THE FINAL DECISION IN THE VIDATEL CASE: THE APPLICATION OF THE PRINCIPLE OF EQUALITY IN THE CONSTITUTION OF THE ARBITRAL TRIBUNAL

In Vidatel v. PT Ventures, Mercury and Geni case (Cass. Civ. 1ère, 9 November 2022, No 21-17203), the French Supreme Court upheld the 2021 decision of the Paris Court of Appeal (26 January 2021, n°19/10666), rejecting Vidatel Ltd’s (Vidatel) request to set aside the 2019 ICC award rendered in favour of PT Ventures SGPS (PTV).  This case provides interesting further guidance on how the French courts may approach the principle of equality and how it can interact with the parties’ arbitration agreement.

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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
Laurence Franc-Menget
Partner
+33 1 53 57 73 70
Emily Fox
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.

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Tribunal des Conflits clears jurisdictional divergence between French Supreme Court and Conseil d’État regarding enforcement of awards rendered in connection with certain public law contracts

In Tribunal des Conflits, 24 April 2017, C4075, the Tribunal des Conflits considered whether the administrative or ordinary courts had jurisdiction to hear an application to enforce an arbitral award made in respect of disputes arising under two public services contracts.

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French Supreme Court declares inadmissible appeal of Court of Appeal’s decision to seek an opinion from the CJEU

In Cass. Civ. 1re, 18 novembre 2015, n°14-26.482, the French Supreme Court considered an appeal from a Court of Appeal decision seeking an opinion from the CJEU on the applicability of European competition law in the context of proceedings to set aside an ICC award.

On 18 November 2015, the Cour de Cassation (French Supreme Court) held that an appeal against the lower court’s decision to seek a ruling from the Court of Justice of the European Union (CJEU) was inadmissible.

The applicant (Genentech) sought to set aside an International Chamber of Commerce (ICC) award ordering it to pay sales royalties due under a biotechnology licence. It did so on the basis that the award breached European competition law (and therefore international public policy). In a preliminary decision dated 23 September 2014, the Paris Court of Appeal stayed the proceedings and referred the question to the CJEU. The respondents appealed to the Supreme Court against the Court of Appeal's decision to seek a ruling from the CJEU. 

In declaring the appeal to be inadmissible, the Supreme Court also found that the Court of Appeal had not carried out a review of the award under Article 1520 5° of the French Code of Civil Procedure, but had simply exercised its right, under Article 267 of the Treaty on the Functioning of the European Union, to refer a question on the "interpretation of the Treaties" to the CJEU.

This decision confirms that the French courts retain the right to refer questions on the interpretation of treaties to the CJEU, even when exercising their supervisory jurisdiction over international arbitrations seated in France. It will be interesting to see how the Court of Appeal deals with Genentech's application to have the award set aside, if the CJEU eventually rules that the award breaches European competition law. (Cass. Civ. 1re, 18 novembre 2015, n°14-26.482)

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Scope and validity of asymmetric jurisdiction clauses in France

On 7 October 2015, in Cass. 1ère Civ., 7 October 2015, No 14-16.898, the Cour de cassation (the French Supreme Court) handed down a decision that significantly clarified its interpretation of the rules for jurisdiction clauses within the European Union (EU). It thereby added to its case law on unilateral or asymmetric jurisdiction clauses, that is, jurisdiction clauses that do not give the same rights to each party to the contract.

In this case, a company incorporated in France and a company incorporated in Ireland had signed a contract with a jurisdiction clause, whereby the parties agreed that disputes would come under the jurisdiction of the courts of the Republic of Ireland. However, the same clause also reserved the right for the Irish company alone to apply to the courts with jurisdiction over the counterparty's registered office, or those in any country where it suffered a loss caused by the counterparty. The French company complained that the Irish company was infringing competition law, and started proceedings before the Paris Commercial Court, seeking compensation for the harm it had suffered. The Irish company successfully argued that the Commercial Court lacked jurisdiction, which belonged to the courts of Ireland. When the French company's appeal to the Paris Court of Appeal was equally unsuccessful, it appealed to the French Supreme Court.

In its decision of 7 October 2015, the Supreme Court took the opportunity to:

  • Refine the case law from X v Banque Privée Edmond de Rothschild (Cass. 1ère Civ., 26 September 2012, No 11-26.022) (Rothschild) and Cass. 1ère Civ., 25 March 2015, No 13-27.264 (Crédit Suisse), upholding asymmetric jurisdiction clauses provided they objectively identify the courts that may have jurisdiction at the choosing of the party benefiting from the asymmetry (see our previous blog posts here and here)
  • Incorporate case law from the Court of Justice of the European Union (CJEU) into its decision: under EU case law, jurisdiction clauses only apply to disputes over alleged infringements of EU competition law if the clause specifically so provides.

