The Paris Court of Appeal has issued a stark warning to litigants who fail to raise procedural objections at the earliest opportunity, denying parties the right to raise those objections in a subsequent challenge to the arbitral award.
In a judgment dated 2 December 2014, the Paris Court of Appeal rejected an application to set aside an arbitral award because the party making the challenge failed to raise the same argument before the Court of International Arbitration of the International Chamber of Commerce.
The procedural posture that led to this judgment was particularly unusual. The challenge, alleging that the arbitral tribunal was not properly constituted, arose after one of the arbitrators was led to resign because of a conflict of interests. The resignation occurred after the close of the proceedings and submission of the award to the ICC Court for review, but before the award was issued. The ICC invited the parties to comment on the resignation at the time, but neither party argued that the proceedings could not continue with the remaining two arbitrators. The Court of Appeal considered that the parties had thereby "waived the right to invoke that irregularity" at a later stage.
The underlying dispute arose because two parties to a share purchase agreement (SPA) could not agree on the net working capital of the target company at completion. Arbitration proceedings were initiated by one of the parties in accordance with the SPA's arbitration provisions, and a three-member ICC tribunal was constituted. The seat of the arbitration was in France.
Following exchange of written arguments and a hearing, the tribunal declared the proceedings closed. However, before the award was issued, the arbitrator appointed by the respondent disclosed he had been in talks with several law firms "for several months" about a potential lateral move, including with the law firm representing the respondent (which he later joined).
The claimant understandably objected to the arbitrator's continuing role in the case, and the arbitrator agreed to resign from the tribunal. The chairman of the tribunal then immediately informed the parties that the award had already been drafted and transmitted to the ICC for scrutiny, pursuant to Article 33 of the ICC Arbitration Rules.
Two days later, the parties received an email from the ICC inviting comments on the arbitrator's resignation "including by application of article 12(5)" of the then applicable ICC Rules. Pursuant to that rule, if an arbitrator resigns or is removed subsequent to the closing of proceedings, instead of replacing that arbitrator, the ICC may decide to allow the remaining arbitrators to continue the arbitration, taking into account the views of the parties. The claimant did not reply to the ICC's email.
In the absence of comments, the ICC decided the arbitration could proceed without appointing a new co-arbitrator. The ICC Court approved the award, which was issued within a month, and in which the tribunal declined jurisdiction over the claimant's case.
After the award was issued, the claimant filed an application for set aside before the Paris Court of Appeal, arguing that the ICC tribunal was not properly constituted (which is a ground for annulment pursuant to article 1520 2° of the French Code of Civil Procedure). According to the claimant's argument, the resignation of the co-arbitrator by itself was insufficient to cure the irregularity resulting from the conflict of interests leading to the resignation, given that the arbitrator resigned after the deliberations of the tribunal and after the award had been drafted.
Decision of the Paris Court of Appeal
The Paris Court of Appeal dismissed the claimant's application for the setting aside of the award. The court relied on article 1466 of the French Code of Civil Procedure, pursuant to which "a party who, 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."
The judges considered that, although the claimant requested the resignation of the arbitrator, that request did not amount to an objection to the case continuing before a truncated tribunal. In other words, had the claimant considered the proceedings tainted by the arbitrator's possible conflict of interest during deliberations, the claimant should have answered the ICC's email regarding article 12(5) and requested the appointment of a replacement arbitrator. By failing to respond, the claimant waived the right to raise that objection in a challenge to the award.
Rejecting the application for annulment, the Court of Appeal ordered the applicant to pay €75,000 toward the legal costs of the defendant (a considerable amount in French practice).
In the wake of the Tecnimont decision, this decision serves as a reminder that procedural objections must be raised at the first opportunity. The Paris Court of Appeal will not entertain challenges that could have been dealt with by the arbitral tribunal (or the ICC Court) but were not due to the fault of the parties. The court is also prepared to issue high costs orders to sanction parties that fail to act diligently.