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11 December 2008
A judgment made on June 4 2008 by the First Civil Section of the Supreme Court is interesting for a number of reasons.
First, it confirms a 2005 ruling of the court regarding the conditions for granting a stay of annulment or enforcement proceedings when criminal proceedings are running parallel to them.(1)
Second, the court has adopted a test that was formulated for the first time in 2004 by the Paris Court of Appeal,(2) according to which an arbitral award violating international public policy (in this case, EU competition law) will be set aside only if recognition and enforcement of the award would amount to "a blatant, effective and concrete violation of international public policy".
Third, the court restated the well-established principle according to which a state court hearing annulment proceedings does not review the merits of the case heard by the arbitral tribunal, but simply reviews the award itself in accordance with the strict criteria set forth in Article 1502 of the Code of Civil Procedure.
In 1991 French company SNF SAS and Dutch company Cytec Industries BV entered into an agreement for the supply of chemicals. In 1993 the parties entered into a supplemental agreement providing, among other things, that disputes arising from the 1991 agreement would be submitted to arbitration. In 2000 SNF terminated the 1993 agreement, alleging an infringement of Articles 81 and 82 of the EC Treaty.
In May 2000 Cytec brought arbitral proceedings against SNF.
Two arbitral awards were rendered by an International Chamber of Commerce tribunal seated in Brussels. The first award was made on November 5 2002 and addressed the question of whether the parties were liable for having agreed and performed an illicit contract. The tribunal held that the 1993 agreement was null and void ab initio (ie, from first principles) because it was contrary to Article 81, but held that Cytec was not guilty of having abused a dominant position pursuant to Article 82. The second award was made on July 28 2004 and awarded damages to Cytec. SNF's claim for damages was held to be unsubstantiated and was accordingly dismissed.
Enforcement of the two awards was authorized in France by the president of the Tribunal de grande instance on September 15 2004, pursuant to an exequatur order.
On November 10 2004 SNF filed a criminal complaint in France against a number of directors and employees of the Cytec group, alleging that a number of violations of competition law had been committed and that the arbitration had been brought by Cytec for fraudulent purposes, solely to circumvent the state courts' jurisdiction. An investigation judge started a criminal investigation.
SNF appealed the exequatur order. It requested a stay of the enforcement of the award pending the outcome of the criminal proceedings on the basis of Article 4 of the Code of Criminal Procedure. SNF also requested that the two exequatur orders be overturned on the grounds that the arbitral tribunal did not comply with its remit, violated due process and rendered an award that was contrary to international public policy.
On March 23 2006 the Paris Court of Appeal dismissed SNF's appeal.(3) Regarding the application for a stay, SNF had already made such an application to the arbitral tribunal on the basis of the same facts as those that were brought to the attention of the investigating judge. The court held that since the tribunal had ruled on the application for a stay, it was not open to it to make a subsequent ruling on an identical application. This would amount to a review of the merits of the arbitral award; pursuant to Article 1502 of the Code of Civil Procedure, the court is excluded from conducting such a review in the context of an appeal against an order authorizing the enforcement of an arbitral award.
Regarding the alleged violation of international public policy, the court held that in the absence of a demonstration by the appellant that enforcement of the awards would cause a "blatant, effective and concrete violation of international public policy", there was no reason to set them aside.
SNF applied again for a stay of the proceedings pending the outcome of criminal proceedings. It also claimed that the court of appeal's judgment should be overturned because it had failed to conduct a proper review of the arbitral award. Specifically, SNF contended that:
The Supreme Court dismissed all of SNF's grounds for appeal and confirmed the Paris Court of Appeal's decision.
Regarding the application for a stay of the proceedings, the court held that such an application can be granted only if: (i) the facts described as amounting to criminal conduct have a direct impact on the validity of the award; and (ii) the decision that is to be made as a result of the criminal proceedings is likely to have an impact on the outcome of the enforcement proceedings.
Regarding the alleged violation of international public policy, the court held that an arbitral award's compliance with that policy should be reviewed only in the context of its recognition and enforcement. Any such review should thus be limited to determining whether there would be a blatant, effective and concrete violation of international public policy if the awards were recognized and leave was granted to enforce them in France. The court held that SNF's claim failed because:
Unlike state courts, arbitrators are under no obligation to order a stay pending the outcome of criminal proceedings running in parallel. However, the issue in this case was different. The application for a stay was made not to the arbitral tribunal, but to a court of appeal, which was hearing an appeal against the order that had recognized and granted leave to enforce the arbitral awards. Consistently with a decision it had previously made on this issue in 2005, the Supreme Court decided that a stay could be granted only when the facts dealt with in the criminal proceedings could have a direct impact on the ruling regarding the validity of the arbitral award and when the outcome of the criminal proceedings was likely to have an impact on the decision to be made in the enforcement proceedings.
One question remains unanswered. If the criteria for granting a stay are not met, should a court of appeal hearing annulment or enforcement proceedings dismiss an application for a stay of the proceedings? Or does it merely have discretion to do so? Article 4(3) of the Code of Criminal Procedure states in this regard that criminal proceedings do not necessarily impose a stay on civil proceedings insofar as the civil proceedings do not relate to the reparation of harm caused by the alleged criminal offence. Thus, a court of appeal sitting in annulment or enforcement proceedings should be entitled to exercise its discretion when deciding whether to grant a stay.
The second part of the judgment provides a definition of a violation of international public policy for the purposes of Article 1502 of the Code of Civil Procedure, which sets out the grounds for setting aside an arbitral award. The court confirmed the position that had previously been adopted by the Paris Court of Appeal in the Thalès Case, according to which an arbitral award will be annulled on grounds of international public policy only if the violation is blatant, effective and concrete.(4)
The courts must therefore conduct an extremely narrow review of an arbitral award's compliance with international public policy. By way of example, as in the June 4 2008 decision, the courts do not determine whether EU competition law has been properly applied by the arbitrators since that would be reviewing the merits of an arbitral award. The courts will annul an award only if it amounts to a "blatant, effective and concrete violation of international public policy". As long as the mandatory rule of law has been applied by the arbitral tribunal (eg, EU competition law), an improper application of the law has no consequence and does not amount in itself to a violation of international public policy.
This decision confirms two recent and major principles in the field of international arbitration. It supports the current position of French courts, initiated by the Cour de cassation, to grant arbitrators substantial leeway by limiting state court judges' review of arbitral awards.
For further information on this topic please contact Elie Kleiman at Freshfields Bruckhaus Deringer by telephone (+33 1 44 56 44 56) or by fax (+33 1 44 56 44 00) or by email (email@example.com).
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