Notwithstanding the fact that the French courts have not had a chance to consider the issue in relation to arbitration since the Rothschild case, there is nothing to suggest that the court's reasoning in the Rothschild, Credit Suisse or Apple cases would apply with regard to clauses containing an arbitration agreement with an option to litigate in one particular jurisdiction, or an exclusive jurisdiction clause with an option for one party to bring arbitration proceedings (so-called hybrid dispute resolution clauses). Throughout the period of uncertainty as to the availability of asymmetric jurisdiction clauses, hybrid arbitration clauses may be an appropriate option for parties in circumstances where there is a nexus with France. 

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Appeal against order granting enforcement only permitted under limited grounds relating to arbitral award (French Supreme Court)

In a judgment dated 7 October 2015, the Cour de cassation (French Supreme Court) has rejected an appeal against an order granting exequatur (enforcement) of a foreign arbitral award. The appellant had argued that such an order may be subject to an appel-nullité (nullity appeal) in circumstances where a judge has exceeded his or her powers. The Supreme Court reiterated that an appeal against an order granting enforcement is only permitted under certain limited grounds relating to the arbitral award itself (that is, those specified in Article 1520 of the French Code of Civil Procedure). It did not, however, expressly exclude the possibility of resorting to an appel-nullité in such circumstances. (Cass. Civ. 1re, 7 Oct. 2015, F-P+B, n° 14-17.490.)

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French Supreme Court allows joint guarantors to challenge arbitral award

In a decision dated 5 May 2015 (Cass. Com. 5 mai 2015, 14-16.644, available at: https://www.courdecassation.fr/jurisprudence_2/chambre_commerciale_574/424_5_31676.html) concerning French domestic arbitration law, the French Supreme Court (Cour de cassation) accepted, for the first time, that a joint guarantor could challenge an arbitral award rendered in a dispute between a debtor and its creditor which determined the amount due to the latter. While the French Code of civil procedure already allowed, under certain conditions, a non-party to French domestic arbitration proceedings to challenge the resulting award by a specific procedure called third party opposition (tierce opposition), this procedure was not available to a joint guarantor until this decision.

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French Supreme Court refuses to apply a unilateral jurisdiction clause

In a recent decision, the French Supreme Court (Cour de cassation) has again refused to apply a unilateral jurisdiction clause. A unilateral jurisdiction clause requires one party to bring proceedings in one jurisdiction only, while the other may choose to bring proceedings in other jurisdictions.

The decision, which comes after the much-discussed 2012 Supreme Court judgment in the Rothschild case (Cass. 1. Civ, 26 September 2012)(see our previous blog post here), is a further reminder of the need to give careful consideration to the validity of dispute resolution provisions in the possible jurisdiction of any future proceedings when drafting contracts.

This decision (and the decision in Rothschild) are significant in the context of unilateral jurisdiction clauses. However, and notwithstanding the fact that the French courts have not had a chance to consider the issue in relation to arbitration since the Rothschild decision, there is nothing to suggest that the same approach would be taken with regard to clauses containing an arbitration agreement with an option to litigate in one particular jurisdiction, or an exclusive jurisdiction clause with an option for one party to bring arbitration proceedings (so-called hybrid dispute resolution clauses). As such, a hybrid arbitration clause may be an appropriate option in circumstances where there is a nexus with France and one of the parties wishes to have a degree of flexibility regarding the forum in which disputes will be heard.

Cour de cassation, chambre civile 1, 25 mars 2015, 13-27.264

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French Supreme Court finds that tribunal acted within Terms of Reference

In Cass. Civ. 1, n° 14-12.077, 18 March 2015, Semapa Investimento E Gestao SGPS v CRH PLC, the French Supreme Court considered an appeal from a Paris Court of Appeal decision dismissing an application to set aside an ICC arbitral award.

The French Supreme Court (Cour de cassation) has dismissed an appeal against a Paris Court of Appeal decision refusing to set aside an ICC arbitral award rendered under a shareholders’ agreement. In the underlying proceedings, the claimant had argued that the tribunal had acted ultra petita, failed to respect principles of due process, and violated international public policy.

The Supreme Court upheld the Court of Appeal decision in its entirety, finding that the tribunal had acted within the authority granted by the Terms of Reference and had not violated due process. Further, the Court of Appeal had not misinterpreted the claimant’s submissions and had been entitled to conclude that recognition and enforcement of the award would not be contrary to public policy.

The Supreme Court’s decision does not break new ground. However, it is an important reaffirmation of the principle that, in circumstances where a tribunal has respected the authority granted to it by the Terms of Reference, and asked the parties to express their views on the relevant issues, an award will not normally be open to attack in the French courts on the grounds of violation of due process. (Cass. Civ. 1, n° 14-12.077, 18 March 2015, Semapa Investimento E Gestao SGPS v CRH PLC.)  Continue reading