One of the attributes that is often cited in favour of arbitration over the judiciary is the ability of the parties to choose their judge. The idea should not be pushed too far. It would be more accurate to speak in terms of the parties enjoying equality in the process that leads to the constitution of the arbitral tribunal than the parties having a freedom of choice. The opposite side of the coin is the ability of the arbitral tribunal to raise issues of law of its own motion - another attribute of arbitration that distinguishes it from the judicial process where this ability is often more restricted. Once again, however, there are limits to what the arbitral tribunal can do and certainly it would be wrong to speak in terms of a complete freedom. When considering points of law, including those raised of its own motion, it is fundamental that the tribunal respect due process and put them to the parties for comment. A breach of due process is one of the grounds on which an award can be annulled or its enforcement denied under the New York Convention. There is and always will be a degree of latitude in how the courts on annulment and enforcement actions view the reasoning adopted by the arbitral tribunal. Two recent decisions of the French courts show them taking a strict approach to what constitutes a change of substantive reasoning that if not raised with the parties exposes the arbitral award to challenge.
In Engel Austria GmbH v Don Trade the Paris Court of Appeal was asked to annul an arbitral award in which a Paris based tribunal had found that a contract of sale was partially void on the grounds of a rule in Austrian law, the law applicable to the contract, which rendered contracts void for "imprévsion" (unforeseen circumstances). On reviewing the award, the Court of Appeal found in its judgment dated 3 December 2009 that neither of the parties had relied upon this rule in their submissions to the tribunal. The arbitral tribunal had noted, however, that it was the only basis on which the contract could be found partially void. The applicant before the Court of Appeal argued that its rights of defence had been breached, not having had the opportunity to make submissions on this new point of law relied upon by the tribunal of its own motion. The respondent argued that since the rule is one of Austrian law, the law applicable to the contract, and was inherently part of the debate over the parties' consent that had been held before the tribunal, there was no breach of due process. The Cour of Appeal found that the applicant had indeed sought the partial annulment of the contract of sale but that it had not relied on any legal rule to that end. Since the rule of "imprévision" was a rule of law which was distinct from those on which submissions had made, it was imperative on the tribunal to hear the parties before relying on it in its award. The tribunal's failure to do so was a ground for annulment since it is essential that the parties know and have been heard on all of the points of law on which the tribunal relies.
The Court of Appeal relied upon this same ground for annulment in Commercial Caribbean Niquel v Overseas Mining Investments on 25 March 2010. CNN had terminated its joint venture agreement with Overseas Mining Investments (OMI) for the exploitation of a nickel mine in Cuba. OMI made a claim for damages in arbitral proceedings in Paris under the arbitration agreement of the joint venture. CNN was found by the tribunal in breach of contract and was ordered to pay OMI damages. Instead of awarding damages for loss of profit, the basis on which OMI had pleaded its case, the tribunal reasoned its award of damages as a loss of chance. The Court of Appeal of Paris held in annulment proceedings that the difference between a claim for loss of profit and one for the loss of chance was not simply one of evaluation but constituted a shift in legal reasoning on which the parties ought to have been heard. The Court of Appeal considered that the existence of a counterclaim by OMI for the loss of chance was irrelevant to the discussion on CNN's claims. Likewise the Court of Appeal dismissed in silence OMI's argument that once the tribunal had heard the parties on the merits, it was not necessary for the tribunal to hear the parties on the issue of quantum of damages. The Cour de Cassation ruled in 2006 that although an arbitral tribunal is not obliged to submit its legal reasoning to the parties, it must hear the parties on all legal rules on which it bases its decision, including those not raised by the parties. A distinction is therefore drawn between the tribunal's legal reasoning and the legal rules on which that reasoning is based.
The earlier decision of the Paris Court of Appeal on 17 January 2008 in which the court ordered the enforcement in France of an arbitral award in S v Cameroon Telecommunications provides an interesting but disconcerting example of how this line between legal reasoning and the legal rules on which that reasoning is based can be drawn. The Court of Appeal found that the fixing of damages in a global manner on the basis of equitable principles by reference to objective factors is a general principle of law recognised in all jurisdictions. Even if a tribunal does not sit as an amiable compositeur, it may determine damages by reference to equity. The tribunal had, as a matter of equity, halved the amount of damages claimed for moral and commercial loss.
The Court of Appeal's creation of a general principle of law that damages may be fixed globally provided that objective factors are relied upon is open to criticism. That, however, is a rule on which apparently tribunals may rely. Therefore, provided that the arbitrators hear the parties on that rule and its application to the case at hand ("I am applying equity and rely upon such and such factors"), the arbitrators will have done their duty and will not be exposed to a successful challenge. If, however, the arbitrators choose a more scientific approach and seek to base their award of damages on a more specific rule of applicable law (eg, expectation loss, reliance loss, loss of chance, etc), they must hear the parties on each and every one of the rules on which they intend relying.
