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08 August 2019
Arbitral tribunals are expected to administer arbitrations fairly and in accordance with applicable arbitration law and rules. Where they fail to do so, parties may have recourse both during and after the arbitration process. However, this right is not absolute under French law. Article 1466 of the Code of Civil Procedure, which applies to domestic and international arbitration, states that a:
party that, knowingly and without a legitimate reason, fails to object to an irregularity before the arbitral tribunal in a timely manner shall be deemed to have waived its right to avail itself of such irregularity.(1)
This provision has long been interpreted to mean that parties that fail to object to a procedural irregularity during an arbitration in a timely manner lose their rights to invoke that irregularity in subsequent annulment proceedings. In its 2 April 2019 decision in Schooner, the Paris Court of Appeal clarified the scope of application of Article 1466 and for the first time confirmed that Article 1466 can also limit a party's ability to seek annulment based on a variety of arguments, whether relating to procedural irregularities or otherwise, that could have been raised in the arbitration.
A US citizen and several US companies acquired shareholdings in several Polish companies through the investment vehicle White Eagle Industries. The US investors incorporated a Polish entity (White Eagle Industries Poland), which received a commission on behalf of White Eagle Industries from the Polish companies. The Polish companies deducted this commission from their taxable income. This arrangement attracted the attention of certain Polish tax authorities. After an investigation, the authorities concluded that White Eagle Industries Poland had not been providing management services to one of the Polish entities.(2) The tax authorities accordingly imposed a penalty on the company, which led to its insolvency.
On 31 March 2011, following the local company's insolvency, the US investors commenced investor-state arbitration proceedings against Poland pursuant to the Poland-US bilateral investment treaty (BIT). The arbitration was conducted under the auspices of the International Centre for the Settlement of Investment Disputes (ICSID) Additional Facility Rules and was seated in Paris.(3) The tribunal had to examine whether the tax authorities' conduct complied with Poland's obligations under the Poland-US BIT. The tribunal held that the issues before it concerned 'tax matters', as defined under the BIT. It declined jurisdiction in this regard on the basis that the BIT generally excluded such matters from its remit.(4) The tribunal concluded that it had jurisdiction to hear claims relating only to expropriation and the transfer of funds since they were expressly outside the scope of the tax matters exception in the BIT. However, the arbitrators rejected the merits of these remaining claims.
On 2 December 2016 the US investors asked the Paris Court of Appeal to annul the award in its entirety. They sought to set aside the tribunal's decision to decline jurisdiction over tax matters. The investors argued that the BIT's tax matters exclusion should apply only to substantive tax measures and should not insulate Poland from responsibility for arbitrary and discriminatory conduct by its tax authorities. Further, they argued that the tribunal should have affirmed its jurisdiction because Poland's reliance on the tax matters exclusion was an abuse of right, or, alternatively, that the tribunal had jurisdiction in respect of tax issues through the BIT's most-favoured-nation clause, since other investment treaties entered into by Poland protected investors in relation to tax matters.
The Paris Court of Appeal dismissed the annulment request in its entirety. The court examined the issue of jurisdiction de novo. It rejected the claimants' argument that substantive tax matters were distinct from the Polish tax authorities' treatment of investors. It held that the arguments based on abuse of right and the BIT's most-favoured-nation clause were inadmissible because they had not been raised during the arbitration proceedings. It is in this context that the Paris Court of Appeal stated that the waiver of rights provided by Article 1466 of the Code of Civil Procedure applies to the grounds to set aside an award enumerated in Article 1520 of the same code.
The Paris Court of Appeal confirmed the wide scope of application of Article 1466 but was also careful to define its limits. It clarified that a party that fails to raise substantive international public policy-based objections during the arbitration itself can do so in an annulment application. Such an objection would be based on substantive rules or laws that French law considers to form a part of international public policy. Here, the court stated that a violation of substantive international public policy was a ground for annulment that by its very nature could be raised by a judge sua sponte or by the claimants for the first time during the annulment proceedings.
Until the decision, academic commentary generally took the position that Article 1466 of the Code of Civil Procedure gave rise to a waiver of a party's right to invoke procedural irregularities only.(5) Schooner changes the landscape. Following it, a party that does not raise arguments in the arbitration that could later serve as grounds for annulment cannot rely on those same arguments in an application to set aside the award. This extends to arguments regarding non-procedural irregularities, such as jurisdiction.
While Schooner concerns an annulment proceeding, the same logic may well apply in enforcement proceedings. That is, if a party does not raise an argument that is relevant to an exequatur in the arbitration, it may be prevented from raising the same ground in order to resist an exequatur of the relevant arbitral award.
The Paris Court of Appeal's decision that waiver under Article 1466 does not apply to international public policy is also significant. While the French courts have effectively been ruling as such to date,(6) this was the first time that the Paris Court of Appeal expressly endorsed this interpretation. The decision will no doubt be relied on in similar future cases.
Absent from the Court of Appeal's decision is any mention of whether the waiver contemplated by Article 1466 could cover objections based on procedural public policy. However, shortly after the April 2019 decision, the Paris Court of Appeal issued another decision that appears to resolve any uncertainty in this regard. In its 14 May 2019 decision it clarified that the Article 1466 waiver can indeed preclude parties from raising procedural public policy objections that should have been raised during the arbitration itself in annulment proceedings.
Insofar as it helps to protect against procedural pre and post-hearing tactics, it is perhaps unsurprising that the Paris Court of Appeal ruled as it did. Indeed, Schooner encourages parties not to lie in the weeds and to avoid bad-faith procedural behaviour during arbitration proceedings in violation of the venire contra factum proprium principle.(7)
This decision makes the French approach more consistent with corresponding English law. In particular, Section 73 of the English Arbitration Act 1996 provides that parties that do not raise an objection to "forthwith or within such time as is allowed by the arbitration agreement or the tribunal or by any provision of this Part" lose the right to do so before the arbitral tribunal or other courts. This provision expressly includes objections relating to a tribunal's jurisdiction.
At the same time, if the French courts wholeheartedly embrace the Paris Court of Appeal's recent approach to the relation between waiver and annulment under Article 1466, this may result in the jettisoning of a common law concept that has otherwise made its way into the case law on annulment: estoppel. In the well-known Golshani case of 6 July 2005, the Court of Cassation confirmed that a party is estopped from contradictory procedural behaviour, such as initiating arbitral proceedings and later contesting the arbitral tribunal's jurisdiction during enforcement proceedings.(8) An expansive approach to the waiver provided by Article 1466 appears to cover similar ground, which may effectively render estoppel redundant in relation to annulment.
For further information on this topic please contact Vasuda Sinha and Veronika Timofeeva 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.
(1) Article 1466 of the French Code of Civil Procedure, English version available here.
(5) C Seraglini, J Ortscheidt, Droit de l'arbitrage interne et international, Montchrestien 2014, Paragraph 164, stating that it would be superficial to consider that 'irregularity' within the meaning of Article 1466 refers to jurisdiction. See also J Jourdain-Marques, Chronique d'arbitrage: la cour d'appel de Paris s'adonne à l'orfèvrerie juridique, 7 June 2019.
(8) Civ 1re, 6 July 2005, Golshani c/ gouvernement de la République islamique d'Iran, Bull. Civ I, 302. Estoppel has since become more widely used in litigation in France. See Option Droit & Affaires, Enfin la définition de l'estoppel en droit français, 21 April 2010, available here. See also Civ 1re, 28 February 2018, 16-27.823, Société First Smart Asia Ltd.
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