On 1 November 2023, in Hulley v Russian Federation [2023] EWHC 2704 (Comm), Mrs Justice Cockerill in the English High Court (the Court) dismissed a jurisdictional challenge brought by the Russian Federation (Russia) in proceedings for the enforcement of two arbitral awards issued in favour of the former majority shareholders in OAO Yukos Oil Company (Yukos) for an amount exceeding US$50 billion. Continue reading
Tag: Emily Fox
English Commercial Court refuses to issue anti-suit injunction for Paris arbitration in the case of SQD v QYP
In SQD v QYP [2023] EWHC 2145 (Comm), the English Commercial Court refused to issue an anti-suit injunction (ASI) and anti-enforcement injunction to stop proceedings commenced by a claimant in its home country in breach of an arbitration agreement. The court reasoned that such an injunction would be inconsistent with the French courts’ approach to ASIs and the parties’ choice of Paris as the seat of arbitration. Continue reading
LCIA European Council Breakfast Seminar in Paris – The English Arbitration Act 1996 Review: Part Two (Tuesday 4 July 2023)
On Tuesday 4 July 2023, Herbert Smith Freehills Paris will be hosting a breakfast seminar organised by the LCIA European Council.
THE FRENCH SUPREME COURT UPHOLDS SET ASIDE OF AWARD DUE TO EVIDENCE OF MONEY LAUNDERING
In Belokon v. Kyrgyzstan (Cass. Civ. 1ère, 23 March 2022, No. 17-17.981), the French Supreme Court upheld the 2017 decision of the Paris Court of Appeal to set aside a $15 billion UNCITRAL award rendered in favour of Latvian investor Valeri Belokon (Belokon) in a dispute with the Republic of Kyrgyzstan (the Award). According to the Supreme Court, the Court of Appeal had not exceeded its powers by determining, based on its own analysis of the case, that enforcement of the Award in the French legal order would allow Belokon to benefit from the proceeds of money laundering contrary to French principles of international public policy.
This much-awaited decision confirms that when considering a challenge to a French seated award on the grounds of international public policy – at least with respect to allegations of corruption and money laundering – French judges have full authority to review the implications that enforcing the award would have on the French legal order. According to the Supreme Court, this necessarily includes full fact finding powers which are not limited by the evidence presented to the arbitral tribunal or its interpretation of the facts.
Background
The dispute arose from a series of measures taken by Kyrgyzstan in regards to Belokon’s investment in a local bank (the Bank) which was placed into administration and eventually declared insolvent by Kyrgyz authorities. Belokon subsequently initiated ad hoc UNCITRAL arbitration proceedings alleging breaches by Kyrgyzstan of the 2008 Latvia-Kyrgyzstan bilateral investment treaty (the BIT). The tribunal issued an award in Belokon’s favour in 2014 dismissing Kyrgyzstan’s claims that the Bank was engaged in money laundering practices.
As the seat of the arbitration was Paris, Kyrgyzstan applied for and successfully obtained set aside of the Award by the Paris Court of Appeal. As discussed in previous blog posts, article 1520 5° of the French Code of Civil Procedure (CPC) allows a party to seek annulment of an award where its recognition or execution would be contrary to French principles of international public policy (see previous post here).
The Court of Appeal found there to be strong evidence that Belokon acquired his interest in the Bank by corrupt means and in order to facilitate money laundering in the absence of effective government oversight. As a result, the Court of Appeal set aside the Award as its recognition in France would have allowed Belokon to benefit from his unlawful activities in circumstances which are contrary to the fight against money laundering, recognised by the Court of Appeal as a principle of international public policy.
Belokon subsequently appealed the decision to the Supreme Court on the grounds that the Court of Appeal had allegedly exceeded its powers under article 1520 5° by re-examining the merits of the Award de novo and substituting its own factual analysis.
Decision
The Supreme Court’s decision confirms that the prohibition and fight against money laundering is the subject of broad international consensus as recognised by the 2003 United Nations Convention against Corruption and is therefore included in the core principles which form part of France’s international public policy.