The process by which arbitrators raise issues of law of their own motion is of course a delicate one. The risk that they face is an appearance of bias. A skilled arbitrator should, however, be able to extinguish that risk by fully, properly and fairly explaining what he or she is doing and why he or she is proceeding in that way during the course of the parties' submissions. The fear of a resulting challenge should not however dissuade arbitrators from doing their duty and properly exercising their right of factual and legal investigation to get to the bottom of the issues over which they have been chosen to rule.
The public/private debate in French arbitration law
The border between the civil and the administrative courts in France is an extremely important one, not least because the procedural rights of the parties differ between the two systems. The border has recently been retraced in the realm of the annulment of arbitral awards rendering the topography clearer and thus more satisfactory than before.
In INSERM v Letten the French conflicts tribunal was seized with an application for annulment of an arbitral award rendered in France between a foreign party and a French public law entity arising out of a contract that under French law qualified as an administrative contract performed in France but which involved international trade. INSERM, a French public law entity, had entered into a contract with Letten, a Norwegian foundation, for the construction and financing of a research centre in France. Letten notified the termination of the contract after difficulties had arisen. The contract contained an arbitration agreement. INSERM brought suit against Letten before the French High Court for damages. Letten appealed and the Court of Appeal of Paris referred the parties to arbitration on the basis of the arbitration agreement.
Following the arbitration, INSERM moved before the Paris Court of Appeal to have the award set aside on the ground of a prohibition against public entities entering into arbitration agreements. This motion was dismissed on the basis that the prohibition only applies to domestic contracts and is not part of international public policy given the overriding principle of the validity of international arbitration agreements.
This issue of jurisdiction was submitted by the Conseil d'Etat to the conflicts tribunal. The conflicts tribunal ruled that "an application to set aside an arbitral award rendered in France, on the basis of an arbitration agreement in a dispute arising out of the performance or termination of a contract between a French public entity and a foreign individual or entity, performed on French territory and involving international trade, is to be brought before the Court of Appeal under whose jurisdiction the arbitral award was rendered, pursuant to article 1505 of the Code of Civil Procedure, even if the contract is an administrative contract according to the criteria set out by French domestic law".
The conflicts tribunal carved out, however, an important exception. Cases where "the challenge against an award rendered under the same circumstances involve reviewing whether the award complies with mandatory rules of French administrative law on the occupancy of French public property or those governing public contracts and applicable to public procurement contracts, public-private partnership agreements and contracts delegating the performance of public services" fall within the jurisdiction of the administrative courts.
Applying this rule and its exception to the case at hand, the conflict tribunal found that none of the categories which are the subject of mandatory rules of administrative law was involved and thus the case had been properly brought before the civil courts.
Where, therefore, a French public or administrative contract involves international trade, arbitration agreements are valid and will result in awards that fall within the civil regime for the purposes of annulment. If, however, the contract falls within one of the four categories of exceptions itemised by the confliccts tribunal, the regime for annulment is very different because of the public order nature of the issues inherently involved. The arbitration agreement remains valid but the resulting arbitral award will be subject to appeal on the merits rather than the review under the annulment system.
The INSERM v Letten case only deals with the rules for the annulment of arbitral awards rendered in France. It does not necessarily follow that the same approach will apply to the enforcement of foreign arbitral awards in France. The difference lies in the French state's obligations under the New York Convention. Whether the French courts will be able to craft a reason as to why its treaty obligations are subordinate to the public policy interests discussed in INSERM or whether they will allow the international arbitration regime to triumph remains to be seen.
Estoppel - crafted the French way
The Cour de Cassation has continued its process of defining and posing the conditions of the French rule of estoppel in international arbitral procedure in a decision rendered on 3 February 2010 Mérial v Klocke Verpackungs-Service. The facts of the case were briefly as follows. Mérial had entered into a contract with Kocke for the preparation of veterinary products which included an ICC arbitration agreement. The arbitral tribunal granted Mérial's claim in part and ordered a set off with sums awarded under Klocke's counterclaim. Klocke's counterclaim had been declared by the tribunal in a procedural order dated 12 April 2006 admissible as being within the terms of reference (Mérial presumably having objected to its inclusion). Mérial made no objection to the terms of the procedural order when it signed minutes of a hearing held subsequently and in which the proceedings were declared closed on 12 May 2006. Mérial brought proceedings before the Paris Court of Appeal for the annulment of the award on the ground that the tribunal had ruled on a counterclaim over which it had not seized and which fell outside its jurisdiction. The Court of Appeal found that Mérial's procedural conduct amounted to an estoppel particularly because of the inconsistency between its silence at the arbitral hearing over the tribunal's procedural order and its claim for annulment. This conduct prevented Mérial from making its claim for annulment. The Court of Appeal dismissed the application. Mérial applied to the Cour de Cassation to review the Court of Appeal's decision.
