary and conclusion
The question in this case was whether the compensation for legal fees and expenses incurred by one party in criminal proceedings related to the agreement in which the arbitration clause is contained can be ordered by an arbitral tribunal.
Under French law, Article 1525 of the French Code of Civil Procedure provides that, “An order granting or denying recognition or enforcement of an arbitral award made abroad may be appealed”. It further states that, “The Court of Appeal may only deny recognition or enforcement of an arbitral award on the grounds listed in Article 1520”. Among the grounds for annulment listed in Article 1520 is the case where the arbitral tribunal wrongly upheld or declined jurisdiction.
It is on this ground that the Paris Court of Appeal denied recognition and enforcement of the arbitral award that ordered the defendant to pay the legal fees and various expenses the claimant incurred during the criminal proceedings related to the contract entered into between the parties to the SSPA. The Paris Court of Appeal considered that the legal fees and various costs incurred during the criminal proceedings did not result from the performance of the SSPA, even though the alleged criminal acts originated from the conclusion of the agreement.
The decision, therefore, raises the important question of the extent of an arbitration agreement’s scope.
