Reinstating Courts’ Deference to Institutional Arbitration Rules: The Tecnimont case

I. Introduction

In a long-awaited decision and close to the end of a judicial ‘marathon’, the French Court of Cassation restored lost tranquility in the troubled waters of commercial arbitration by confirming that the institutional rules chosen by the parties to govern the arbitration procedure set limitations over a judge’s power to review an award[1]. An earlier decision by the Reims Court of Appeal generated intense criticism by  holding that the scope of the institutional rules governing the time limit for challenging arbitrators does not extent to the question of the admissibility of an action to set aside an award. [2]

II. Factual Background

Société Tecnimont SPA (“Tecnimont”), an Italian company and S.A.J. & P. Avax (“Avax”), a Greek company, entered into an agreement for the construction of a propylene plant in Greece. Pursuant to an arbitration clause contained in the subcontract agreement, all disputes arising from the agreement would be resolved by recourse to International Chamber of Commerce (“ICC”) arbitration. A dispute arose between the parties, and Tecnimont initiated ICC proceedings in Paris.

During the proceedings, it came to Avax’s attention that the Chairman’s law firm assisted a company later acquired by the parent company of Tecnimont. In September 2007, Avax challenged the Chairman’s appointment before the ICC Court alleging a lack of independence, pursuant to Article 11 of the 1998 ICC Rules (now Article 14 of the 2012 ICC Rules). In October 2007, the ICC Court dismissed the challenge for undisclosed reasons. Avax then continued to participate in the arbitration while reserving its rights. In December 2007, Avax filed an application to set aside the partial award. The Paris Court of Appeal held that the Chairman of the tribunal did not observe his duty to disclose relevant facts that allegedly raised reasonable doubts as to his independence.

In February 2009, the Paris Court of Appeal annulled the award. It specifically held that the arbitrator was under a continuing obligation to inform the parties of any matter that called into question his impartiality and independence.[3] The same Court rejected Tecnimont’s argument that Avax’s application was inadmissible because it had already unsuccessfully challenged the Chairman before the ICC on the same grounds. The Paris Court of Appeal found that Avax had been notified of the relevant facts and circumstances only after it had challenged the arbitrator before the ICC Court and after the partial award was issued.

In November 2010, the French Court of Cassation reversed the Paris Court’s decision on the ground that most of the facts complained about in Avax’s application to set aside the award were invoked before the ICC Court.[4] It further determined that the Paris Court modified the subject-matter of the dispute by considering facts that came in light after the partial award was rendered.  Consequently, the Court of Cassation remanded the case to the Reims Court of Appeal for the latter to decide on the substantive question of the validity of the award.

III. The Controversial Ruling of the Reims Court of Appeal

The actual question before the Reims Court of Appeal was whether a party’s failure to adhere to the ICC’s 30-day deadline to challenge an arbitrator precludes a judge form setting aside an award on the same grounds. The Court first held that the judge who is seized of the question of the award’s validity is not bound by the time limit prescribed by the institutional rules. It further added that the absence of any subsequent challenge against the arbitrator regarding facts discovered at a later stage by the challenging party does not preclude the latter from seeking annulment of the award insofar as it has not waived its right.

The Court also explained that for a grievance against an award to constitute a basis for a challenge under the Article 1520-2° of the French Code of Civil Procedure, it has to be raised during the arbitration procedure whenever possible.  Moreover, the Court emphasized that it was not bound by the ICC’s dismissal of the challenge: a challenge before the ICC and an application to set aside an award are separate proceedings, which do not serve the same purpose and are not controlled by the same authority. In this context, the Court further held that the decision of the ICC Court is of an administrative nature and therefore does not have the effect of res judicata.

On the merits, the Reims Court held that a proper disposition of the challenge required consideration not only of the ties between the company and the Chairman’s law firm, but also of the ties between other companies of the group and the law firm. To the extent that Avax obtained its information about the Chairman gradually, the Reims Court determined that Avax’s application was admissible. In this regard, the Court explained that it could not conclude that Avax waived its right as a consequence of the non-exercise of the institutionally provided disqualification procedure. Based on this reasoning, the Reims Court set aside the partial award of 2007 holding that the Chairman failed to meet his duty of disclosure, which itself raised reasonable doubts as to his independence. As expected, Tecnimont challenged the Reims Court decision.

