In its April 1 2014 decision the Paris Court of Appeal has reiterated its well-established position in relation to the enforcement of arbitral awards set aside at the seat of arbitration, confirmed the arbitrators' duty of disclosure, and restated the respective roles played by the arbitrators' duty of disclosure and the parties' duty of loyalty in arbitration proceedings.
In recent years arbitrators' duty of disclosure has grown considerably under French law. Arbitrators must disclose their past and current involvement with the parties.(1) Further, disclosure must comprise not only arbitrators' personal relationships with the parties, but also the existence of any relationship between the parties and other members of the firm in which the arbitrators practise.(2) Arbitrators must also disclose their relationship with counsel for the parties and party-appointed experts.(3) This duty is continuous: when new events occur in the course of the proceedings, they must be disclosed.(4)
Failure to comply with the duty of disclosure can result in the award being annulled or in refusal by the court to grant leave to enforce the award on the ground that the arbitral tribunal was irregularly constituted given the arbitrator's lack of independence and impartiality.
However, there are limits to this rule. In its April 1 2014 decision the Paris Court of Appeal held that an award will be granted leave to enforce despite failure by an arbitrator to comply with its duty of disclosure when the lack of disclosure is relied upon by the losing party in bad faith.(5) The court held that procedural loyalty prohibited the use of information about the relationship between the arbitrator and the expert by the appealing party where such information was publicly available on the Internet. The court also held that a party had breached its duty of loyalty by raising this issue before the arbitral tribunal at a very late stage in the arbitration.
On November 22 2007 Maksimov and Russian company Novolipetsk Mettallurguicheski Kombinat (NLMK) entered into a share transfer agreement.
A dispute arose between the parties regarding the contractual method for determining the transfer price of the shares.
In December 2009 Maksimov commenced arbitral proceedings before the International Commercial Arbitration Court at the Chamber of Commerce and Industry of the Russian Federation.
The arbitral tribunal issued an award on March 31 2011 ordering NLMK to pay just over Rb8.9 billion, with interest, to Maksimov.
NLMK brought an action to set aside the award in Russia on the ground of lack of independence and impartiality of two of the three arbitrators. It also challenged the award's enforcement in France.
On June 28 2011 the Moscow Commercial Court annulled the award. The annulment was confirmed by the Federal Commercial Court for the Moscow District on October 10 2011 and by the Supreme Commercial Court of the Russian Federation on January 30 2012.
On May 16 2012 – nearly one year after the award was annulled in Russia by the court of first instance – the presiding judge of the Paris First Instance Court granted leave for the award to be enforced in France (exequatur).
NLMK lodged an appeal against the exequatur order before the Paris Court of Appeal on the ground of Article 1520 2° of the Code of Civil Procedure, which provides that exequatur will be refused if the arbitral tribunal was not regularly constituted. NMLK raised the following arguments:
- Two of Maksimov's legal experts and two members of the arbitral tribunal were members of the same academic institutions, namely the Ural State Law Academy and the Russian Academy of Sciences;
- At least one of the arbitrators was in a position of hierarchical subordination to one of the experts in that institution; and
- Those circumstances had not been disclosed by the arbitrators, which allegedly raised reasonable doubts as to their impartiality and independence.
In support of its contention, NMLK also claimed that the Moscow Commercial Court had decided to annul the award on the basis that the arbitrators lacked impartiality and independence.
NLMK also challenged the validity of the exequatur order on the ground that it violated international public policy (Article 1520 5° of the code) due to the existence of fraud. The Paris Court of Appeal dismissed NLMK's argument on the ground that it had already been argued before and dismissed by the arbitral tribunal.(6)
On April 1 2014 the Paris Court of Appeal upheld the decision of the Paris First Instance Court, which had granted exequatur to the arbitral award.
First, the court applied its well-established doctrine according to which the annulment of an award in its country of origin is not a ground for refusing recognition and enforcement of the award. Therefore, it was decided that the award's annulment in Russia was not an obstacle to its enforcement in France.
Second, the court held that although, as a matter of principle, arbitrators have a duty to disclose circumstances that are likely to affect their judgement and give rise to reasonable doubts as to their impartiality and independence, the performance of such duty must be appreciated in light of whether the information is public knowledge. If so, the reasonably foreseeable impact of that information on the arbitrators' decision must be taken into account.
