Paris Court of Appeal upholds challenge to ICC treaty award and rejects third party intervention in resisting application to set aside

The Paris Court of Appeal has upheld a challenge to an International Chamber of Commerce (ICC) investment treaty award (Cour D'Appel de Paris, Pole 1 - Chambre 1, 15 March 2016, n° 14/19164). This is the latest instalment in the long-standing dispute regarding an insurance claim for damage to a textiles factory during the civil unrest that followed the Madagascan coup of 2009.

The Paris Court of Appeal set aside the sole arbitrator's decision on the grounds that he decided the case based on arguments raised of his own initiative and on which the parties did not have the opportunity to comment (ignoring the adversarial principle applicable under French law). The appeal court also rejected an attempt by an interested third party to intervene in resisting the challenge to the award, on the basis that this would flout the contractual nature of arbitration.

This decision is a rare example of a successful challenge to an arbitral award in France. It provides a helpful reminder of the Court of Appeal's supervisory role over French-seated arbitrations and its ability to annul an award where the tribunal has exceeded the scope of its powers and duties (in particular, where the tribunal failed to comply with due process and based its conclusions on arguments not raised by the parties). The judgment also shines a light on the limitations of the ICC scrutiny process.

Facts

Polo Garments Majunga's (PGM) is a Madagascar-based company owned by Belgian nationals Peter and Kristof de Sutter (directly and indirectly through a holding company, DS2 S.A.).

PGM's Madagascan insurer, Ny Havana, refused to pay out on a claim for  damage caused to PGM's textile factory during the civil unrest that followed the Madagascan coup of 2009 on the basis that the damage arose from political events (which the policy did not cover).

PGM sued Ny Havana in the Madagascan courts and was awarded judgment of €5.88 million. The local court found that the damage was caused by industrial action, rather than being politically motivated. The Madagascan Court of Appeal upheld this decision in 2011 but, in 2012, Madagascar's Supreme Court ordered that execution of the judgment be stayed pending determination of an appeal by the public prosecutor in the interest of the law.

PGM, DS2 and the de Sutters filed a €10 million investment treaty claim against the Madagascan state under the 2005 Madagascan bilateral investment treaty (BIT) with the Belgium-Luxembourg Economic Union. The claim was referred to a sole arbitrator, Barton Legum, under the International Chamber of Commerce (ICC) Rules with a seat in Paris. Mr Legum declined jurisdiction over the claims brought by PGM but heard DS2's and the de Sutters' claims.

In an award dated 29 August 2014, Mr Legum found that Madagascar had breached the fair and equitable treatment obligations under the BIT (Article 3.2). He ruled that the stay of execution was granted by the Supreme Court not to correct an issue of public interest but rather to protect the interests of the insurance company, owned largely by the Madagascan State. Mr Legum ordered Madagascar to pay damages of nearly €700,000, representing 6% of the principal sum awarded by the local courts (being the amount of interest which the judgment would have accrued under local law had its execution not been suspended).

On 22 September 2014, Madagascar brought an application before the Paris Court of Appeal to have the award set aside. The submissions filed by PGM, DS2 and the de Sutters were held inadmissible, as they were not filed within the time limit specified in Article 909 of the French Code of Civil Procedure (this provision provides a two-month time limit to file submissions in response to an annulment application, and which is extended by two additional months when the party is a foreign company.

Cebelec SA sought to voluntarily intervene in the proceedings on the basis that it had provided a loan to DS2 and the de Sutters, secured against the ICC award (and, therefore, had an interest in the award being upheld).

Decision

The Paris Court of Appeal set aside the award.

The court first rejected Cebelec's application to intervene in the proceedings, regardless of its interest in seeing the award upheld. This was because Cebelec was not a party to the arbitration agreement.

The Court of Appeal then went on to set aside the award, finding that the sole arbitrator's rationale for the damages awarded was not pleaded by the claimants and/or commented on by Madagascar (paraphrasing):

"the tribunal could not, without giving the parties an opportunity to make submissions on the point, substitute a claim for the principal amount and applicable interest awarded by the Madagascan Court of Appeal, in favour of a claim for compensation for the loss caused by the stay of execution during the appeal to the Supreme Court. The arbitrator might have calculated the damages on the basis of the interest rate applicable under Madagascan law, but this is nonetheless a different basis to the claim made before him".

The appeal court held that this disregard for the adversarial principle applicable under the civil procedure code justified setting aside the award.

Comment

This decision, in the long-standing dispute regarding an insurance claim by PGM for damage to its textiles factory, is a rare example of a successful challenge to an arbitral award in France, which remains an arbitration-friendly jurisdiction.

The judgment provides a helpful reminder of the Court of Appeal's supervisory role over French-seated arbitrations and its ability to annul an award where the tribunal has exceeded the scope of its powers and duties (in particular, where the tribunal failed to comply with due process and based its conclusions on arguments not raised by the parties). The judgment also shines a light on the limitations of the ICC scrutiny process.

The institutional scrutiny of draft awards is a distinctive feature of ICC arbitration. Whilst the scrutiny process is intended to "identif[y] any defects that could be used in an attempt to have [the award] set aside at the place of the arbitration or resist enforcement elsewhere", including "claims or issues not raised by the parties" (see paras. 3-1181 and 3-1208 of the 2012 Secretariat's Guide to ICC arbitration), the language of Article 33 of the ICC Rules makes clear that the scrutiny process cannot require a tribunal to change the substance of its award. The Secretariat's Guide to ICC arbitration states that the ICC Court can do no more than draw the tribunal's attention to matters of substance and that the Court is careful to respect this limit.

Further, whilst the summary of the parties' respective cases included by a tribunal in the draft award might lead the ICC Court to highlight parts of the tribunal's reasoning not raised by the parties, it might be difficult for the ICC Court to identify a departure from a parties' pleaded case without reviewing the whole record. As the ICC's scrutiny process is confidential, it is not known whether the issues raised in the application to set aside the award were commented on by the ICC Court during the scrutiny process.

All other things being equal, the risk of an award being successfully challenged may be greater where the tribunal comprises a sole arbitrator rather than a panel of three. This is because a three-member tribunal might be expected to exercise internal checks and balances during their deliberations and in drafting the award, from which a sole arbitrator would not benefit.

The judgment also reiterates the need for parties to comply with procedural rules and deadlines under the French Code of Civil Procedure both in initiating a challenge to an arbitral award but also in submitting arguments in response to such a challenge, failing which they may lose the opportunity to state their case. In this case, PGM, DS2 and the de Sutters filed their submissions over a year after the application to set aside the award was filed.

By rejecting Cebelec's request to intervene in the proceedings, the appeal court also reiterated the sanctity of consent and party autonomy in arbitration, regardless of whether or not a third party might have a commercial interest in the outcome of the questions to be decided.

This long judicial saga is likely to continue. According to recent press articles, a pourvoi en cassation (appeal to the French Supreme Court) is to be lodged against the Paris appeal court’s decision.

A version of this article has previously been published by Practical Law.

For further information, please contact Laurence Franc-Menget, Of Counsel, Charlie Morgan, Associate or your usual Herbert Smith Freehills contact.