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16 March 2017
In a decision dated November 8 2016, the Paris Court of Appeal set aside an award on the grounds of a violation of the principle of equality of arms. This decision comes as a reminder that arbitration is a jurisdictional process where parties and arbitrators, while enjoying considerable freedom and flexibility, should be mindful of due process and fair trial guarantees.(1)
The court had to rule on the Iraq war's impact on due process in arbitral proceedings between the Republic of Iraq and German companies ThyssenKrupp and MAN. The Republic of Iraq petitioned the court to annul an arbitral award decided on evidence presented by the claimant only, which found it contractually liable contract for more than €6.5 million, plus interest. The Republic of Iraq argued that this award should be set aside based on, among other grounds, the arbitral tribunal's violation of the principle of equality of arms (which is encompassed in the notion of due process). The Republic of Iraq complained that the arbitration proceedings were commenced seven months after the beginning of the Iraq war, which prevented it from effectively organising its defence in the arbitration and, specifically, from having access to evidence. While granting extensions for the Republic of Iraq to submit its evidence, the tribunal eventually concluded that the Republic of Iraq's inability to do so did not deprive it of an effective defence. As such, the tribunal proceeded to rule on the basis of the evidence before it.
In deciding on the annulment application, the court had to consider whether principles of efficient dispatch of arbitral justice justified deciding the case:
Article 1464 of the Code of Civil Procedure proclaims that "the parties and arbitrators shall act with celerity and loyalty in the conduct of the proceedings"(2) and, in order to enhance the efficiency and flexibility of the procedure, Article 1509 of the code permits the parties to choose which procedural rules will apply to their arbitration proceedings.(3) However, Article 1510 of the Code of Civil Procedure states that "irrespective of the procedure adopted, the arbitral tribunal shall ensure that the parties are treated equally and shall uphold the principle of due process".(4)
Due process, which is inherent to the fair adjudication of disputes, is a fundamental principle of French arbitration law. As such, it is protected by international public policy(5) and its violation by an arbitral tribunal constitutes grounds for the annulment or non-recognition of an award in France.(6) French courts are therefore particularly watchful when allegations of due process infringement are raised.
The Paris Court of Appeal endorsed the Republic of Iraq's position. Although it acknowledged that the arbitral tribunal had a duty to conduct the proceedings efficiently and that the respondent's failure to produce evidence should not deprive the claimant of adjudication of the case, the court nonetheless ruled that the arbitral tribunal should have adapted the procedure in order to guarantee equality between the parties. The court therefore found that the arbitral award had been rendered in violation of the principle of the equality of arms, which the court insisted constituted an essential component of due process, thereby also infringing international public policy. As such, the court held that award should be set aside.
On May 27 1981 and June 10 1981 the Republic of Iraq and a joint venture of German companies Krupp, MAN and Carl Zeiss executed a construction contract for the Iraqi National Astronomical Observatory on Mount Korek, Kurdistan, in northeast Iraq. Following bombings in 1983 and 1991, in the context of the wars with Iran(7) and the United States,(8) respectively, the partially built observatory was destroyed. The aftermath of this destruction ended work on the project.
A dispute arose between the Republic of Iraq and the consortium as to the outcome of their contractual relationship. In accordance with the arbitration clause contained in the 1981 contract, ThyssenKrupp and MAN, the successors in interest to the joint venture, initiated International Chamber of Commerce (ICC) arbitration proceedings before a three-arbitrator tribunal in Paris against the Republic of Iraq on November 27 2003, eight months after the invasion of Iraq by a US-led coalition.
During the arbitral proceedings, the Republic of Iraq claimed that because of the Iraq war(9) it no longer had access to its files, and that the Iraqi witnesses who had been involved in the project could no longer be located. It also stressed that it could not adequately communicate with its attorneys. The arbitral tribunal therefore granted the Republic of Iraq extensions up to three months to file its submissions before the tribunal. However, since the Republic of Iraq was unable to produce evidence in support of its defence, the debate revolved only around the exhibits produced by ThyssenKrupp and MAN.
In support of its findings, the arbitral tribunal relied in particular on two exhibits produced by ThyssenKrupp and MAN: a final balance sheet and a deed of acknowledgement. The tribunal acknowledged that these had been signed by unidentified persons. Notably, the tribunal authorised ThyssenKrupp and MAN to produce copies of these documents (as opposed to their originals), as it accepted that the archives of these companies were too large to allow them to locate the documents quickly.