The Cour de Cassation overturned the Court of Appeal's decision for two reasons, both of which go to refining procedural estoppel in the field of French international arbitration law. The first looked to the consistency from a legal perspective of Mérial's procedural conduct and its effects on Klocke. The Cour de Cassation ruled that "Mérial's procedural conduct [between the issuance of the procedural order and its claim for annulment] did not constitute a change in legal position such that Klocke was mistaken as to Mérial's intentions". Reasoning contrary to this, a positive rule can, with all the reservations associated with this type of reasoning, be induced. There will be a procedural estoppel when the procedural conduct of a litigant comports a change in legal position such that its adversary is mistaken as to the litigant's intentions. In this "rule" there are therefore two elements. The first is whether the subsequent action or claim is made on the same legal basis as the litigant's earlier position in the proceedings. In a procedural context, this question boils down to the question as to whether there is inconsistency of conduct. In most cases, this should not be difficult to apply. The second prong of the "rule" is open to more subjective judgement and asks whether the change in position of the litigant is of such a nature as to lead the adversary into error over the litigant's intentions. It would seem from the formulation used by the court that the test is an objective one. In the Mérial case, there would have been no need to go so far as the second prong since the legal basis of Mérial's conduct had not changed.
The second reason adopted by the Cour de Cassation focused on Mérial's silence at the end of the hearing following the issuance of the procedural order that had admitted Klocke's counterclaims. The court ruled "the absence of challenge by Mérial to the admissibility of Klocke's counterclaim [between the procedural order and the minutes of the hearing] did not constitute, alone, an abandonment of the claim of inadmissibility in subsequent annulment proceedings". This would seem to suggest that procedural (and arguably substantive) challenges made during the course of an arbitration remain "on the record" as it were unless a litigant subsequently takes a position that, as a matter of legal foundation, is inconsistent with the earlier challenge. There is no need for the litigant to restate its position each step of the way to preserve its rights. Adversaries therefore should keep careful note of all such challenges and if necessary may consider it appropriate to raise certain issues a second time before proceedings are closed to clear the air as to possible bases for future annulment proceedings. Silence in the face of such a patent request may well not be treated as protectively as Mérial's silence regarding the hearing minutes.
The court has therefore given a clear statement of the rule of procedural estoppel, although its application in any given case will no doubt lead to further litigation and legal literature.
Reform of French arbitral law
The French government is in the process of reforming French arbitration law and is in the process of passing a decree to this effect. The following are a few of salient points of the draft decree.
The distinction between domestic and international arbitration is maintained. The distinction lies in the definition of "international" which means whenever the interests of international commerce are affected.
French domestic arbitration law applies to an arbitration only if either the parties have chosen French law as the procedural law of the arbitration or if the arbitration takes place in France and if the parties have not chosen a procedural law. Even in this latter case, the arbitrators are themselves free to adopt a different procedural law.
With respect to international arbitration, there are developments with respect to the supporting judge, disclosure of documents, the form of the arbitration agreement and certain changes to the process for challenges to and the enforcement of arbitral awards, the overall aim of which seems to be to improve the efficiency of arbitral awards rendered or recognised in France.
The supporting judge or "juge d'appui" is the president of the High Court of Paris and his or her jurisdiction covers all disputes over the constitution or the composition of the arbitral tribunal and the extension of the time to conclude the arbitral proceedings. The supporting judge will have territorial jurisdiction whenever one of the following tests is met:
- the parties have chosen French procedural rules to apply to the arbitral proceedings;
- the proceedings of an international arbitration take place in France and the parties have not chosen a specific procedural law to apply;
- the proceedings of the arbitration take place abroad and the parties have expressly chosen the French courts to rule on disputes on arbitral procedure; or
- the dispute has a sufficient link with France and one of the parties faces a general and long-lasting impossibility to seize the courts of the country with jurisdiction over the dispute.
The supporting judge's powers include the ability to require a party to the proceedings or a third party to produce evidence. This procedure is to be restricted to applications made upon the invitation of the arbitral tribunal.
There are no conditions as to the form of an international arbitration agreement for it to be valid.
With respect to challenges to and enforcement of an international arbitral award, the grounds for challenge are:
- the arbitral tribunal wrongly decided that it had or did not have jurisdiction;
- the arbitral tribunal was irregularly constituted;
- the arbitral tribunal did not rule within the scope of its mission;
- due process was not respected; or
- the recognition or enforcement of the award is against international public policy.
The parties may, by special agreement, expressly waive at any time the right to seek to set an award aside. There are no nationality or other requirements to the enjoyment of this right. Parties may not, however, agree to oppose the enforcement of an award.
Arbitral awards that have been granted an order for enforcement are automatically enforceable in France and an application for annulment of the underlying award or to have the enforcement order set aside will not suspend the enforceability of the award. The courts do retain the right to suspend enforcement if it is likely to have manifestly excessive consequences. The courts have also been the given the right to order the enforcement of an award pending challenge or enforcement proceedings.
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Fax: +33 1 42 89 10 73Tim Portwood
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