Two years ago, Decree 2011-48 was passed, which reformed the French law on arbitration.(1)
One of the decree's major innovations was to amend the position under French law in relation to the stay of enforcement of international arbitral awards pending the outcome of annulment proceedings or of an appeal against an order granting leave to enforce (exequatur). The purpose of this change was to enhance France's reputation and attractiveness as a seat for arbitration.
Before the decree was enacted, actions to have an award set aside or to appeal a decision granting leave to enforce suspended the award's execution in France, pursuant to former Article 1506 of the Code of Civil Procedure. As a result of this rule, losing parties would routinely launch an action to set aside or an appeal against the order granting exequatur, as the bringing of such proceedings automatically stayed the execution of the arbitral award.
In order to improve the enforceability of awards and prevent delaying tactics, Article 1526 of the code now provides that an application to set aside an arbitral award or to appeal the exequatur order does not stay execution as a matter of law. The new regime affords a high level of protection to the winning party - particularly given that, as was previously the case, application for exequatur is made ex parte.
An adjustment to this rule is to be found in Article 1526(2) of the code, which provides some flexibility in situations where automatic execution would seriously prejudice one of the parties' rights.(2) Pursuant to this provision, a senior judge may stop or subject the enforcement of an arbitral award to certain conditions.
The case law rendered to date shows that it is extremely difficult for losing parties to obtain such measures.(3)
The balance of harm test seems to apply, which requires a demonstration that compliance with the award would cause both material and irreparable harm to one party, whereas no comparable harm would be suffered by the other party if execution were stayed.
These issues were considered in three recent decisions; in all three decisions, the application to stay execution was denied.
Stay of execution was refused in a case where the losing party claimed that enforcement of the award would jeopardise its financial situation, and that it would be a daunting task to seek reimbursement from the winning party. The request was rejected on the grounds that the losing party had failed to show that enforcement of the award was likely to seriously harm its rights. First, the president of the Paris Court of Appeal observed that the losing party's revenue had increased in 2010. Second, the president considered that the losing party had failed to demonstrate the winning party's alleged inability to reimburse the former in the event that the action to set aside the award succeeded. In this regard, the president ruled that the mere fact that the winning party was not domiciled in France and did not have assets in France was insufficient to prove its inability to reimburse, absent any evidence of its inability to meet its debt with its available assets and given that the economic situation in the relevant sector was favourable.(4)
In Pierre Cardin v Société Ratti SpA, renowned designer Pierre Cardin invoked two grounds in support of his claim that enforcement had to be stayed. First, he alleged that the retroactive effect of the decree seriously harmed his rights, given that at the time when the arbitration proceedings were initiated, enforcement proceedings would have been automatically stayed, as the decree had not yet been enacted. Second, he argued that his action to set aside the award had serious prospects. The judge refused to stay enforcement of the award, on the grounds that none of the arguments raised by Cardin demonstrated that his rights would be seriously harmed in the event of immediate execution of the award.(5)
In another case it was held that it was not sufficient for the losing party to demonstrate that it would become insolvent absent a stay of enforcement pending a decision on its appeal against the exequatur order. The losing party claimed that absent such a stay, it would be deprived of its right to appeal. It also alleged that the award had been issued by an arbitral tribunal which had breached due process by failing to wait for the filing of an expert report before it rendered its decision. The losing party's request for a stay of enforcement was denied on the grounds that:
- insolvency proceedings did not deprive it of its right to an appeal, as the second instance procedure could be pursued by the receiver even after the commencement of liquidation proceedings; and
- there was no breach of due process simply because the losing party did not agree with the arbitrator's conclusions.(6)
These decisions set a particularly high standard for a losing party to obtain a stay of enforcement. Therefore, it is not sufficient for the losing party to demonstrate either that there exists a prima facie arguable case for setting aside the award or for succeeding in the appeal against the exequatur order, or that enforcement of the award will render it insolvent.
A different standard applies to domestic awards under Article 1497 of the code, which requires the showing of a risk that execution of the award will result in manifestly excessive consequences. This standard mirrors that applicable to court decisions under Article 524 of the code. Intuitively, one would think that it would be more difficult to prove "manifestly excessive consequences" than "a severe prejudice to one of the parties' rights". However, this is not the case. In a decision dated April 3 2002, the stay of execution of a court decision was ordered on the grounds that its execution was likely to jeopardise irremediably the company's cash flow and to place the losing party into liquidation.(7) This is in sharp contrast with the finding made in the third decision mentioned above, where a stay of execution was denied under similar circumstances.