On several occasions in 2006, the Republic of Iraq requested that the arbitral proceedings be suspended until its situation could be stabilised.
However, the arbitral tribunal dismissed the Republic of Iraq's requests for suspension and on February 26 2007 the tribunal upheld its jurisdiction to rule on the matter and found the Republic of Iraq liable to pay ThyssenKrupp and MAN €6,274,959.51 and ID406,329.51, plus 5% interest and $300,000 in arbitration costs.
The ICC notified the award to the parties on March 4 2007.
More than six years later, on June 14 2013 the Republic of Iraq filed an application to set aside the award with the Paris Court of Appeal. The Republic of Iraq contended that, among other things, the arbitral tribunal had violated due process since it failed to consider that the Republic of Iraq could not efficiently represent its interests in the arbitration proceedings given that it was facing war.
On December 3 2014 ThyssenKrupp and MAN filed a motion requesting that the court declare the Republic of Iraq's challenge against the arbitral award time barred and hence inadmissible.
ThyssenKrupp and MAN asserted that the Republic of Iraq had to file its set-aside application within a month of the ICC's notification of the award. Therefore, according to the German companies, given that the Republic of Iraq's application was filed more than six years after the award was notified by the ICC, its application was late and inadmissible. In support of their claim, ThyssenKrupp and MAN argued that although under the default rule of French civil procedure, the one-month time limit starts to run from the service of the award by the award creditor to its debtor, the Republic of Iraq had waived this requirement and accepted that it would run from the ICC's notification by agreeing to the application of the ICC rules and the arbitration's terms of reference.(10) ThyssenKrupp and MAN also pointed out that they had served the award, which had been declared enforceable in Germany, on the Republic of Iraq by way of diplomatic channels on August 10 2010. Therefore, according to ThyssenKrupp and MAN, the challenge brought by the state should be regarded as time barred and inadmissible for this reason as well.
In reply, the Republic of Iraq first stressed that, under French civil procedure rules, the one-month time limit did not start to run from the ICC's notification to the parties, but from the proper service of the award by ThyssenKrupp and MAN. It added that such service was invalid within the meaning of French law since the arbitral award that was served had been declared enforceable in Germany, but not in France; hence, it could not trigger the time limit in France.
On January 22 2015 the appellate judge in charge of the administration of the proceedings ruled that the Republic of Iraq's set-aside application was admissible.(11) The Paris Court of Appeal confirmed this decision on March 17 2015.
The court found that:
The court emphasised that the enforceability of the award abroad was irrelevant for the purposes of its service in France and pointed out that the notice served on the Republic of Iraq failed to mention available recourses against the award, which is compulsory for the validity of such service.(12)
The Paris Court of Appeal therefore held that the Republic of Iraq's set-aside application was admissible and allowed the case to proceed on its merits.(13)
The Republic of Iraq claimed that the arbitral award should be set aside based on, among other grounds, the arbitral tribunal's violation of the principle of equality of arms (which is a component of due process) based on Articles 1520(4) and (5) of the Code of Civil Procedure.(14) It stressed that the arbitration proceedings, which took place more than 15 years after the relevant facts, were commenced seven months after the beginning of the Iraq war. The Republic of Iraq contended that this war occurred on its territory, preventing it from effectively organising its defence in the arbitration.
In this respect, the Paris Court of Appeal observed that, as a matter of fact, the arbitration proceedings took place from November 27 2003 to November 9 2006. Further, it noted that Iraq's territory was invaded on March 20 2003 and occupied until December 18 2011, during which hostage situations, terrorist attacks and riots were ceaselessly occurring on an extreme scale. It also noted that the internal and international conflicts happening in Iraq led to the death of over 1 million Iraqis, the emigration to neighbouring states of over 2.5 million refugees and the displacement within the Iraqi territory of over 800,000 persons.(15)
In reply to the Republic of Iraq's contentions, ThyssenKrupp and MAN articulated the four following defences.
First, ThyssenKrupp and MAN insisted that the Republic of Iraq was late in raising its circumstance and was therefore estopped from relying on them, as it had requested that the proceedings be suspended for the first time only on March 31 2006, yet had filed submissions before the tribunal after being granted extended deadlines to do so.