The Court went on to recognise that the role of the Court of Appeal was not to review Belokon’s underlying claim under the BIT or the allegations of money laundering under Kyrgyz law, but to determine the effect that recognising the Award would have on the French legal order. To this end, it was not bound by the evidence which had been put before the tribunal or its findings of fact, and was therefore entitled to find as it did that there was “serious, specific and consistent” evidence of money laundering practices in this case.
In circumstances where the Court of Appeal had found that recognising the Award would allow Belokon to benefit from suspected illegal activities, and would therefore result in a serious violation (“violation caractérisée“) of international public policy, the French Supreme Court upheld the set aside decision.
Comment
The non-interventionist and pro-arbitration stance of French courts has historically been such that the scope of the Court of Appeal and Supreme Court’s review of awards was extremely limited in the context of set aside proceedings. In recent years, however, the Court of Appeal had begun adopting a so-called “maximalist” approach to the review of certain international public policy violations, culminating in its controversial decision in Belokon.
By upholding the Court of Appeal’s decision on all counts, the Supreme Court has now confirmed the trend which has seen a broadening of the scope of French courts’ review in annulment proceedings based on allegations that enforcement of an award would give effect to illicit practices such as money laundering. However, it remains unclear if this trend is limited to allegations of corruption and similar criminal conduct, or whether it may apply to other serious or manifest breaches of international public policy.
Importantly, the decision of the Supreme Court states clearly that the Court of Appeal’s review of the facts underlying the allegation of breach of international public policy was not a substantive review of the findings of the tribunal but only a review of the conformity of the award with principles of international public policy.
The balance which the Court of Appeal and Supreme Court seek to strike is delicate and will no doubt give rise to further controversy, but the Belokon decision gives welcome clarity that where serious breaches of international public policy are at stake – at least with respect to matters of corruption and money laundering – French judges will not shy away from addressing difficult issues, including, where necessary, by carrying out a detailed factual review of the allegations of breach.
For more information, please contact Laurence Franc-Menget, Partner, Emily Fox, Of Counsel, or your usual Herbert Smith Freehills contact.
The authors would like to thank Louis Austin for his assistance with this article.
Laurence Franc-Menget
Partner
+33 1 53 57 73 70
Emily Fox
Of Counsel
+33 1 53 57 72 48
ENGLISH HIGH COURT REJECTS FULL AND FRANK DISCLOSURE CHALLENGE TO EX PARTE ARBITRATION ORDER (GENERAL DYNAMICS V LIBYA)
In the recent decision of General Dynamics United Kingdom Ltd v State of Libya [2022] EWHC 501 (Comm) the English Commercial Court refused to set aside an arbitration enforcement order against the State of Libya. Because the case considers issues of state immunity, the article can be found on the HSF Public International Law Notes blog here.
The article was first published in very similar form by HSF Of Counsel, Emily Fox, on LexisPSL on 22 March 2022 here (subscription required).
For more information, please contact Emily Fox, Of Counsel, or your usual Herbert Smith Freehills contact.
The author would like to thank Louis Austin for his assistance with the article.
Emily Fox
Of Counsel
+33 1 53 57 72 48
The French Supreme Court employs the principle of procedural loyalty to prevent a jurisdictional challenge
In Tagli’apau v Amrest Holdings and al. (Cass. Civ. 1ère, 9 February 2022, No. 21-11253), the French Supreme Court reversed the decision of the lower courts to decline jurisdiction in favour of arbitration. It did so on the grounds that the jurisdictional challenge was inadmissible because it had been raised by the parties who had refused to pay their share of the ICC’s advance on costs, which had caused the withdrawal of the claims from arbitration. This case is an interesting new application of the principle of procedural loyalty which the French courts established in the late 2000s.
THE NEW ICC RULES 2021: WHAT YOU NEED TO KNOW
The International Chamber of Commerce (ICC) has released its 2021 Arbitration Rules in draft (the 2021 Rules). This is a “soft launch” with the current text still subject to editorial changes prior to their formal release in December. The 2021 Rules will come into force on 1 January 2021.
