Introduction
Two Paris Court of Appeal decisions, rendered two weeks apart, offer a contrasting perspective on the challenges associated with arbitration: while the enforcement of awards that have been recognised must be facilitated and applications for stays of enforcement are held to the most stringent standards, the legitimacy of arbitration requires that the legal process remain immune from suspicions of corruption and fraud.
On January 29 2015, in Gold Reserve v Venezuela, the Paris Court of Appeal refused to stay the enforcement of a $740 million arbitral award against the state, allowing its execution while an action to set aside had been commenced in Paris. The court applied the principle of immediate enforceability of arbitral awards, an innovation of Decree 2011-48 (enacted in January 2011) which was codified in Article 1526 of the Code of Civil Procedure.(1)
On February 17 2015 - in the latest episode in the long-running Tapie saga, which has kept French courts busy for the past 20 years - the Paris Court of Appeal upheld an application for revision against four arbitral awards that had been rendered in 2008. The court's finding was based on the manifest lack of impartiality of one of the party-appointed arbitrators and on the circumstance that the latter had played a pre-eminent role in the award-making process. The court ordered the withdrawal of the award (rétractation) and decided that it would be subject to full review on the merits conducted by the court.(2)
The two decisions sit at opposite ends of the spectrum of the judicial scrutiny of arbitration. One ensures swift enforcement of an award against a sovereign state, while the other strikes down awards procured by the fraud committed by a party-appointed arbitrator. Both decisions pursue the same goal and are inspired by the same philosophy, as the promotion of a liberal arbitral system goes hand in hand with the fight for reliable, impartial and independent proceedings. Courts will lend their imperium and vest the arbitral justice with maximum efficiency only if they are fully satisfied that the arbitral process adheres to the highest standards of probity and ethics.
Principle of immediate enforcement of arbitral awards
Under Article 1526 of the Code of Civil Procedure, arbitral awards are enforceable immediately after a judge has rendered an order granting leave to enforce the award (an exequatur order), even where an action to set aside the award has been commenced or the exequatur order has been challenged. Article 1526 provides that the court may stay the enforcement of an arbitral award at the award debtor's request if the latter's rights would be "severely prejudiced" as a consequence of enforcement. As a result, arbitral awards are vested with unprecedented efficiency.(3)
In this respect, the order issued by the Paris Court of Appeal in Gold Reserve Inc v Venezuela on January 29 2015 illustrates the pre-eminence of the principle of immediate enforceability of arbitral awards.
In October 2009 Canadian mining company Gold Reserve Inc filed a request for arbitration with the International Centre for Settlement of Investment Disputes (ICSID) against Venezuela. As Canada had not yet ratified the Washington Convention of March 18 1965 establishing the ICSID at the time the claim was filed, arbitration proceedings were commenced under the ICSID Additional Facility Rules.(4) The arbitral tribunal, seated in Paris, was chaired by Piero Bernardini, with Pierre-Marie Dupuy and David AR Williams acting as co-arbitrators.
The dispute arose out of Venezuela's deprivation of Gold Reserve's right to a gold and copper project comprising two concessions: the Unicornio Concession and the Brisas Concession. The Brisas Concession was due to expire on April 18 2008, 20 years after it had initially been granted, but was renewable for two additional10-year terms if so requested six months before expiration. In October 2007, more than six months before the date of expiry, Gold Reserve requested an extension of the Brisas Concession. In May 2009 Gold Reserve's request was denied and Venezuela decided to terminate the Brisas Concession. To legitimise its refusal, Venezuela stressed Gold Reserve's alleged insufficient solvency and failure to comply with some "special advantages" consisting of specific obligations that Gold Reserve had undertaken. Therefore, in October 2009 the Venezuelan government seized Gold Reserve's assets and occupied the Brisas mining site. Further, in June 2010 Gold Reserve's Unicornio Concession was terminated on the grounds of:
- Gold Reserve's alleged failure to commence exploitation within seven years as required by local mining laws; and
- Gold Reserve's breach of another of its specific obligations regarding the hiring of interns.