Third, the court ruled that a party breaches its duty of procedural loyalty if it seeks to challenge an award by belatedly relying on the arbitrators' failure to disclose certain information without proving that it was not aware of that information and that it could not have become aware of it at an earlier stage.
The court observed that the allegedly undisclosed information at the heart of the parties' dispute was easily accessible on the Internet. It also noted that the appellant had waited until the arbitral proceedings had come to an end before filing its request that the arbitrators be recused. Accordingly, the court concluded that the appellant, who had breached his duty of procedural loyalty, could not invoke the arbitrators' breach of their disclosure duty in support of its appeal of the exequatur order.
First reiteration: award previously set aside may be enforced in France The position of French international arbitration law regarding the enforcement of arbitral awards rendered abroad is well established and clear: an arbitral award may be enforced in France notwithstanding its annulment at the seat of arbitration.
Article 1525 of the Code of Civil Procedure provides that a French "Court of Appeal can refuse recognition or enforcement of an arbitral award only on the grounds mentioned in Article 1520". There are limited grounds for annulling an award under Article 1520 of the code:
- The arbitral tribunal wrongly upheld or declined jurisdiction;
- The arbitral tribunal was not properly constituted;
- The arbitral tribunal went beyond the scope of the mission conferred upon it - for instance, by granting relief that was not claimed by the parties;
- Due process was not respected; or
- The recognition or enforcement of the award would be contrary to French international public policy.
This provision implies that enforcement of an award may not be refused on the ground that it was set aside at the seat of arbitration. This has been consistently confirmed by French case law.
The first decision on the enforcement of an award set aside at the seat of arbitration was made in theNorsolor case of October 9 1984.(7) In this case, the Paris Court of Appeal had reversed the first instance decision granting exequatur to the award on the ground that it had been set aside in Vienna. The French Supreme Court quashed the appeal court's decision on the ground that a judge cannot refuse to grant exequatur based on Article V(1)(e) of the New York Convention. Further, the court held that the judge must verify, even on his or her own initiative, whether the law of the country where exequatur is sought permits the enforcement of an arbitral award set aside at the seat of arbitration.
A decade later, the Supreme Court went one step further and held that a party may obtain leave to enforce an international award set aside at the seat.(8) In support of its position, the court reasoned that the international nature of such an award means that it need not be integrated into the legal system of the seat of arbitration. It may therefore continue to exist and be enforced despite its annulment at the seat.
This solution has taken firm root and is consistently confirmed by the French courts.(9)
In its April 1 2014 decision the Paris Court of Appeal reiterated the position under French law by rejecting the appellant's claim that enforcement of the award had to be denied on the ground that it had been set aside at the seat of arbitration in Russia.
By refusing to view the annulment of the award at the seat of arbitration as an obstacle to its enforcement in France, French law takes an arbitration-friendly stance. This approach is embedded in the French philosophy of arbitration, according to which an international arbitral award does not belong to the legal order of any particular state.
Second reiteration: arbitrators' duty of disclosure The arbitrator's duty of disclosure is set out under Article 1456 of the Code of Civil Procedure, which provides that "Before accepting a mandate, an arbitrator shall disclose any circumstance that may affect his or her independence or impartiality. He or she also shall disclose promptly any such circumstance that may arise after accepting the mandate." Article 1506 2° of the code provides that Article 1456 applies to international arbitration, unless the parties agree otherwise.
The arbitrator's duty is continuous: it is under an obligation to disclose events that occurred before as well as after acceptance of its mandate.
The scope of the arbitrator's duty is very broad: "in principle, the arbitrator must disclose all circumstances likely to affect his judgement and which could raise reasonable doubts as to his impartiality and independence."(10)
For arbitrators, the difficulty lies in determining which facts ought to be disclosed.(11)
Case law has set certain limits to the arbitrators' duty of disclosure. Arbitrators need not disclose facts that raise no reasonable doubts as to their independence and impartiality,(12) or are public knowledge.(13)
In the case at hand, Maksimov filed legal opinions prepared by two experts. Both were members of two different academic institutions where two of the three arbitrators worked as directors of academic departments. Specifically, one of the arbitrators served as director of the Institute of Business and Law within the Ural State Law Academy where one of the experts was rector. As a consequence, the arbitrator was in a position of hierarchical subordination to the expert, the latter possessing power of nomination and dismissal over him.