FRENCH COURT OF APPEAL UPHOLDS AWARD THAT WAS DENIED ENFORCEMENT IN ENGLAND
In Kabab-Ji SAL (Lebanon) v Kout Food Group (Kuwait) [CA Paris, 23 June 2020, n°17/22943], the Paris Court of Appeal refused to set aside an arbitral award handed down by an ICC Tribunal seated in Paris, although the same award had been denied enforcement and recognition in England on the basis that the award was made against a non-party (our post on the English decision can be accessed here). The French court expressly rejected the argument that it was bound by the English decision.
This case is another illustration of the differences in approach between French and English courts with respect to (i) the identification of the law governing the arbitration clause and (ii) the extension of arbitration agreements to third parties.
PARIS COURT OF APPEAL REFUSES TO SET ASIDE AN AWARD AND CONFIRMS THAT AN ARBITRAL TRIBUNAL DOES NOT EXCEED ITS MANDATE WHEN APPLYING UNIDROIT PRINCIPLES TO DECIDE ON THE MERITS OF A DISPUTE
In a judgment issued on 25 February 2020, the Paris Court of Appeal (the “Court”) refused to set aside an ICC award, dismissing all four grounds of annulment on which the claimant relied (Cour d’appel de Paris, 25 February 2020, n° 17/18001). The judgment, which reiterates well-established principles of French arbitration law, is a helpful illustration of how the Court, as the annulment court for an award issued in France, addresses the grounds to set aside an award under article 1520 of the French Code of Civil Procedure (“CPC”).
Background and arbitration proceedings
Prakash Steelage Ltd, a company incorporated in India (“Prakash”) and Uzuc SA, a company incorporated in Romania (“Uzuc”, and together with Prakash the “Parties”), entered into a sales agreement under which Prakash would deliver stainless steel tubes (the “Tubes”) to Uzuc (the “Sales Agreement”). Uzuc then planned to use the Tubes to build heat exchangers that would ultimately be delivered to QAFCO Qatar. Uzuc alleged that the Tubes were defective and filed a request for arbitration with the ICC on 19 December 2014, claiming compensation from Prakash.
On 13 June 2017, the tribunal issued an award ordering Prakash to pay EUR 1 million in damages to Uzuc for breach of its contractual obligations under the Sales Agreement (the “Award”).
The Court’s decision
In November 2017, Prakash commenced annulment proceedings before the Paris Court of Appeal on the grounds that (i) the tribunal had wrongly upheld its jurisdiction (article 1520 1° of the CPC); (ii) the tribunal had ruled without complying with the mandate conferred upon it (article 1520 3° of the CPC); (iii) due process was violated (article 1520 4° of the CPC); and (iv) enforcement of the award would be contrary to international public policy (article 1520 5° of the CPC). The Court rejected all four grounds and refused to set aside the Award. We consider each of the alleged grounds of annulment in turn below.
Lack of jurisdiction
Prakash argued that the tribunal should not have accepted jurisdiction as the reference to “Paris Court of arbitration” (Cour d’arbitrage de Paris) in an email between the Parties was not an effective arbitration clause. Prakash argued that the reference (i) was part of the negotiation process, and was not an expression of consent to arbitration; and (ii) did not include any indication as to the scope of the submission to arbitration, rendering it “impracticable”. According to Prakash, it was entitled to rely on this ground before the Court as it had raised it previously in its answer to the request for arbitration (the “Answer”).
The Court rejected Prakash’s argument and held, consistent with previous decisions[1] and on the basis of article 1466 of the CPC,[2] that a party which actively participates in the arbitration proceedings is deemed to have waived its right subsequently to rely on any irregularities which it knowingly refrained from raising before the arbitrators. The Court noted that while Prakash did comment, in its Answer, that the Parties had not agreed to submit their disputes to arbitration, it did not in fact argue that the tribunal did not have jurisdiction in that document or at a later stage in the proceedings. Further, during the hearing, Prakash had expressly accepted the tribunal’s jurisdiction. The Court therefore concluded that Prakash could not challenge the Award on the basis of the tribunal’s alleged lack of jurisdiction.
Decision beyond the scope of the tribunal’s mandate
Prakash argued that the tribunal exceeded its mandate by applying the UNIDROIT Principles to the dispute. Prakash claimed that Indian law was applicable and that the tribunal’s decision to apply the UNIDROIT Principles instead amounted to a ruling in equity rather than in law, which exceeded the tribunal’s mandate.