In an award rendered on September 22 2014, the arbitral tribunal found for Gold Reserve on the basis of Venezuela's breach of its obligation of fair and equitable treatment under the Canada-Venezuela Bilateral Investment Treaty. The arbitral tribunal ordered Venezuela to pay $713,032,000 in damages, plus $22 million in interest and $5 million in costs.(5)
On October 20 2014 Venezuela filed a petition before the Paris Court of Appeal to set aside the award,(6) invoking three of the five potential grounds for annulment recognised by French law under Article 1520 of the Code of Civil Procedure.(7) Among other things, the petition included claims that the arbitrators lacked jurisdiction, infringed French international public policy, violated due process and exceeded their powers by granting punitive damages. At the same time, Venezuela applied for a stay of enforcement of the award, claiming that enforcement would constitute a "severe prejudice" to its rights within the meaning of Article 1526 of the Code of Civil Procedure. Shortly after Venezuela's petition, Gold Reserve filed a cross-petition before the Paris Court of Appeal requesting enforcement of the award and commenced parallel enforcement proceedings in Washington DC.(8)
In its January 29 2015 order the Paris Court of Appeal ruled that none of the grounds invoked by Venezuela was sufficient to justify staying the enforcement of the award.(9) The court made clear that the annulment grounds set forth by Article 1520 of the Code of Civil Procedure per se are irrelevant when assessing whether enforcement would cause "severe prejudice" to the award debtor's rights and also rejected Venezuela's argument that it would be exposed to disproportionate risk should the award be enforced. The court ruled that, regardless of the awarded amount, the risk should be assessed in light of the state's considerable resources. The Paris Court of Appeal therefore refused to stay enforcement of the award and issued an exequatur order.(10)
Through the order, the court confirmed that serious and specific grounds must be shown demonstrating that the award debtor's rights would suffer actual "severe prejudice" as a result of enforcement, in order for a request to stay or modulate the enforcement of an arbitral award to be granted.
First, as was recalled in Gold Reserve, the courts consider that the grounds relied on to challenge arbitral awards under Article 1520 of the Code of Civil Procedure are not relevant in the context of proceedings on the stay or modulation of enforcement.(11) Further, the case law to date shows that these measures are ordered only in limited circumstances.
Recent decisions of the Paris Court of Appeal indicate that where it is established that enforcement of an award would jeopardise the economic viability of the award debtor, the court will stay the enforcement of the award.(12) Where the viability of the award debtor is not jeopardised as a result of enforcement, but the ability or the willingness of the award creditor to reimburse the amounts received is doubtful (should the award later be set aside or leave to enforce be refused), the court is then inclined to modulate the enforcement of the award and order that the award debtor pay the amount into an escrow account.(13) Moreover, the balance of harm test applies, which requires a demonstration that immediate compliance with the award would cause both material and irreparable harm to the award debtor, whereas no comparable harm would be suffered by the award creditor if enforcement were stayed.(14)
In any other situation, Paris Court of Appeal case law shows that a stay or modulation of the enforcement of an award is likely to be refused; the court sets a particularly high standard for an award debtor to obtain a stay of enforcement and strictly scrutinises the facts alleged.(15)
Moreover, the court's refusal to order a stay of enforcement can be challenged in only very limited situations. If rendered by the first president of the first-instance court, decisions to refuse the stay or modulation of enforcement may be challenged before the Supreme Court only. If rendered by the appeal court judge in charge of preparing the trial (conseiller de la mise en état), these decisions cannot be appealed at all (unless they put a final end to the proceedings before the court of appeal, in which case an appeal may be brought before the court of appeal within 15 days of the date of the order).(16)
By allowing the stay or modulation of enforcement only where it is clear that the award debtor would suffer "severe prejudice" to its right as a result of immediate enforcement, the court deprives challenges of their potentially obstructive character and helps to preclude the use of enforcement-delaying tactics.
The principle of immediate enforceability affords a high level of protection to the award creditor, particularly given that obtaining an order granting leave to enforce an award takes only around two weeks if the award is not first challenged.(17) The procedure is undertaken ex parte by submitting the award and the arbitration agreement to the court registrar, and requires only that the award not "manifestly infring[e] French international public policy".(18) In Gold Reserve this process took a little longer, as Venezuela filed for annulment and then resisted Gold Reserve's counterpetition for enforcement. However, despite Venezuela's opposition and application to set aside, less than three months passed following Gold Reserve's application for enforcement before it obtained satisfaction.
