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04 December 2014
In order to enhance the flexibility of the arbitral process, French arbitration law allows parties to nominate their arbitrators, either directly or by reference to arbitration rules. The choice is entirely free, subject to the condition that arbitrators are and remain independent and impartial.
This requirement is well established in case law and now codified by Decree 48/2011 at the second paragraph of Article 1456 of the Code of Civil Procedure.(1) It derives from the notion of due process and is of the "essence of the arbitral function itself".(2)
Under this requirement, arbitrators are barred from accepting an appointment where a conflict of interest exists. Further, they must disclose any circumstances likely to affect their judgement or create reasonable doubt in the parties' minds regarding their independence and impartiality.
As France aspires to remain at the forefront of arbitration, and accordingly ensures that its legislators and courts support the impartiality and efficiency of the arbitral process, conflicts of interest have been a focal point of judicial debate in recent years. The second half of 2014 has been no exception, with two major decisions on conflicts of interest having been rendered. They are illustrative of the French courts' approach, which seeks to strike a delicate balance between vesting arbitration users with enhanced freedom and ensuring that due process and fair trial guarantees apply to arbitral proceedings.
In the first case the French Supreme Court had to decide whether a party that knowingly fails to challenge an arbitrator within the timeframe provided by the institutional rules chosen can later challenge the arbitrator's independence and impartiality before a domestic court.(3) By answering in the negative, the Supreme Court affirmed the binding character of the parties' agreement regarding the time limits to challenge an arbitrator.
Then in October 2014 the Paris Court of Appeal ruled on another sensitive issue: the scope of an arbitrator's duty of disclosure.(4) The court ignored the arbitrator's good faith and ignorance of the controversial undisclosed circumstances and annulled the order granting leave for enforcement of the award. As a result, the court reaffirmed with utmost rigour the continuing nature and enlarged scope of the duty to disclose.
Where parties have decided to submit their dispute to an institution, a specific procedure to challenge an arbitrator's appointment is generally provided by the applicable rules. A time limit in which to bring this challenge – between 14 and 30 days from the arbitrator's appointment or from the date on which the requesting party learns of the relevant facts – is set by those rules.(5)
If the challenge is rejected and an award is made, a party can ultimately request that it be set aside on the grounds that the tribunal was irregularly constituted.(6)
The Tecnimont saga, which has been keeping French courts busy for over five years, saw an additional development on June 25 2014 when the Supreme Court decided on the admissibility of a challenge against an arbitrator by a party which had not complied with the time limit set by the International Chamber of Commerce (ICC) rules.(7)
Italian company Tecnimont SpA had entered into a contract relating to the construction of a factory with a Greek company, J&P Avax. After their relationship deteriorated, Tecnimont commenced arbitration based on the arbitration clause contained in the contract, which referred to the International Chamber of Commerce. Avax expressed doubts about the chairman's independence and impartiality and challenged his appointment before the ICC Court. Avax had discovered that lawyers working in the same firm as the chairman had participated in a conference with a Tecnimont representative. Consequently, Avax asked the chairman to provide a full disclosure statement. The chairman eventually revealed that the law firm he had been working for at the time had been consulted by Tecnimont in the past and was still acting as counsel for one of Tecnimont's subsidiaries at the time of the arbitration. In light of this revelation, Avax challenged the chairman. Under ICC arbitration rules, the time limit for challenging an arbitrator's appointment is 30 days from learning of the relevant circumstances.(8) The ICC rejected Avax's claim because Avax had learned of the facts in question more than 30 days before the request was formulated.