The Court rejected this argument and held that the tribunal had not exceeded its mandate. The Court noted that, in light of the Parties’ disagreement as to the applicable law (with Prakash arguing that Indian law was applicable and Uzuc arguing that Romanian law was applicable), the tribunal issued two procedurals orders: (i) procedural order No. 1 which invited the Parties to examine the application of substantive norms and to consider the application of transnational principles such as the UNIDROIT Principles; and (ii) procedural order No. 3, which asserted the tribunal’s decision to apply the UNIDROIT Principles in accordance with article 21.1 of the ICC rules and article 1511 of the CPP. On the basis of those provisions and the Parties’ agreement on the direct application method of choice of law, the tribunal held that it enjoyed broad discretion to apply substantive norms it deemed appropriate, taking into account trade usages and without the need to refer to conflict of law principles. Applying this method to determine the law applicable to the dispute, and on the basis of the “largely international” character of the Sales Agreement, the tribunal applied the UNIDROIT Principles. The Court held that that this was a decision in law rather than in equity and that it did not exceed the tribunal’s mandate.
Breach of due process
Prakash alleged that the tribunal breached due process by (i) denying Prakash its right to be heard within a reasonable period of time, and adopting “an intolerable attitude tantamount to harassment”; and (ii) endorsing an expert report which was allegedly neither impartial nor independent.
The Court of Appeal rejected Prakash’s arguments and held that:
- in accordance with established case-law,[3] the obligation for tribunals to comply with due process only requires that each party be given an opportunity to make its arguments known to the other party and to challenge the other party’s arguments. The Court further observed that, although the ICC Secretariat refused two of Prakash’s requests for extensions of time for the service of its Answer, it also granted several extensions at various stages of the proceedings, as did the tribunal. The Court concluded that there was no basis for a finding that due process had been breached; and
- both Parties had instructed experts and had had an opportunity to cross-examine the other Party’s expert. It was not for the Court to consider whether the tribunal had erred in choosing not to rely on the evidence presented by Prakash’s expert.
Breach of international public policy
Finally, Prakash asserted that the Award breached international public policy by awarding Uzuc damages that were disproportionate to Uzuc’s loss.
The Court rejected this argument and reaffirmed, in accordance with its recent case-law[4], that awards could only be set aside for breaching international public policy if they manifestly, effectively and concretely conflict with the principles and values included in the notion of international public policy. The Court held that, while the award of punitive damages is not, by itself, contrary to French international public policy, the situation would be different if the amount awarded was disproportionate with respect to the loss suffered and the breaches of the debtor’s contractual obligations. In the circumstances, however, the Court noted that the tribunal in this case did not award punitive damages (which had not been claimed in any event) and therefore rejected the fourth ground of challenge.
Comment
The Paris Court of Appeal’s decision does not break new ground and, as discussed above, it mainly reiterates established principles. However, this case does provide useful guidance as to how the Court approaches the grounds for setting aside an arbitral award (such as the tribunal’s jurisdiction, due process, and international public policy). The judgment also provides useful guidance as to the arbitrators’ broad discretion under French law to apply transnational principles, such as the UNIDROIT Principles, where the parties have not expressly agreed an applicable law to their arbitration proceedings.
For more information, please contact Emily Fox, Of Counsel, or your usual Herbert Smith Freehills contact.
Emily Fox
Of Counsel
+33 1 53 57 72 48
[1] See for example, Cour d’appel de Paris, Pôle 1, Chambre 1, Arrêt du 22 janvier 2019, Répertoire général nº 16/23370 and Cour de cassation, Deuxième Chambre civile, Arrêt nº 799 du 11 juillet 2002, Pourvoi nº 00-21.823
[2] Article 1466 of the CPC is applicable to international arbitrations seated in France pursuant to article 1506 3° of the CPC
[3] See for example, Cour d’appel de Paris, Pôle 1, Chambre 1, Arrêt du 10 janvier 2017, Répertoire général nº 14/21345
[4] See for instance, amongst others, Cour d’appel de Paris, Pôle 1, chambre 1, Arrêt du 14 Juin 2016, n° 14/16113 and Cour d’appel de Paris, Arrêt du 26 septembre 2017, n° 16/15338
COURT OF APPEAL REFUSES TO ENFORCE AN ARBITRATION AWARD AGAINST A NON-PARTY
In Kabab-Ji SAL (Lebanon) v Kout Food Group (Kuwait) [2020] EWCA Civ 6, the English Court of Appeal refused the enforcement and recognition of an arbitral award handed down by an ICC Tribunal seated in Paris, on the basis that the award was made against a non-party. This case provides helpful guidance on two significant issues: (i) how to determine the governing law of an arbitration agreement as a matter of English law and (ii) the extent to which No Oral Modification (“NOM”) clauses will be upheld by the English courts.