Gold Reserve illustrates how quickly the enforcement of an award can take place in France. However, in order to preserve the legitimacy of arbitration, maximum efficacy can be granted to an award only if the fairness of the arbitral process is unconditionally upheld. Flawless proceedings - in particular with regard to due process, independence, impartiality and the absence of fraud - constitute the core of France's arbitral values and culture. To this end, French law also provides avenues to neutralise awards that have been rendered fraudulently.
Penalty for fraudulent arbitration proceedings
Under Article 1502 of the Code of Civil Procedure, parties are entitled to apply for a "revision action" (recours en revision) in order to review awards allegedly rendered fraudulently.(19) An application for revision of the award "shall be made to the arbitral tribunal". If the arbitral tribunal cannot be reconvened, where the disputed award is international a new tribunal must be constituted; however, if the award is domestic, the "Court of Appeal which would have had jurisdiction to hear other forms of recourse against the award" may hear an application for revision.(20) This application must be made within two months of the date on which the party became aware of the circumstances on which it relies to seek revision of the award.(21) If the judge decides that the application for revision is admissible, the award will then be reviewed on the merits.(22)
On February 17 2015 the Paris Court of Appeal rendered a decision which ushered in a new episode in the Tapie saga.(23) Just two weeks after it rendered the Gold Reserve order, the Paris Court of Appeal handed down an equally important decision in a politicised – and hence publicised – case in which it upheld an application for revision against four awards that had been rendered in 2008.
Bernard Tapie was a prominent French businessman in the 1990s, a period in which he also engaged in politics. In 1990 and 1991, through his holding companies Bernard Tapie Finance SA (BTF) and Bernard Tapie GmBH (BT GmBH), he acquired the then-struggling German sporting goods company Adidas in order to restructure it. The acquisition was financed by a bank pool led by SdBO, a subsidiary of French bank Crédit Lyonnais (now LCL), then a state-owned company. When Tapie joined the French government as minister for urban planning in 1992, he decided to sell the shares of BT GmBH which owned Adidas and mandated SdBO to do so. SdBO performed its mandate and executed the sale. Adidas was bought by Clinvest (Crédit Lyonnais), Rice SA (owned by French-Swiss businessman Robert-Louis Dreyfus) and six other investors, including offshore corporations, to which Crédit Lyonnais granted loans providing that in case of the resale of Adidas, two-thirds of the sales profits would be awarded to Credit-Lyonnais. The deal closed on February 12 1993 and BT GmBH's shares were sold to the acquirers at the price agreed with Tapie. However, Tapie later alleged that he was misled by Crédit Lyonnais, as the latter - unbeknown to him - had entered into an opaque financial arrangement with the BT GmBH acquirers, which had accepted to sell their shares bought from BTF to Dreyfus for three times the purchase price, allowing Credit Lyonnais to make a considerable profit from the operation.
BTF was declared bankrupt in 1994 and its liquidators initiated proceedings against SdBO and Crédit Lyonnais on the basis of an alleged breach of mandate, leading to a decision of the Plenary Assembly of the Supreme Court on October 9 2006.(24) This decision recognised the admissibility of BTF's liquidators' claim, but nevertheless annulled the Paris Court of Appeal's 2005 decision that had ordered the consortium de réalisation (CDR) – which took over from Crédit Lyonnais as the entity in charge of liquidating its debts after it went bankrupt – to pay the liquidators €135 million. The case was remanded to the court of appeal for a new set of proceedings, but BTF's liquidators, Tapie and his wife (who had brought personal claims against the CDR) and the CDR signed an arbitration agreement for all of the various ongoing disputes between them to be finally settled and adjudicated by an arbitral tribunal on November 16 2007.
The arbitral tribunal was jointly appointed by the parties and composed of eminent legal professionals. The panel was chaired by Pierre Mazeaud, former judge and former president of the French Constitutional Court; with Pierre Estoup, former first president of Versailles Court of Appeal, and Jean-Denis Bredin, founder of elite Parisian boutique law firm Bredin Prat, appointed as co-arbitrators. On July 7 2008 the arbitral tribunal awarded BTF's liquidators €240 million and €45 million in moral damages to Tapie and his wife, as well as €8.4 million as compensation for the expenses incurred because of the liquidation of Tapie's companies.(25) Three other awards were issued on November 27 2008, notably on costs and clarifications regarding the first award.
