The new law clarifies the role of French courts. The President of the Paris Court of First Instance (Tribunal de grande instance de Paris) has been attributed the official title of “support judge” (“juge d’appui”), a term first introduced in scholarly works and used in case law, and now has sole jurisdiction to “support” international arbitration proceedings in case of related procedural disputes (Article 1459). This centralisation of power with the Paris Court is designed to ensure consistency in decisions.

Consistent with the previous law, this “support judge” has jurisdiction when the place of arbitration is France, or the parties have chosen to apply French procedural law. In addition, the “support judge” now also has jurisdiction if the parties have expressly agreed to refer their procedural disputes to French Courts or where one of the parties is exposed to a risk of denial of justice (Article 1505), which is a noteworthy innovation. French case law had previously upheld the jurisdiction of the President of the Paris Court of First Instance as “support judge” of an international arbitration between two foreign parties, in order to avoid denial of justice (NIOC case, dated 1 February 2005). In this case, the French Supreme Court noted, as one of the grounds for its decision, that there was a link, even if remote, with France. The new law goes further still. The “support judge” has jurisdiction in case of a risk of denial of justice, without there needing to be a link with France, thus granting universal jurisdiction to the “support judge”.

The new law also clarifies the respective powers of national courts and arbitral tribunals to take conservatory or provisional measures. Before appointment of the arbitral tribunal, national courts have sole jurisdiction to order such measures. Once constituted, arbitral tribunals have jurisdiction to take conservatory or provisional measures during arbitration proceedings, with the exception of conservatory seizures or judicial securities which are within the exclusive jurisdiction of national courts (Article 1468).

Further, the law introduces new rules governing the production of evidence. Arbitral tribunals are entitled to order parties to produce evidence subject to penalties should they fail to do so (Article 1467). Parties to the arbitration may, upon leave of the arbitral tribunal, request the “support judge” to order a third party to produce documents relevant to the case (Article 1469).

Another aim of the new law is to reinforce recognition and enforcement of arbitration awards and, therefore, provide more certainty to the parties relying on arbitration to settle their disputes.

Thus, according to the new law, “by way of a specific agreement the parties may, at any time, expressly waive their right to bring an action to set aside” the arbitration award (Article 1522). The parties’ waiver under this provision (which applies only to arbitration agreements entered into after 1 May 2011) does not affect their right to appeal a court decision to enforce the award in France (exequatur).

To accelerate enforcement of awards, the new law provides that any claim to set aside an award must be filed within one month of notification of the award (Article 1519) (three months for a foreign party), instead of one month (or three months) of service of the judgment enforcing the award (jugement d’exequatur) under the previous law.

The new law also facilitates proceedings for court enforcement (exequatur) of the award. It no longer requires a certified translation of the award or the presentation of the original copy of the award (Article 1515).

Finally, and importantly, to minimise unnecessary delays, the existence of court proceedings to set aside an arbitration award no longer stay the enforcement of the award, unlike under the previous law. Instead, the arbitral award is provisionally enforceable, unless the party against which the award is sought to be enforced applies for a stay of the award with the Court of Appeal. However, this party would have to demonstrate that enforcement of the award would be highly detrimental to its rights (Article 1526). The purpose of this provision – which will apply to awards rendered after 1 May 2011 – is to discourage parties from initiating frivolous annulment proceedings to delay the enforcement of awards.

These new provisions are by no means an exhaustive description of the new arbitration law. They are though illustrative of how the new law confirms France’s desire to remain a pro-arbitration jurisdiction.

Christophe von Krause and Paul Giraud

This development is one of several recent manifestations of the Commission’s opposition to the application of BITs between Member States of the European Union.

The question of the applicability of an intra-EU BIT was raised in the Eastern Sugar v. Czech Republic arbitration (Partial Award, 27 March 2007). In this case, two letters from the Commission were considered by the Tribunal. These included statements such as: “where the EC Treaty or secondary legislation are in conflict with some of these BITs’ provisions […] Community law will automatically prevail over the non-conforming BIT provisions”; “intra-EU BITs should be terminated in so far as the matters under the agreements fall under Community competence”; or “that Member States [should] exchange notes to the effect that such BITs are no longer applicable, and also formally rescind such agreements.” The Commission therefore considered that intra-EU BITs should be rescinded because they were superseded by EU law (notwithstanding the fact that EU law does not confer access to arbitration to investors).