The arbitral tribunal rendered a partial award on liability in favour of Tecnimont on December 10 2007. Avax then applied to the Paris Court of Appeal to set aside the award on the grounds that the chairman had breached his duty of disclosure and was not independent. On February 12 2009 the Paris Court of Appeal set aside the award, finding that the chairman lacked independence and that the arbitral tribunal had been irregularly constituted.(9) The supreme court quashed the decision on a technical ground and remanded the case to the Reims Court of Appeal in a decision dated November 4 2010.(10)
On November 2 2011 the Reims Court of Appeal set aside the partial award on the grounds of the arbitrator's lack of independence.(11) It found that the annulment court could not be bound by the time limit for submission of the challenge against an arbitrator under the rules of the arbitral institution (here the ICC). The Reims Court of Appeal's decision was based partly on the numerous steps that Avax had taken to identify the nature of the relationship between the chairman and Tecnimont, and on the fact that disclosure about the arbitrator's circumstances had occurred over time. On this basis, the court inferred that Avax had not waived its right to invoke the chairman's lack of independence on the sole grounds that it had not raised the issue within the timeframe provided by ICC rules. This decision met with significant criticism from commentators.(12)
Tecnimont appealed before the Supreme Court, arguing that when Avax filed its challenge on September 14 2007, the 30-day time limit had lapsed, so it could not invoke those grounds again before the annulment court.
On June 25 2014 the Supreme Court set aside the Reims Court of Appeal's decision, holding that:
"[A] party who knowingly refrains from challenging an arbitrator on the grounds of circumstances related to his alleged lack of independence or impartiality within the time limit provided by the applicable arbitration rules is deemed to have waived the right to invoke such circumstances before the annulment judge."(13)
In so ruling, the Supreme Court firmly established that the institutional rules chosen by the parties, here the ICC Rules, are binding throughout the arbitration and should be fully complied with. The solution conveyed by this decision thus relies on the principle of pacta sunt servanda (ie, agreements must be kept) and the notion of procedural estoppel.
It is well established in case law that parties which knowingly refrain from invoking an irregularity before the arbitrators are deemed to have waived their right to raise it in an action to set aside the award.(14) This rule, embodying the notion of procedural estoppel, has been codified by the decree in Article 1466 of the Code of Civil Procedure.(15)
Since the parties' agreement must prevail, contractual time limits provided for by the arbitration rules are also binding upon domestic courts.(16) The Supreme Court expressly stated that the Reims Court of Appeal should have checked that the 30-day time limit specified by the ICC rules had been complied with for each set of facts and circumstances that constituted a breach of the duty of independence and impartiality.
This decision is of paramount importance. The Supreme Court reinforces the authority of arbitration rules and prevents parties from ignoring the terms of their agreement. By requiring a prompt challenge, the Supreme Court urges parties to invoke doubts as to the independence of arbitrators as soon as they become aware of them. This finding will undoubtedly enhance the efficiency of arbitral proceedings and avoid dilatory tactics by parties reluctant to comply with the award.
Tecnimont affirms that French law empowers the parties to establish the framework within which arbitrators' appointment can be challenged. Parties should therefore be vigilant when drafting their arbitration agreement and later when they become aware of potential conflicts of interest.
Finally, while the Supreme Court decision considers that the right to challenge an arbitrator's appointment is waived if exercised in an untimely manner, it does not allow advance waivers of conflicts of interest whereby parties would presumptively agree not to invoke issues relating to the independence and impartiality of arbitrators. Arbitrators' independence and impartiality constitute the "essence of arbitral justice itself" and cannot be waived under any circumstances.
French courts take a harsh view on this point. They are aware that their rigorous acceptance of independence and impartiality constitutes the cornerstone of France's legitimacy as a reliable arbitration forum. In the Nykcool decision dated October 30 2012, the Paris Court of Appeal made it clear that arbitration rules cannot deprive a party of the ability to challenge an arbitrator's appointment for circumstances which become known after the expiration of the time limit provided by the rules.(17) In this case, the institutional rules provided that the time limit would run from constitution of the tribunal and not from the date on which knowledge was acquired.(18)
While committed to the strict enforcement of the parties' agreement, French courts refuse to compromise their fundamental right to due process and a fair trial.
Arbitrators are required to disclose any circumstances likely to affect their judgement or create a reasonable doubt in the parties' minds as to their independence and impartiality. Disclosure is a continuing duty that must be fulfilled throughout the arbitration. Hence, if circumstances likely to trigger such a doubt did not exist at the time the tribunal was constituted, they should be disclosed immediately to the parties and the other arbitrators if they arise later during the proceedings.(19)
This requirement is crucial: should an arbitrator be dependent, partial or fail to disclose relevant information, parties may challenge his or her appointment before an arbitral institution or a domestic court (for ad hoc arbitrations).