The Paris Court of Appeal emphasised that when filing its exhibits, the Republic of Iraq constantly claimed that:
The Paris Court of Appeal therefore concluded that the Republic of Iraq had raised its circumstances before the arbitral tribunal in a timely manner and was thus not barred from relying on them before the domestic courts.(16)
Second, ThyssenKrupp and MAN argued that the Republic of Iraq failed to demonstrate that it had actually faced hardship in preparing its defence – in particular, it failed to prove that its files had been destroyed and that its witnesses had disappeared. The German companies underlined that most of the destruction occurred between March 30 2003 and May 1 2003, and that the country's growing economy between 2004 and 2005 showed that the state of Iraq had been administered in an effective manner. Moreover, they added that over this period, the state was able to defend itself in other legal proceedings.
The Paris Court of Appeal nevertheless observed that in 2003, the Iraqi government was overthrown by the US-led coalition, which resulted in between 15,000 and 30,000 members of the Ba'ath party being excluded from the administration(17) and a US civil administrator being tasked with the reconstruction of the infrastructure and restoration of the country's institutions. The court considered that it was impossible to remediate the:
It also stated that the mere fact that the Ministry of Justice was vested with the power to represent the Republic of Iraq in legal actions before arbitral tribunals and domestic courts did not create a presumption that this administration could effectively perform this mission. The court finally noted that the improvement of Iraq's economic situation was due to the waiver of international sanctions and the restart of oil production and exportation. The court therefore dismissed ThyssenKrupp's and MAN's contention that the Republic of Iraq had failed to show that its documentation had been destroyed and that its witnesses had disappeared.(18)
Third, ThyssenKrupp and MAN argued that even if the court were to deem the Republic of Iraq's demonstration of hardship sufficient, the fact that Iraq's files were unavailable was irrelevant in the present case. ThyssenKrupp and MAN claimed that the questions that the tribunal put to the parties in October 2005, January 2006 and February 2006 did not require the production of evidence, but merely elements regarding Iraqi administrative law, which could be gathered outside of Iraq. Therefore, the suspension sought by Iraq in 2006 was pointless, especially in light of the extended deadlines that were granted to Iraq to present its defence.
The court first noted that:
The court added that the Republic of Iraq's failure to produce exhibits could not deprive ThyssenKrupp and MAN of their right to have a tribunal ruling on the merits of their claims. However, this principle should be enforced on a case-by-case basis and in the respect of the equality of arms, which, the court added, is a component of due process protected by international public policy. The court then noted that:
However, unlike the arbitral tribunal, the Paris Court of Appeal stressed that it had been established that it would be impossible for the Republic of Iraq to find its main witnesses unless its institutional situation could be stabilised. Second, the court disagreed with the arbitral tribunal's position that due process was guaranteed by the Republic of Iraq's ability to challenge the claimants' exhibits. In this respect, the court noted that the arbitral tribunal relied on two exhibits produced by ThyssenKrupp and MAN, which were challenged by the Republic of Iraq: a final balance sheet and a deed of acknowledgement, which, as the tribunal had acknowledged, had been signed by unidentified persons. Notably, the tribunal authorised ThyssenKrupp and MAN to produce copies of these documents (as opposed to their originals), as it accepted that the German companies' archives were too large to allow them to find these documents quickly. The court therefore found that in these circumstances, the Republic of Iraq's ability to criticise such exhibits, without being in a position to bring contradictory evidence itself, guaranteed respect for due process in a merely formal manner and created an inequality between the parties regarding the administration of evidence.(20)
Finally, ThyssenKrupp and MAN contended that if the arbitral proceedings had been suspended for an indefinite period, this would have amounted to a denial of justice.