In September 2008, the Commission intervened directly in two ICSID arbitration proceedings against Hungary (AES v. Hungary and Electrabel v. Hungary) by filing amici curiae briefs. It has been reported that the Commission took Hungary’s side by stating that the power purchase agreements between the investors and a Hungarian State-owned entity violated EC law as they could restrict competition, thereby not taking account of the protection granted to the investors by the investment treaty at stake. The Commission’s view, based on the supremacy of EC law over investment treaties, seems to leave little room for the application of investment treaties between Member States.

The Commission’s views were also expressed in more informal settings: during a conference on investment law and the European Union in Paris in April 2009, the Commission reiterated its views on the supremacy of EC law over intra-EU BITs. International law specialists held a different position, according to which questions relating to conflicts between treaties must be resolved by the application of the Vienna Convention on the Law of Treaties, including Article 59 which sets out conditions for a treaty to be terminated by the conclusion of a later treaty.

The two letters by the Commission analyzed by the tribunal in the Eastern Sugar case provide us with the reasons behind the Commission’s position.

In the first letter, addressed to the Czech Republic, the Commission advances the argument that “the application of intra-EU BITs could lead to a more favourable treatment of investors and investments between the parties covered by the BITs and consequently discriminate against other Member States, a situation which would not be in accordance with the relevant Treaty provisions.” What does this difference of treatment amount to? One element of BITs comes to mind: the right of investors to have recourse to international arbitration. Indeed, only EU investors whose State of origin has entered into a BIT with the host State would have access to international arbitration.

In the second letter, addressed to the Economic and Financial Committee, the Commission states that investors starting arbitration proceedings based on intra-EU BITs “could lead to arbitration taking place without relevant questions of EC law being submitted to the ECJ, with unequal treatment of investors among Member States as a possible outcome.”

Therefore, the Commission seems to consider that the application of intra-EU BITs, including access to arbitration, may be a source of inequality between EU citizens as well as a hindrance to the harmonized development of EC law.

During the April 2009 Paris conference, certain speakers criticized the Commission’s position and stressed the importance of access to arbitration in the build-up of a European area of freedom, security and justice. However, the recently reported intervention by the Commission in the Eureko v. Slovakia case confirms the Commission’s apparent opposition to arbitration under intra-EU BITs.

A measure of hope is to be found in the attitude of Member States and tribunals.

As highlighted by the Economic and Financial Committee in a 2008 report: a “clear majority of Member States prefer to maintain the existing [intra-EU BITs], in particular with a view to the provisions on […] investor-to-state dispute settlement.”

In addition, in the Eastern Sugar case, the arbitral tribunal stated that the BIT in question was not superseded by EC law because, inter alia, this was not expressly set out in the treaties marking the Czech Republic’s accession to the EU nor in the BIT; and the conditions set out in Article 59 of the Vienna Convention were not satisfied. Also, in the newly published AES v. Hungary award (Award, 23 September 2010), the tribunal stated that EC law, “once introduced in the national legal orders … is part of these legal orders” and that “a state may not invoke its domestic law as an excuse for alleged breaches of its international obligations.”

By Christophe von Krause and Florian Quintard

The case concerned a transportation agreement entered into by SOERNI and ASB for the transport by ASB of a motorboat from Libreville to Pointe Noire. The agreement between the parties did not contain any arbitration clause. However the parties also entered into a hold harmless letter, which made reference to an arbitration clause contained in a bill of lading. ASB initiated arbitration proceedings, arising out of the sinking of the motorboat, on the basis of the arbitration clause contained in the bill of lading. Ultimately the arbitral tribunal would rule in favour of ASB and order SOERNI to pay damages to ASB.