Background
The case concerned a Franchise Development Agreement (“FDA”) entered into by Kabab-Ji SAL (Lebanon) (“KJS”) and Al Homaizi Foodstuff Company (“AHFC”). Following a corporate reorganisation, AHFC became a subsidiary of Kout Food Group (Kuwait) (“KFG”). A dispute arose under the FDA, leading KJS to commence an arbitration against KFG (and not AHFC).
This raised a jurisdictional question as to whether KFG had become an additional party to the FDA, and therefore to the arbitration agreement, and if so how. In order to answer that question, it was necessary to decide (i) which law governed the question of whether KFG became a party to the arbitration agreement (ii) whether, under that law, KFG had become a party to the arbitration agreement.
The arbitration clause specified that Paris would be the seat of arbitration, and the governing law clause stipulated that the FDA would be governed and construed in accordance with English law. The contract contained NOM clauses.
An ICC Tribunal seated in Paris determined that (i) whether KFG was bound by the arbitration agreement was a matter of French law and (ii) that English law governed whether a transfer of substantive rights and obligations to KFG took place. The Court of Appeal judgment does not say expressly whether the Tribunal determined that the arbitration agreement was governed by French law, suggesting that the Tribunal followed the French courts’ approach of assessing the arbitration agreement without reference to a specific national law (i.e. treating it as “autonomous”).
By majority decision, two of the arbitrators (who were not English qualified) concluded that, as a matter of English law and despite the NOM clauses, a novation was to be inferred by the conduct of the parties. Having found jurisdiction, the tribunal went on to determine that, on the merits, KFG was in breach of the FDA.
KFG filed an application before the French courts to annul the award. The application has yet to be heard and is scheduled for February 2020. Separately, KJS made an application for the enforcement of the award under section 101 of the English Arbitration Act (the “Act“). The English court initially made an ex parte order for the Award to be enforced as a judgment, and KFG responded by seeking an order refusing recognition and enforcement of the award under section 103(2) of the Act. The first instance court heard the s103 application and determined that English law governed the validity of the arbitration clause. The court considered that KFG did not become a party to the arbitration clause, but declined to make a final determination on this point in case further evidence on this issue might emerge after the decision of the French court. The court accordingly refused enforcement and recognition of the award.
The first instance decision was appealed by KJS to the Court of Appeal.
The first issue on the law governing the arbitration agreement
KJS’s key arguments were:
- There was no express choice of English law as the governing law of the arbitration agreement. The FDA was governed by English law supplemented by the obligation of good faith and fair dealing and by “principles of law generally recognised in international transactions” which included the UNIDROIT principles. The choice of “English law plus” was at odds with the common law requirement that the law applicable to an arbitration be the law of a country.
- Alternatively, there was no implied choice of English law, as the seat of the arbitration was in a different country from the country whose law governed the main agreement. This was an important factor pointing away from English law being an implied choice of law governing the arbitration agreement. The judge should have concluded either that the implied choice of law governing the arbitration agreement was French law or, in default of any choice, that French law applied as the law of the place where the Award was made (the test for foreign arbitration awards under the New York Convention).
In contrast KFG argued that:
- As a matter of construction, there was an express choice of English law as the governing law of the FDA. Article 1 provided:
- This Agreement consists of the foregoing paragraphs, the terms of agreement set forth herein below, the documents stated in it, and any effective Exhibit(s), Schedule(s) or Amendment(s) to the Agreement or to its attachments which shall be signed later on by both Parties. It shall be construed as a whole and each of the documents mentioned is to be regarded as an integral part of this Agreement and shall be interpreted as complementing the others.