The issue of the scope of the arbitrators' duty to disclose was pending before the Supreme Court in Tecnimont, but the issue was left unresolved. However, the Paris Court of Appeal recently ruled on this issue, proving that it is increasingly exacting on this point.
French company Auto-Guadeloupe Investissement (AGI) and Caribbean Fiber Holdings LP (CFH), a US company owned by Leucadia National Corporation, held 60% and 40% of Global Caribbean Fiber SA (GCF), respectively. In 2008 AGI and CFH entered into negotiations to transfer the entirety of GCF's capital to Colombus Acquisitions Inc and Colombus Holdings France SAS. A first memorandum of terms fixed the end date of the negotiations as December 31 2008. This deadline was not met, so a renewed memorandum of terms was signed on March 3 2009, which contained an arbitration agreement. On May 20 2009 AGI declared that it no longer wished to transfer the shares. Colombus therefore initiated arbitral proceedings on July 10 2009 in order to enforce the transfer agreement and obtain compensation under the auspices of the International Centre for Dispute Resolution. CFH joined the action and sought punitive damages.
The sole arbitrator, who had accepted his appointment on September 15 2009, heard the parties until August 2010 and eventually rendered an award on March 27 2011 in Bridgetown, Barbados. He found that the parties' agreement was binding and that AGI had breached it.
On June 20 2013 leave to enforce the award was granted in France by the Paris Court of First Instance, but AGI appealed. It invoked, among other things, the irregularity of the arbitral tribunal's composition and a resulting violation of French international public policy.
AGI argued that the arbitrator had failed to disclose relations between the law firm in which he was a partner and a party to the arbitration. Through a publication on the firm's website, AGI had learned in December 2010 that a three-partner team from the arbitrator's law firm had assisted Leucadia (CFH's parent company) in a corporate matter during the course of the arbitration. AGI argued that, having failed to disclose these circumstances, the arbitrator was subject to a conflict of interest.
Columbus argued that the arbitrator had disclosed the circumstances and that these were well known, having been published on the law firm's website. In his declaration of independence the arbitrator, who was based in Vancouver, mentioned that "a partner in [his] firm's Toronto office has represented Leucadia National Corporation … over a number of years", but that he understood that "at present there are no matters in respect of which [his] firm is currently providing advice to Leucadia National Corporation". This declaration was made in 2009 and was accepted by AGI.
In its decision of October 14 2014 the Paris Court of Appeal stressed that if parties are expected to undertake due diligence, inspecting publicly available and easily accessible information before the beginning of arbitral proceedings, they cannot reasonably be required to pursue their inquiries and to proceed to a 'systematic review' of sources once the proceedings have begun.(20)
Further, the court found that even if it were shown that the firm received only minor remuneration for its assistance, the size of the deal, the number of lawyers involved and the subsequent publicity given to the work demonstrated the significance of this instruction for the firm. Those circumstances, unknown to the arbitrator at the time of his appointment, were likely to raise a reasonable doubt for AGI regarding the arbitrator's independence and impartiality. The Paris Court of Appeal thus quashed the order granting leave to enforce the award.
Notably, evidence was placed before the court to show that the arbitrator did not know about the ongoing engagement when he signed his declaration and even after it was made public.
Further, as Ana Vermal, a partner at Proskauer Rose in Paris, has pointed out, it could be argued that when AGI accepted the appointment in light of the declaration, it acknowledged the lawyer-client relationship between the arbitrator's firm and Leucadia.(21) AGI therefore accepted that this relationship could be renewed over time and trusted that the arbitrator would not be influenced by it.(22)
The decision is therefore undeniably strict and champions a strict standard of apparent impartiality.
Under French law, when an arbitrator fails to disclose a litigious circumstance, it is irrelevant whether he or she is actually conflicted. The fact that the undisclosed circumstances could have raised doubts in the mind of a party is sufficient to seek resignation of the arbitrator or annulment of the award rendered. The decision confirms that the good faith of the arbitrator and his or her honest ignorance are irrelevant.
Even though it is harsh, the Paris Court of Appeal's decision can also be understood as having been motivated by the court's intention to maintain an unequivocally wide and continuing duty of disclosure.