The arbitral award was enforced by the Paris First Instance Court in August 2006. However, on 20 December 2006, SOERNI filed an action before the Paris Court of Appeal to set aside the enforcement order. After the Paris Court of Appeal confirmed the enforcement order, on 15 May 2008 SOERNI appealed that decision to the French Supreme Court. SOERNI argued that it had not seen the arbitration clause before entering into the transportation agreement and that under French law an arbitration agreement incorporated by reference is not binding if a party is not aware of its contents when entering into a contract referring to it. SOERNI also argued that it had been represented by an employee who had no binding authority.

In its decision dated 8 July 2009, the French Supreme Court confirmed the validity of the arbitration agreement. The French Supreme Court declared that the question of whether a party is or is not validly bound by an arbitration agreement should be examined in light of the parties’ common intent, the requirement of good faith, and the belief that the person who signed the clause had the power to bind the company. In doing so, the Supreme Court did not discuss the law governing the arbitration agreement, but considered only the following relevant facts: (a) the hold harmless letter made a clear reference to the arbitration agreement, (b) the employee was ASB’s only contact during the negotiations, and (c) ASB had never been informed by SOERNI that the employee lacked the authority to bind SOERNI.

Thus, the French Supreme Court confirmed its position in the Dalico case (see Municipalité de Khoms El Mergeb v. Société Dalico, December 20, 1993, Case no. 91-16828) according to which the validity of the arbitration agreement depends primarily on the parties’ common intent, without reference to the law governing the contract or other national law. As in the SOERNI v. ASB case, the French Supreme Court chose not to apply a conflicts of law analysis when considering the validity of an arbitration agreement, but to turn to the relevant facts and examine the common intent of the parties, i.e., to apply the French substantive rules of international arbitration to the arbitration agreement. The French Supreme Court has adopted this position on a number of occasions previously (see L’Entreprise Tunisienne d’Activités Pétrolières (ETAP) v. Bomal Oil, November 9, 1993, Case no. 91-15194; Société anonyme Française Entrepose GTM pour les Travaux Pétroliers Maritimes (ETPM) v. Société anonyme Empresa Constructoria Financiera (ECOFISA), December 4, 1990, Case no. 88-13336).

This recent decision confirms, once again, the pro-arbitration approach of French courts.

By Christophe von Krause and Marily Paralika

A French company had signed three contracts for the sale of crystallized sugar with an Egyptian company. Pursuant to the contracts, the parties were to refer any disputes thereunder to arbitration. The Egyptian company initiated arbitration proceedings on October 5, 2001 to settle a dispute in connection with the performance of the contracts. On May 20, 2003, while arbitration proceedings were ongoing, a French court issued a bankruptcy ruling against the French company and, on July 1, 2003, ordered the French company’s assets to be liquidated.

On February 9, 2004, the arbitral tribunal rendered its award, ruling in favor of the Egyptian company and ordering the French company to pay damages. The Egyptian company obtained an order of enforcement (ordonnance d’exequatur) of the award from a French court. The liquidator appealed against such order on, inter alia, the ground that the arbitral tribunal had violated public policy in ordering an insolvent party to pay a sum of money.

On November 8, 2007, the Paris Court of Appeal rejected the appeal and held – reiterating its famous reasoning in the Thales decision (Thales v. Euromissile, November 18, 2004) – that the recognition or enforcement of an arbitral award can only be considered contrary to public policy if the violation is flagrant, actual and concrete. However, in this case, the Egyptian company had, in the course of the appeal proceedings, waived its right to enforce the award and, in any event, the French company was not able to pay damages given that it had been liquidated. Therefore, the arbitral award could not produce any effects in practice. The Court of Appeal decided that the violation was purely “formal” and, thus, upheld the award.

The liquidator brought the matter before the French Supreme Court (Cour de cassation), which overruled the Court of Appeal’s reasoning on public policy. The Supreme Court held that the arbitral tribunal had violated public policy because it had ordered an insolvent party to pay damages, instead of limiting itself to validating and quantifying these damages. The Supreme Court held, in substance, that, pursuant to French bankruptcy law, and as a matter of public policy, legal proceedings (including arbitration) against an insolvent party in bankruptcy proceeding should be stayed until the claimant has filed a declaration of its claim with the liquidator and, thereafter, legal proceedings should be limited to the validation and the quantification of claims.