However, the respective positions occupied by the experts at the academic institutions were neither mentioned in the legal opinions filed by Maksimov nor disclosed by the arbitrators.
NLMK alleged that failure by the arbitrators and the experts to disclose this information at the time when the legal opinions were filed demonstrated that the arbitrators lacked independence and impartiality.
One of the grounds relied upon by the Paris Court of Appeal in deciding that the arbitrators had not breached their duty of disclosure was that the information which had not been disclosed by them was easily accessible on the Internet.
This decision therefore confirms the position adopted in earlier cases, which recognises that information that is public knowledge need not be disclosed by arbitrators.(14)
It is noteworthy that the court appears to consider that information capable of being found on the Internet is common knowledge. If one were to admit that any information that can be found on the Internet need not be disclosed, the arbitrators' duty of disclosure would, to a large extent, become devoid of substance. The appeal court's reasoning should therefore be applied with caution and in light of the particular facts and circumstances.
Third reiteration: arbitrators' duty of disclosure and parties' duty of loyalty NLMK had raised concerns about the relationship between the arbitrators and the experts before the arbitral tribunal by filing a request for recusal of the arbitrators. However, the request was not filed until the arbitral tribunal had rendered its award, even though the information on which NLMK sought to rely had been publicly available on the Internet for quite some time.
The appeal court therefore decided that "since NLMK could have been aware of the existence of the relationship between the arbitrators and the experts by simply consulting the internet websites" of the two academic institutions, and since it had waited "until the very day on which the award was rendered to file a request for recusal, which was rejected, [NLMK] had breached its duty of procedural loyalty and could not invoke the arbitrators' breach of their duty of disclosure".
This ruling echoes the finding of the Supreme Court in its December 19 2012 decision holding that a party's annulment action was inadmissible on the ground that it had belatedly relied upon the arbitrators' failure to disclose certain information. It challenged the award without showing that it did not know and could not have known about the relevant information earlier. This constituted a breach of its duty of procedural loyalty.(15)
The Supreme Court decision was rendered in the context of an arbitration in the cereal industry, where few individuals possessed the sector experience that warranted them being appointed as arbitrators and most arbitrator candidates had links with the parties, due to the small size of the market. The court had regard for the fact that the dispute and the arbitration mechanism were closely connected with a particular industry: this type of sector focused arbitration is known as 'arbitrage corporatif' – a reference to guilds or 'corps de métier' of medieval times. It was not clear whether the same solution would have applied in the framework of standard arbitration. The Paris Court of Appeal's decision of April 1 2014 has clarified that the position under French law applies irrespective of the type of arbitration.
The increasing importance of the duty of loyalty in arbitration is a logical consequence of the Decree of January 13 2011 reforming French arbitration law, which elevated the duty of loyalty in arbitration to the status of a general principle. Pursuant to Article 1464(3) of the Code of Civil Procedure, a domestic law provision which also applies to international arbitrations, unless the parties agree otherwise,(16) the parties shall behave "with celerity and loyalty during the arbitral proceedings". Before the entry into force of this provision, the duty of loyalty was already recognised under French law.(17)
One aspect of the duty of loyalty is found in the concept of procedural estoppel. This was first admitted by the Supreme Court in its Golshani decision of July 6 2005.(18) The court held that an individual who initiated and participated in arbitration proceedings for over nine years without raising any objection was estopped from claiming that the arbitral tribunal had ruled without an arbitration agreement or on the basis of an agreement that was null and void. In the 2010 Supreme Court decision Sté Mérial v Sté Klocke 'procedural estoppel' was defined as a "change in legal position which might cause the other party to misunderstand one's intentions".(19) Following the entry into force of the decree, the concept of procedural estoppel was codified under Article 1466 of the Code of Civil Procedure. This article – which applies to international arbitration unless the parties agree otherwise by virtue of Article 1506 2° of the code – provides that the parties must raise any criticism regarding the procedure before the arbitral tribunal or otherwise be deemed to have waived their right to do so: "A party which, 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."(20)
Even though the Paris Court of Appeal made no express reference to the concept of procedural estoppel in its April 1 2014 decision, this concept is palpably at the heart of its reasoning.