French Supreme Court allows joint guarantors to challenge arbitral award

In a decision dated 5 May 2015 (Cass. Com. 5 mai 2015, 14-16.644, available at: https://www.courdecassation.fr/jurisprudence_2/chambre_commerciale_574/424_5_31676.html) concerning French domestic arbitration law, the French Supreme Court (Cour de cassation) accepted, for the first time, that a joint guarantor could challenge an arbitral award rendered in a dispute between a debtor and its creditor which determined the amount due to the latter. While the French Code of civil procedure already allowed, under certain conditions, a non-party to French domestic arbitration proceedings to challenge the resulting award by a specific procedure called third party opposition (tierce opposition), this procedure was not available to a joint guarantor until this decision.

Background

The facts of the case are relatively simple: in 1997, Sogire (the "Debtor"), a subsidiary of the company Pierre et vacances, sold the shares it held in Sati, to Alfa holding  (the "Creditor"). The transaction documents included a representation and warranty agreement containing an arbitration clause. In addition, pursuant to a separate instrument which did not contain an arbitration clause, Pierre et Vacances (the "Guarantor") became jointly and severally liable with its subsidiary, Sogire, to the Creditor. A liability for Sati to pay a third party arose and the Creditor started arbitration against the Debtor to seek compensation.

An arbitral award rendered on 10 December 2008 ordered the Debtor to pay compensation to the Creditor. The Debtor refused to pay, so the Creditor filed court proceedings against the Guarantor. The Guarantor in turn challenged the award by means of third party opposition (tierce opposition).

The Paris Court of Appeal considered that this third party opposition was inadmissible because, in particular, the Guarantor was deemed to be implicitly represented by the Debtor in the arbitral proceedings and therefore should not be considered a third party to the arbitral award. In doing so, the Paris Court of Appeal followed previous case law, which limits such right only to a joint guarantor who is able to (i) show the existence of a fraud, or (ii) put forward a defence that is only available to itself. The Paris Court of Appeal also noted that a guarantor who considers that the main debtor did not sufficiently defend itself before the arbitral tribunal can hold it liable and sue it directly.

The Supreme Court decision

However, the Paris Court of Appeal decision was overturned by the Supreme Court on the basis that it was contrary to both (i) Article 6.1 of the European Convention on Human Rights providing the right to access to court and (ii) Article 1481 of the French Code of civil procedure (then applicable, this article has been replaced by the new Article 1501 created by the Decree No. 2011-48 of 13 January 2011) which establishes the possibility for a non-party to a French domestic arbitration to challenge – under certain conditions – the resulting award. In particular, the French Supreme Court held that the right of access to a court implies that a joint guarantor, who was not a party to the arbitration, is allowed to file a third party opposition against an award that determined the amount of the debt that the main debtor owes to the creditor.

Comment

As explained above, third party opposition allows non-parties to the arbitration to challenge an award which indirectly has legal consequences for them. However, the French Code of civil procedure restricts this right to awards rendered in the context of French domestic arbitration (Article 1506 of the French Code of civil procedure, which lists the provisions applicable to international arbitration, does not contain Article 1501).

Before this decision, the non-admissibility of such proceedings to a joint guarantor was grounded on the fact that the joint guarantor was considered implicitly represented in the proceedings by the debtor. This rule, which clearly limited the scope of third party opposition, was based on the idea that by protecting itself, the debtor would also protect its guarantor. Therefore, save in the case of fraud or where the joint guarantor could put forward a unique means of defence not available to the debtor, third party opposition was not available to the joint guarantor.

This decision, which has been generally welcomed in legal and academic circles, now establishes that the right to challenge an arbitral award should be available to the joint guarantor.

Indeed, the decision also removes the concern that had been expressed that the theory of representation of the joint guarantor by the debtor was not adapted to arbitration, since the guarantor was, as a matter of principle, prevented from participating in the arbitration proceedings and was generally left with no action against the arbitral award which could have serious consequences for it. As a result, this situation was sometimes compared to a breach of due process.

Undoubtedly, this decision will be seen as a positive change for French domestic arbitration law.

However, there is still at least one point that needs to be clarified: will, or should, this solution be extended to third party opposition against international arbitration awards even though the French Code of civil procedure does not provide for this?

In its decision of 5 May 2015, the French Supreme Court did not rule on this question. However, by referring in its judgment to the international standard set down in Article 6.1 of the European Convention on Human Rights, it seems that the door may already be open.

For further information, please contact Emmanuelle Cabrol, Partner, Jehan-Damien Le Brusq, Advocat or your usual Herbert Smith Freehills contact.