The French courts' severity towards requests for a stay of execution of international awards has given rise to concerns about the exequatur proceedings - which, as explained above, are ex parte. In practice, an application for exequatur is made by filing an envelope containing the arbitration agreement (or a certified copy thereof), the award (or a certified copy thereof) and translations into French when the documents are in a foreign language. There is therefore no contradictory debate between the parties until the filing of an action to set aside or of appellate proceedings against the order granting exequatur.
On February 19 2013 Patrick Mennucci, a socialist member of the French Parliament, called into question the current regime, which does not provide for a contradictory debate at the level of the application for an exequatur order. This was raised through a question posed to the minister of justice within the framework of weekly parliamentary sessions dedicated to questions and answers by members of the Parliament to members of the government.(8)
Mennucci's question reads as follows:
Article 1526, paragraph 1, of the civil code of procedure, introduced by Decree No. 2011-48 dated 13 January 2013 reforming the law governing arbitration, provides that actions to have an award set aside no longer suspend its enforcement. As a result, the state's review of arbitral awards is exercised primarily during the exequatur procedure. Hence, as of the first instance, the judge plays a fundamental role, namely that of preventing the enforcement in France of awards rendered in violation of international public policy… To date, before the first instance judge, the exequatur procedure is not adversarial, and application for an exequatur order is made on an ex parte basis (article 1516 of the code of civil procedure). The judge thus issues an exequatur order without having obtained any information from the defendant on neither the circumstances in which the award was rendered, nor on the potential action to set aside the award. The elements that he disposes of are therefore insufficient to determine whether the award's enforcement is compatible with international public policy. The sole safeguard provided by the law lies in the possibility of exercising a recourse before the first president of the court of appeal or before the judge assigned to the matter before the court of appeal (conseiller de la mise en état); this is not satisfactory as such recourse is exercised through summary proceedings, which are poorly adapted to complex disputes involving considerable issues. As a consequence, we question the Government as to what it intends to guarantee the rights of French litigants in the framework of exequatur procedures.
According to Article 135(5) of the Rules of Parliament, the minister of justice must publish her response in the Official Journal within one month. However, Article 135(6) of the rules allows her:
- to refuse to answer if the question relates to a matter involving public policy; or
- under exceptional circumstances, to obtain a one-month extension to gather the information necessary to answer.(9)
Mennucci's question does not involve an issue of public policy. The minister of justice will therefore have to provide her answer by March 19 2013, or April 19 2013 if an extension is obtained.
(1) For more details please see "English translation of new arbitration law now available"; "New arbitration law reform : the market's verdict"; "Long-awaited arbitration law reform finally passed", "French arbitration law reforms imminent"; and E Kleiman and J Spinelli, "La réforme du droit de l'arbitrage, sous le double signe de la lisibilité et de l'efficacité", Gaz pal 2011, 27, p 9.
(3) See, for example, Ch Seraglini, "L'efficacité et l'autorité renforcée des sentences arbitrales en France après le décret n° 2011-48 du 13 janvier 2011", Paris J Int Arb 2011, p 375, paras 11-23; see also Ord CA Paris, October 18 2011, 11/14286, note D Bensaude, Gaz Pal 2012, 24, p 11; Ord CA Paris, July 13 2012, 12/11616, note D Bensaude, Gaz Pal 2012, 276, p 12.
(5) See Ch Jarrosson and J Pellerin, "La notification et l'exécution de la sentence (art. 1519 et 1526 CPC) : Droit transitoire et conditions d'application, note sous Paris, Pôle 1 – Ch.5 (Ord. Prem. Prés.), 18 octobre 2011, Paris, Pôle 1 – Ch. 1 (Ord. cons. mise en état), 8 mars 2012 et Paris, Pôle 1 – Ch.1 (Ord. cons. mise en en état), 3 mai 2012", Rev Arb 2012, p 406.
(6) Ord CA Paris, July 13 2012, 12/11616, note D Bensaude, Gaz Pal 2012, 276, p 12.