The court stressed that it was the arbitral tribunal's duty to ensure that a fair balance was achieved between the claimant's right to have its claims heard within a reasonable timeframe and the defendant's right to organise its defence effectively.(21)
The court remarked that the Republic of Iraq had indeed requested that the arbitral proceedings be suspended until its situation could be stabilised on February 17, March 31 and June 13 2006. Further, on December 7 2006 it had produced a declaration from UN Secretary General Kofi Annan stating that "given the level of the violence, the level of killing and the way the forces are ranged against each other" and in light of the deterioration of the situation, the situation in Iraq was "much worse" than a civil war.(22)
The court therefore considered that the arbitral tribunal should have adapted its duty of efficiency in the conduct of the proceedings to these exceptional circumstances, especially given that ThyssenKrupp and MAN had:
Therefore, in light of the particular circumstances of the case, the court found that the extensions given to the Republic of Iraq were insufficient to re-establish equality between the parties and loyalty of the arbitral debates.(23)
In light of the above, the Paris Court of Appeal concluded that the Republic of Iraq was put in a "substantially disadvantageous situation" compared to that of ThyssenKrupp and MAN. Therefore, it found that the recognition or enforcement in France of an award rendered in violation of the principle of the equality of arms, which, the court insisted, constitutes an essential component of due process, would infringe international public policy. As such, the award had to be set aside.(24)
Leaving aside the singularity of the circumstances of this case, this ruling provides noteworthy takeaways that must be carefully considered by arbitrators.
First, the Paris Court of Appeal agreed to hear the Republic of Iraq's challenge to the award on the grounds that it invoked only because the Republic of Iraq first raised the existence of the circumstances on which it relied before the arbitral tribunal and in a timely manner. It is a well-established principle that a party which knowingly refrains from making a claim regarding the irregularity of the proceedings before an arbitral tribunal is deemed to have waived its right to raise such irregularity in a later challenge against the award brought before the local courts.(25)
In this respect, a parallel must be drawn between this decision and the République Démocratique du Congo v FG Hémisphère Associates LLC ruling, which was rendered by the same court on April 12 2016. The circumstances of both cases are strikingly similar. In FG Hémisphère Associates LLC the Democratic Republic of the Congo contended that an arbitral award had been rendered against it in violation of the principle of due process because the arbitration's procedural calendar had been altered in such a way as to exclude the Democratic Republic of the Congo from discussions – in particular, it had been established without considering that the country was at war and therefore facing a material impossibility of properly defending itself in the proceedings. However, in that case, the Paris Court of Appeal dismissed the challenge against the order recognising the award in France,(26) observing that, among other things, since the Democratic Republic of the Congo had not raised this issue during the arbitral proceedings, although it could have done so, it was barred from raising it before the local courts.(27)
Second, in this decision, the court expressly tasked arbitral tribunals with the:
"duty to ensure, on a case by case basis, that a fair balance is stricken between the right of the claimant to have its claims heard within a reasonable timeframe and the right of the defendant to effectively organise its defense."
It noted that in this instance "the arbitral tribunal should have adapted its duty of efficiency in the conduct of the proceedings to these exceptional circumstances".
The principle of efficiency of arbitral proceedings, which is evoked by the courts, is cardinal in France. French law was substantially reformed in 2011 in order to enhance the flexibility and effectiveness of such proceedings and the French courts have issued numerous consistent rulings. Even if France wants to tailor arbitral proceedings to users' needs and ensure its swiftness, it nonetheless will not compromise on the quality of the arbitral justice, under which due process and fair trial guarantees should be strictly enforced.
Article 1464(3) of the Code of Civil Procedure affirms this dual expectation, providing that "the parties and arbitrators shall act with celerity and loyalty in the conduct of the proceedings".(28)
Accordingly, the courts are tasked not only with supporting arbitration proceedings, but must also serve as the guardians of fairness of the arbitral process, which this important ruling recalls with clarity.
Most importantly, ThyssenKrupp v Republic of Iraq emphasises that arbitrators must ensure that due process is effectively guaranteed to all parties, and not afforded in a merely formal manner.
In other words, as emphasised by the court in its decision, an arbitral tribunal's assessment as to what measures are necessary to guarantee respect for due process should be carried out on a case-by-case basis. There is no one-size-fits-all approach to due process and tribunals are bound by a duty of pragmatism: they must understand the practical situation of the parties and adapt the procedure accordingly in order to ensure equality between the parties.
In this regard, when factual evidence is determinant and it is established that, unlike its opponent, a party cannot produce relevant evidence due to specific circumstances, it is insufficient to grant only time extensions.
This was made clear by the Paris Court of Appeal: a party's ability to criticise determinant exhibits presented by its opponent, without being in a position to bring contradictory evidence itself, means that respect for due process in a merely formal manner and creates an inequality between the parties in the administration of evidence, which constitutes an infringement of due process.