The amount of the awards and the fact that the French state owned the CDR and had to pay for them caused a public outcry. The principle of having the dispute resolved through arbitration was publicly questioned and suspicions of cronyism grew. A criminal investigation was initiated in 2012 for conspiracy to defraud, based on allegations of a lack of impartiality of Estoup, the arbitrator appointed by Tapie.
The connection between counsel and party-appointed arbitrator crystallised these suspicions, as they seemed to have had a working relationship for many years, notably through several arbitral appointments. Moreover, Estoup appeared to know Tapie well, as he possessed his personal contact information and evidence of several meetings between them was found. Finally, a dedication by Tapie to Estoup was discovered in a book authored by Tapie entitled Librement, seized at Estoup's daughter's home; in this dedication Tapie expressed his "infinite gratefulness" to Estoup, declaring that "the support he gave him changed his destiny". However, Estoup did not disclose any of these circumstances before his appointment as a member of the arbitral tribunal.(26)
On June 28 and July 1 2013, the CDR initiated annulment proceedings against the four arbitral awards that were rejected as time barred on April 10 2014 by the appeal court judge in charge of preparing the trial. At the same time, the CDR initiated a revision action based on the ongoing criminal investigation and the findings that it had unveiled.
Since, in the context of domestic arbitration, former Article 1491 of the Code of Civil Procedure authorised revision applications to be brought before the court of appeal only (whereas Article 1502 now provides that they should be brought before the arbitral tribunal itself, if it can still be convened),(27) part of the debates concerned the domestic nature of the arbitration proceedings (as opposed to international arbitration).(28)
In its decision the Paris Court of Appeal declared that the arbitration was domestic, and thus that the application for revision was open to the CDR before the Paris Court of Appeal. However, the qualification of the arbitration proceedings as domestic under former Article 1491 of the Code of Civil Procedure (now Article 1504) could be legitimately questioned in light of the contemporaneous authoritative case law, and has been challenged by numerous specialists.(29) Whereas most jurisdictions have elected a definition of internationality based on legal criteria (grounded on legal elements showing extraneousness, such as the nationality of the parties, the nationality of the arbitrators, the applicable law or on the place of arbitration), French law has coined an 'economic definition' of the notion.(30) Well-established case law deems arbitration proceedings international if the underlying business transaction from which the dispute arose was not economically performed in a single country.(31)
As such, since the Tapie arbitration arose out of the sale of Adidas - a major German sporting brand - through the sale of BT GmBH's shares, with the assistance of Crédit Lyonnais, one of the leading French banks at the time, it would arguably fit under the definition of 'international arbitration'.
As a rationale, the Paris Court of Appeal observed that BTF and BT GmBH were not parties to the arbitration proceedings. It further stressed that the arbitral tribunal was constituted not pursuant to a clause contained in the mandate for the sale of Adidas, but rather under an arbitration agreement concluded by BTF's liquidators, Tapie and his wife and the CDR, and aimed at the resolution of disputes that were pending before French courts. The court finally concluded that these disputes involved financial agreements between French parties that were performed in France and breaches of contract between the same parties; and that the "settlement [of these disputes], whatever it is, will not imply international financial streams or transfer across the borders". It therefore held that the arbitration proceedings should be regarded as domestic.
In the wake of recent case law rendered in the context of corporate disputes,(32) the court disregarded the nature of the underlying acquisition-operation for the purposes of which the litigious mandate was executed. It considered that the dispute was limited to mere performance of the mandate, which it deemed to be domestic.(33) Also, by focusing on the impact of the settlement of the dispute, rather than on the nature of the underlying economic relationships, the Paris Court of Appeal departed from the case law to date. Although he expresses scepticism about the court's rationale, Professor Sylvain Bollée considers that the domestic qualification is reasonable, since it conveys a more restrictive view of international arbitration, which is dominant in comparative law.(34)
It is possible that, with regard to allegations and evidence showing serious fraud and to the political implications of the case, the Paris Court of Appeal was inclined to construe broadly the 'domestic arbitration' category in this case, allowing former Article 1491 of the Code of Civil Procedure to apply and the revision application to proceed before it.