The French decision confirms a number of previous decisions (Almira v. Ema Films, February 5, 1991, Case no. 89-14382; Industry et al. v. Alstom Power Turbomachines, June 2, 2004, Case no. 02-13.940). The coexistence of international arbitration and bankruptcy proceedings is a recurring issue and, in the context of the recent financial downturn, one can expect that this kind of situations will occur more frequently. It is therefore useful to know how insolvency proceedings will affect arbitration proceedings.

The French Supreme Court’s comes shortly after two decisions regarding the same subject, one rendered by the English High Court (Syska (Elektrim SA) v. Vivendi Universal SA, October 2, 2008, Case [2008] EWHC 2155 (Comm)), the other by the Swiss Federal Supreme Court on March 31, 2009 (Vivendi SA et al. v. Elektrim S.A. (Poland), March 31, 2009), which considered, among other things, whether an arbitration agreement involving an insolvent party should be annulled because of its insolvency.

In contrast, the French decision does not focus on the insolvent party but on the power – or duties – of the arbitral panel, and, thus, confirms that insolvency is not, per se, an obstacle to international arbitration.

By Christophe von Krause and Gaelle Filhol

By way of background, Phoenix is an Israeli company which purchased two Czech companies, Benet Praha (“BP”) and Benet Group (“BG”), in 2002 while these two companies were involved in ongoing legal disputes – BG with a private party, BP with the Czech fiscal authorities. The Czech Republic challenged the jurisdiction of the Tribunal on the basis that Phoenix was an ex post facto sham Israeli entity created by a Czech national in order to establish diversity of nationality. The Czech Republic specifically asked the Tribunal to decide whether a foreign entity could be created for the sole purpose of establishing diversity of nationality, thus triggering ICSID jurisdiction.

In its decision, the Tribunal revisited the often-cited “Salini test” which attempts to determine whether there is an investment for the purposes of Article 25 of the ICSID Convention. The Salini test sets out four criteria for an investment to qualify as such under the ICSID Convention, i.e. (a) a contribution of money or other assets of economic value, (b) a certain duration, (c) an element of risk, and (d) a contribution to the host State’s development.

The Tribunal refused to rely exclusively on the Salini test. Instead, the Tribunal concluded that for an investment to benefit from the international protection of ICSID, the following six elements had to be taken into account:

“1 – a contribution in money or other assets;
2 – a certain duration;
3 – an element of risk;
4 – an operation made in order to develop an economic activity in the host State;
5 – assets invested in accordance with the law of the host State;
6 – assets invested bona fide.”

The purpose of this blog entry is to focus on the fifth element developed by the Tribunal, i.e. assets invested in accordance with the law of the host State.

As a preliminary matter, it is of note that the Czech Republic in its objections to jurisdiction did not raise an argument on the grounds of a violation by the claimant of a rule of the Czech Republic legal order.

Nevertheless, the Tribunal devoted a portion of its award to the fact that only investments made in accordance with the laws of the host State may have access to the ICSID dispute settlement mechanism.

Interestingly, the Tribunal noted that the conformity of the establishment of the investment with the national laws was implicit “even when not expressly stated in the relevant BIT.” This position confirms the position adopted in Plama v. Bulgaria, where the tribunal was faced with the silence of the relevant treaty on the necessary conformity of a protected investment with the laws of the host country. The Plama tribunal found that even if the Energy Charter Treaty did not contain a provision requiring the conformity of the investment with a particular law, the substantive protections of the Energy Charter Treaty could not apply to investments made contrary to law.

In practice, a tribunal assessing the conformity of the investment with the host State’s law will generally take into account the laws in force at the moment of the establishment of the investment. Of course, the Tribunal noted, the host State may not modify the scope of its legislation or what qualifies as an investment under its laws to escape liability under the relevant treaty.

The criterion of whether an investment is made in accordance with the law of the host State is decisive to determine whether the investment will be “protected”. An operation otherwise qualifying as an investment but made in violation of the laws of the host State may not qualify for protection under a particular treaty.