When a party raises concerns regarding its ability to defend itself in an effective manner throughout the arbitration and substantiates reasons, the arbitral tribunal should carefully analyse the situation. If it finds that the party faces hardships in making its case due to specific conditions, whereas its opponent faces no similar issues, the tribunal is under an obligation to re-establish an actual equality between the parties. As long as the other party's interests are not jeopardised, the arbitration proceedings may need to be suspended until the affected party is able to represent its interests in an effective manner.
Recalling that due process is paramount, being expressly placed under the protective halo of international public policy, and warranting that its violation by an arbitral tribunal will be inevitably penalised, such a decision, in the same vein as its precedential ruling on independence and impartiality of arbitrators in SA Auto Guadeloupe Investissements v Columbus Acquisitions Inc,(29) highlights the French courts' dedication to ensuring that arbitration remains a safe and fair dispute resolution mechanism.
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 (firstname.lastname@example.org or email@example.com). The Freshfields Bruckhaus Deringer LLP website can be accessed at www.freshfields.com.
(5) See, eg, CA Paris, September 9 1997, Monsieur Richard H v Société Graziano Trasmissioni SpA, 96/80322, obs Y Derains, Rev Arb 1998, pp 712-714 ; CA Paris, March 25 2010, Société Overseas Mining Investments Ltd v Société Commercial Caribbean Niquel SA, 08/23901, Rev Arb 2011, pp 442-446 (confirmed by Cass Civ 1, June 29 2011, Société Overseas Mining Investments Ltd v Société Commercial Caribbean Niquel SA, 10-23.321, Rev Arb 2011, pp 678-679); and CA Paris, November 8 2016, Gouvernement de la République d'Irak v Sociétés ThyssenKrupp et MAN, 13/12002.
(6) Failure to observe due process and contrariety of an arbitral award to international public policy both constitute grounds for annulment or non-recognition of an award in France under Article 1520(4) and (5) of the Code of Civil Procedure.
(10) Under Article 28 of the 1998 ICC rules: "[o]nce an Award has been made, the Secretariat shall notify to the parties the text signed by the Arbitral Tribunal, provided always that the costs of the arbitration have been fully paid to the ICC by the parties or by one of them" (a similar provision can be found under Article 34 of the 2012 ICC Rules and Article 35 of the 2017 ICC Rules, effective as of March 1 2017).
(12) CA Paris, March 17 2015, Sociétés ThyssenKrupp et MAN v Gouvernement de la République d'Irak, 15/02556. See JC Honlet, B Legum, AS Dufêtre and A Lecompte in JM Carter (ed) The International Arbitration Review, 7th ed, Law Business Research Ltd, 2016, pp 206-208.
(25) Article 1466 of the Code of Civil Procedure. With regard to the issue of estoppel in French arbitration law, see E Kleiman and Y Dehaudt-Delville, "Principle of procedural estoppel under French arbitration law", International Law Office, November 3 2016.
(26) The award was rendered in Zurich. Given that France was not the seat of arbitration, the Democratic Republic of the Congo was therefore not applying to set the award aside in France, but brought an appeal against the order recognising it in France (the exequatur order). It is noteworthy that both legal actions (ie, set-aside proceedings or appeals against an exequatur order) may be brought only on the same exclusive grounds (see Articles 1525 and 1520 of the Code of Civil Procedure).
(29) CA Paris, October 14 2014, SA Auto Guadeloupe Investissements v Columbus Acquisitions Inc, 13/13459; see D Cohen, "Encore l'indépendance de l'arbitre et sort de l'exequatur d'une sentence", Paris Journal of International Arbitration, 2014, 795; E Kleiman and Y Dehaudt-Delville, "Challenges of arbitrators: clarification on timeframe and standard of review", International Law Office, December 4 2014; and R Woolley, "Alvarez award gets short shrift in Paris", Global Arbitration Review, October 23 2014. This Paris Court of Appeal ruling was confirmed by Cass Civ 1, December 16 2015, SA Auto Guadeloupe Investissements v Columbus Acquisitions Inc, 14/26279; see A Ross and T Jones, "Alvarez conflict of interest ruling upheld in France", Global Arbitration Review, January 29 2016; and E Kleiman and Y Dehaudt-Delville, "Independence and impartiality: Supreme Court confirms stern approach to duty of disclosure", International Law Office, April 21 2016.
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