Indeed, the Paris Court of Appeal exercised full factual scrutiny in order to characterise fraud. It emphasised the facts demonstrating Estoup's lack of impartiality, highlighting circumstances showing that Estoup had tried to fraudulently influence the tribunal to serve Tapie's best interests, observing that he had relied on drafts submitted by Lantourne ex parte and before the arbitration. The court also noted that, even though he was not chair of the tribunal, Estoup took care of drafting all procedural orders, minutes and letters to the parties, and took a pre-eminent role in drafting the award.(35)
The court held that, disregarding the exigency of impartiality which is essential to the arbitral fuction itself, Estoup used his extensive practice of arbitration and the authority attached to his former position as a high magistrate to influence the outcome of the proceedings in favour of the interests of Tapie, and marginalised the other two arbitrators. The court further stated that the fact that an award has been rendered unanimously is irrelevant, as long as it is established that one of the arbitrators led the others into accomplishing his or her fraudulent scheme. The court concluded that Estoup had exercised a crucial role in the decision-making process and had influenced the tribunal's decision fraudulently.(36)
The Paris Court of Appeal therefore decided that the conditions of the revision action were met and ordered the withdrawal of the four litigious awards. As a consequence of the characterisation of the arbitration as domestic, the parties have been called to return to court on September 29 2015 to argue the case again on the merits before the Paris Court of Appeal.(37)
Characterising the arbitration as domestic was not the only way to allow revision for fraud to succeed in the present case. Under the applicable law at the time, revision applications were also admissible in international arbitration proceedings. Pursuant to the Fougerolle precedent, an application for revision against an international award should be heard by the arbitral tribunal itself, provided that it can be reconvened.(38) However, while it makes sense for the same tribunal to hear the same case anew in circumstances where fraud was committed by one of the parties (eg, if a party produced forged documents), this ceases to be the case where the fraud involved the arbitral tribunal itself, as in the Tapie arbitration. Alternatives remain possible in the context of an international arbitration seated in Paris, such as referring the matter to a newly formed arbitral tribunal or the court retaining exceptional jurisdiction due to the fact that the tribunal cannot be constituted again. None of these options being self-evident, they would have required some interpretation of the applicable law.(39)
With this landmark decision, the Paris Court of Appeal reiterated that the independence and impartiality of arbitrators cannot be compromised. Every arbitrator must be entirely independent and impartial, even when he or she is party appointed. If an arbitrator acts as a de facto counsel for a party and takes advantage of his or her apparent legitimacy to obtain favours for his or her 'client' by abusing the trust of the other members of the panel, who presumably believe that he or she is impartial, the penalty is now clearly identified: the award may be withdrawn and revised on the merits.
The Gold Reserve order confirms the pro-arbitration approach of the French courts: the Paris Court of Appeal made a forthright application of the principle of immediate enforceability of arbitral awards in a case in which hundreds of millions of dollars are at stake and in which the award debtor is a state.
Then, by expanding the category of domestic arbitration in Tapie in order to allow the revision application to proceed and a full review on the merits to be conducted, the Paris Court of Appeal demonstrated its determination to intervene in a case that could be characterised as 'international' pursuant to standards of internationality that are far reaching and flexible, but that nevertheless exuded a distinctly French scent of scandal. In these particular circumstances, the Paris court decided to tweak the legal categories to achieve an unquestionably legitimate objective: ensuring that the fraudulently procured Tapie awards were not vested with any legal value. Rather than being seen as unduly tightening the screw on the test of internationality, this decision will remain an illustration of how vigilant French courts can be in maintaining a high degree of integrity and fairness in arbitral proceedings.
When doubt exists as to arbitrators' independence or impartiality, French courts have on many occasions - including in recent decisions(40) - demonstrated their willingness to set aside or deny recognition of awards. If an award is rendered fraudulently, the solution of the Paris Court of Appeal confirms that another penalty exists: the award's withdrawal and potentially court review of the merits.
Awards rendered under fraudulent circumstances will not be accepted in the French legal order and the cases will have to be heard anew. By reiterating this principle, the Paris Court of Appeal serves the best interests of the French arbitration community and its decision should be praised.
With these two recent decisions the Paris Court of Appeal has illustrated its commitment to ensuring that arbitration remains an efficient and trustworthy dispute resolution mechanism, making clear that arbitration proceedings must follow fundamental rules inherent to the adjudication of disputes for an award to be entitled to recognition in the French legal system. By being merciless to awards rendered fraudulently, the French courts have paved the way for the otherwise very liberal arbitration regime to flourish.
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) or email ([email protected] or [email protected]).The Freshfields Bruckhaus Deringer LLP website can be accessed at www.freshfields.com.
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