The Tribunal stated that if it is manifest that the investment has been performed in violation of the law, this will constitute a bar to the tribunal’s jurisdiction. This development is in line with other decisions of ICSID tribunals, notably the Fraport v. Philippines decision where the tribunal denied its jurisdiction on the grounds that Fraport had intentionally structured its investment in a way which it knew to be a violation of the host State’s legislation. Notably, however, that case contained an “accordance with law” requirement in the applicable BIT.

The Phoenix Action decision is novel insofar as the Tribunal ruled that even absent any provisions to that end in the relevant treaty, an investment will benefit from the protections of the treaty, and hence a tribunal will have jurisdiction, only if the investment is made in accordance with the law of the host State.

By Christophe von Krause and Nathalie Makowski

In Merial, the claimant, a French company, sought annulment of an arbitral award on the grounds, inter alia, that it was not given the opportunity to reply in writing to new claims introduced by the defendant, a German company, two months before a scheduled hearing during the arbitration proceedings. The claimant also argued that the arbitral tribunal had ruled on the defendant’s tortious claims in violation of the arbitration clause and the terms of reference, which referred only to contractual claims. The Paris Court of Appeal rejected the claimant’s arguments on the basis that the claimant had not objected to a procedural order issued by the arbitral tribunal stating that both parties had an opportunity to explain their views about the admissibility of the defendant’s new claims. The Court also added that the claimant signed the transcript of the hearing, which took place after the introduction of the defendant’s new claims, without protesting. The Court concluded that the claimant was therefore estopped from arguing that the arbitral tribunal had violated its right to due process and failed to comply with the arbitration agreement and terms of reference.

In Marocaine des Loisirs, the claimant, a Moroccan company, had successfully challenged the arbitrator originally appointed by the defendant. The defendant then appointed a new arbitrator, which was confirmed on the very same day that an interim award was rendered by the arbitral tribunal. The claimant sought an annulment of the final arbitral award on the grounds, inter alia, that the terms of reference were null and void because the claimant was induced to sign them by fraud (since one of the arbitrators had a conflict of interest and was successfully challenged). The claimant also argued that the interim award could not have been approved by the replacement arbitrator by virtue of him having been appointed on the same day. Nonetheless the Paris Court of Appeal held that the claimant was estopped from raising any issues regarding the appointment of the new arbitrator because the claimant had signed the amendment to the terms of reference ratifying this appointment without protesting.

These two decisions are in line with recent rulings of the Paris Court of Appeal. See, e.g., Baste SA v. Lady Cake Feine Kuchen GmbH, September 20, 2007, Case no. 05-21985; SELAFA MJA v. International Company for Commercial Exchanges Income, November 8, 2007, Case no. 06-7417; Société Française de Rentes et de Financements Credirente v. Compagnie Générale de Garantie SA, February 7, 2008, Case no. 06-1279 (involving domestic arbitration); Liv Hidravlika DOO v. Diebolt, February 28, 2008, Case no. 05-10577).

The Merial and Marocaine des Loisirs decisions are also consistent with the much-discussed decision of the French Supreme Court (Cour de Cassation) in Golshani v. Islamic Republic of Iran, dated July 6, 2005 (Case no. 01-15912). In Golshani, for the first time the Supreme Court referred expressly to the concept of estoppel, and applied it to prevent an individual who had commenced arbitration proceedings from contesting the resulting award on the basis that there was no arbitration agreement. Commentators have emphasized the significance of the Golshani decision, which introduced the Anglo-American concept of estoppel into the French legal system, and highlighted the difference between estoppel and similar civil law concepts such as implied waiver, good faith, or procedural loyalty, which French courts had relied upon before the Golshani decision to prevent a party from seeking the annulment of an arbitral award based on arguments not raised before the arbitral tribunal.

The consistent reference to the common law concept of estoppel by France’s highest courts – as shown in these recent decisions – is an illustration of the unique nature of international arbitration, which combines civil and common law concepts. These decisions also confirm the pro-arbitration approach adopted by French courts.

By Christophe von Krause and Nicolas Bouchardie