- Arbitral Award
- ICC International Court of Arbitration 9875
LONG-TERM CONTRACTS - LICENSING AGREEMENT - BETWEEN A FRENCH COMPANY AND A JAPANESE COMPANY - LEX MERCATORIA AS APPLICABLE LAW
CONTRACT INTERPRETATION – INTENTION OF PARTIES DECISIVE – TO BE DETERMINED IN THE FULL CONTEXT OF THE CONTRACT AND OF THE CONDUCT OF THE PARTIES PREVIOUS AND SUBSEQUENT TO THE CONCLUSION OF THE CONTRACT – ARTICLES 4.1, 4.3 AND 4.4 OF THE UNIDROIT PRINCIPLES.
CONTRACT INTERPRETATION – PRINCIPLE OF GOOD FAITH AND FAIR DEALING IN INTERNATIONAL TRADE – PROHIBITION FROM DOING INDIRECTLY WHAT THE CONTRACT PREVENTS FROM DOING DIRECTLY - ARTICLE 1.7 OF THE UNIDROIT PRINCIPLES.
Claimant, a French company, and Defendant, a Japanese company, entered into a license agreement according to which Claimant was given an exclusive license to manufacture, sell and distribute Defendant’s products in Europe. Subsequently Defendant entered into an agreement with an American company granting it an exclusive license for the North American market and a non-exclusive license for other countries. According to Claimant Defendant, by not expressly excluding Europe from those other countries, had violated its agreement with Claimant.
After determining in a partial award that the dispute was to be settled on the basis of the lex mercatoria, in its final award the Arbitral Tribunal addressed the merits of the case and decided in favour of Claimant. It reached its conclusion on the basis of a careful interpretation of the license agreements in question and in this context it expressly relied on Articles 4.1, 4.3 and 4.4 of the UNIDROIT Principles to which both parties had referred to in their pleadings. Yet in support of its decision the Arbitral Tribunal also invoked Article 1.7 of the UNIDROIT Principles and the general principle of good faith and fair dealing in international trade laid down therein: indeed it would be contrary to this principle to do indirectly what the contract prevents from doing directly.
 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) usage's”. 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, usage's 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.
 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
 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 setup 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  As for 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 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.
 Significantly, the 1996 (draft) contracts introduce specific provisions concerning indirect sales.
 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 for 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.
 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.
 [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.
 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).
 [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.
 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.’}}
Excerpts of the award published in
ICC International Court of Arbitration Bulletin Vol. 12, No. 2 (Fall 2001), 97-99.}}