- The governing law clause (Article 15) then made it clear that “This Agreement” was governed by English law, which must mean all the agreement, including the arbitration agreement.
- The fact that the seat of the arbitration was in a different country should not displace the strong indication that there was an implied choice of English law to govern the arbitration agreement by virtue of the FDA being expressly governed by English law.
The Second Issue – had KFG become a party to the arbitration agreement?
The parties focused on the following contractual provisions of the FDA, known together as “No Oral Modification” clauses:
Article 3: Grant of Rights
3.1 License…This grant is intended to be strictly personal in nature to the LICENSEE and no rights hereunder whatsoever may be assigned or transferred by LICENSEE in whole or in part without the prior written approval of LICENSOR
Article 17: Waiver
17.1 Any waiver of any term or condition of the Agreement must be in writing and signed by the affected party…
Article 24: Entire Agreement
…No interpretation, change, termination, waiver of any provision hereof, and no consent or approval hereunder, shall be binding upon the other party or effective unless in writing signed…
Article 26: Amendment of Agreement
The Agreement may only be amended or modified by a written document executed by duly authorised representatives of both Parties
KJS argued that even if the first instance court was correct that the governing law of the arbitration agreement was English law, he had erred in concluding that consent in writing was required for KFG to become an additional party to the FDA. The good faith and fair dealing provisions contained in both the FDA and the UNIDROIT principles overrode the NOM clauses and KFG could therefore be a party to the arbitration agreement without written consent.
In response, KFG argued that the parties had sought to achieve a high level of business certainty in the drafting of the FDA. It contained a “double lock” owing to the combination of Articles 26 and 24 with Article 17. In other words, any amendment and consent to an amendment could only be effective in writing, and any consent to waive these requirements also had to be in writing. The UNIDROIT principles could not be relied upon to establish some amendment as this would contradict the double lock in the NOM clauses. The only way in which the NOM clauses could be overridden was to the extent that the test for an estoppel stated in Rock Advertising was satisfied (see our previous post on this topic here on our Litigation Blog).
The Court of Appeal’s decision
On the first issue, the Court concluded that Articles 1 and 15 of the FDA provided for an express choice of English law to govern the arbitration agreement. The “English law plus” provisions did not point to some other system of law (specifically French law) governing the arbitration agreement and said nothing about the law governing the arbitration agreement. The fact that the arbitration clause itself did not expressly refer to English law did not matter, as the wording in Articles 1 and 15 demonstrated a clear intention that the entire FDA would be governed by English law. It was therefore not necessary to consider whether there was an implied choice of law.
On the second issue, the Court of Appeal agreed with KFG that, under English law, the NOM clauses could only be overridden to the extent that the test for an estoppel in Rock Advertising was satisfied. Principles of good faith and fair dealing could not override the clear wording of the contract. The Rock Advertising test was therefore not satisfied. The Court also considered that the first instance judge should have made a final determination that KFG was not a party to the FDA or the arbitration agreement.
Comment
This case raises important issues of construction and interpretation. It is a reminder that there is real merit in including an express governing law provision within an arbitration clause or by expressly referring to the arbitration clause within the main governing law provision of the contract. This will avoid wasting time and money arguing the issue at both the arbitration and enforcement stage.
It also demonstrates the importance of the Supreme Court’s decision in Rock Advertising and its implications for the many contracts containing NOM clauses. These will generally be effective so as to prevent contracting parties being bound by a subsequent variation unless the formalities contained within the contract are complied with. In this instance, the inclusion of the clause ensured that KFG was not a party to the FDA or the arbitration agreement as the requirement for written notice had not been followed.
For more information, please contact Craig Tevendale, Partner, Emily Fox, Of Counsel, Elizabeth Kantor, Senior Associate, Vanessa Naish, Professional Support Consultant, or your usual Herbert Smith Freehills contact.
Craig Tevendale
Partner
+44 20 7466 2445
Emily Fox
Of Counsel
+33 1 53 57 72 48
Elizabeth Kantor
Senior Associate
+44 20 7466 2406
Vanessa Naish
Professional Support Consultant
+44 20 7466 2112