By remaining firmly attached to the apparent independence and impartiality test, the Paris Court has dramatically expanded the scope of arbitrators' duty of disclosure. It invites arbitrators who practise in large law firms to proactively investigate links of any kind that the firm as a whole – including non-partner positions such as of counsel, as ascertained in Tecnimont – has or may have with the parties.
The burden that arbitrators bears is onerous. They must keep themselves informed of current affairs in their law firms (and potentially of their various offices) since, as the Parisian court made clear, the parties are no longer expected to carry out background research once the proceedings have started, even if information is public and accessible. The burden then shifts to arbitrators, who are accountable for their failure to disclose, as the AGI decision illustrates.
French arbitration law has always been innovative. It is constantly evolving to improve the efficiency of the arbitral process and increase the speed and flexibility of proceedings, while limiting judicial intervention.
Flexibility and reliability undoubtedly constitute the core principles of French arbitration law. Hence, in order to guarantee the vitality of those values, essential to French arbitral culture, courts strictly enforce the parties' agreement. Tecnimont reflects the French courts' commitment to party autonomy.
However, if party autonomy and speed prevail, they cannot eclipse certain essential principles which are vital for the reliability and sustainability of arbitration. This explains the commitment of French courts to an extremely strict standard regarding the independence and impartiality of the arbitrator.
Despite their apparent severity, the rulings are in line with the modern French arbitration regime. To maintain the country's untarnished reputation, French courts are ready to make tough decisions, which may constitute the price to be paid for legitimacy.
For further information on this topic please contact Elie Kleiman or Yann Dehaudt-Delville at Freshfields Bruckhaus Deringer by telephone (+33 1 44 56 44 56), fax (+33 1 44 56 44 00) or email (firstname.lastname@example.org or email@example.com).The Freshfields Bruckhaus Deringer LLP website can be accessed at www.freshfields.com.
(2) CA Paris, April 2 2003, Société Fremarc v ITM Entreprises Rev Arb 1231. See also CA Paris, November 28 2002, Voith Turbo GmbH AG et Co v. Société Nationale des Chemins de Fer Tunisiens, Rev Arb 445.
(5) ICC Rules 2012, Article 14.2 (30-day time limit); London Court of International Arbitration rules 2014, Article 10.3 (14-day time limit); Stockholm Chamber of Commerce rules 2010, Article 15.2 (15-day time limit); International Centre for Dispute Resolution rules 2014, Article 14.1 (15-day time limit); Singapore International Arbitration Centre rules 2013, Article 12.1 (14-day time limit).
(12) M Henry, "Note – November 2 2011, Reims Court of Appeal (Aud Solemnelle)" Rev Arb 112, paras 23-24 ; T Clay "L'application perlée du règlement d'arbitrage pour la contestation des liens non révélés entre arbitre et conseil", 4 Paris J Int Arb 1109, paras 28-41.
(14) CA Paris, June 2 1989, Sociétés TAI, ESW et IEC v sociétés SIAPE, Engrais de Gabès et autres, Rev Arb 87; CA Paris, May 16 2002, STPIF v SB Ballestrero, Rev Arb 1231; Cass Civ 1, July 6 2005, Golshani v Gouvernement de la République Islamique d'Iran, Rev Arb 993; CA Paris, October 28 2010, Rev Arb 691.
(16) The Supreme Court decided that the parties waived the right to invoke such circumstances before the annulment judge. It unclear whether this waiver will also prevail before the judge acting in support of the proceedings while the arbitration is ongoing (the juge d'appui). The third paragraph of Article 1456 of the Code of Civil Procedure sets forth a similar time limit to ICC, providing a one-month time limit for challenging an arbitrator before the juge d'appui from the date of disclosure or discovery of the relevant conflict. It can therefore be argued that the juge d'appui would also be bound by the parties' agreement.
(18) The relevant rules here provided that the time limit would run from the "starting day of the arbitration proceedings", which under French law is the date on which the arbitral tribunal is finally constituted (ie, when all arbitrators have accepted their appointment). Cass Civ 1, March 30 2004, Société Frabaltex, 98 Bull Civ 79.
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