IV. The French Court of Cassation Ruling

The Court of Cassation, apparently not convinced by the Reims Court reasoning, reversed the latter’s ruling with a brief, though clear-cut, decision.[5] The Court of Cassation held that a party who knowingly fails to ask for the disqualification of an arbitrator within the prescribed time period is deemed to have waived their right. Accordingly, the Court of Appeal should have examined whether the 30-day time limit for exercising the right of challenge was observed in respect of each of the facts and circumstances the court held to constitute a breach of the arbitrator’s obligation of independence and impartiality.

V. Analysis of the Court of Cassation Decision in Light of the Reims Court Ruling

To understand the value of the Court of Cassation decision, one should read it in conjunction with the Reims Court ruling. In doing so, it is necessary to identify why the Reims Court decision was met with criticism and the ways in which the Court of Cassation altered the situation created by the former.

The question that tormented both courts was whether a timely challenge of the arbitrator was a precondition for the court to set aside the award on the grounds of lack of independence and impartiality, when the challenging party was already aware of them during the arbitration procedure. For the Reims Court, the question whether Avax rose the challenge within the prescribed time limit was not determinative for the admissibility of its claim at the setting-aside stage. Instead, according to the Reims Court reasoning, the mere fact that the challenging party expresses its doubts on the arbitrator’s impartiality at any time during the arbitral procedure is sufficient for the admissibility of a request to set aside the award on the same grounds.

The implications of the Reims Court ruling are far-reaching. Ιt is true that the short and concise ruling of the Court of Cassation, although corrective in its very essence, is devoid of an explicit argumentation that could shed enough light on the reasoning behind the reversal of the Reims Court decision. However, this is not to suggest that the Court of Cassation judge was not conscious of the wider implications of the Reims Court ruling. The analysis below aims to address the elements that presumably were taken into account by the Court of Cassation in formulating its ruling.

The ultimate issue before the two courts was the legal force of the arbitration rules chosen by the parties on the judge who reviews the award. At the outset, it should be noted that the incorporation of the institutional rules in the arbitration agreement is of a contractual nature and constitutes an extension of the arbitration agreement.[6] Indeed, by concluding the specific arbitration agreement, the parties in this dispute relied on certain rules on which they developed their expectations.  These rules reflect certain balance between the opposing interests of the parties and were selected by them as appropriate to govern the conduct of the arbitration procedure. In this regard, the parties’ expectation was that any concern related to the independence and impartiality of the arbitrators would be raised during the arbitration procedure within reasonable time, as prescribed by the ICC rules. Failure to do so would amount to a waiving of the party’s right to challenge the arbitrator and, therefore, the proceedings would move on without the fear that this issue would come up at a later stage. In determining, therefore, the appropriateness of these rules, each party has accepted any constraints or stakes accruing by the very content of the rules. Having said that, the judge of the Reims Court overturned those expectations when he considered allegations about the Chairman’s impartiality without examining whether Avax timely raised those during the arbitration procedure.

In fact, there are two competing principles that scramble to prevail on each other in this debate. On the one hand, it is the security and predictability that arbitration rules offer to the parties. The ICC rules are built on the idea that disputes need to be resolved within certain timeframe and that the different stages of the arbitration procedure should also be governed by time limits. On the other hand, it is the judge’s duty and concern to ensure that the award issued by the arbitral tribunal is not ultimately the product of any abuse that could result to the unfair treatment of either party. Here, the Reims Court judge in ensuring that the award was issued by a proper tribunal might find himself accepting the abuse of the procedure by the party who did not raise the challenge on time during the arbitration.

What the Reims Court judge did not seem to consider though, was that such an approach encourages dilatory tactics and ultimately results in an unequal treatment of the parties, to longer proceedings and additional costs. These time limits serve an important protective function: without them a party would be able to use information about an arbitrator’s independence as a weapon to obstruct the arbitration or to successfully challenge the validity of the award rendered by the tribunal. A party with knowledge of facts capable of resulting to the disqualification of an arbitrator is therefore obliged by the time limit to make them known immediately. Otherwise, the party will be estopped from invoking them later on.[7]

It has been suggested, that sometimes there might be ‘reasons of opportunity’ not to force a party to challenge an arbitrator during the arbitration proceedings: for instance when a party might not want to antagonize the tribunal or to aggravate an already tense situation.[8] In this author’s view, it would be hardly acceptable that there might be any such reasons justifying a belated challenge. The request of an arbitrator’s disqualification is by its very nature an ‘inconvenient’ moment during the proceedings and this is something that parties need to consider when challenging an arbitrator. In this regard, they should be prepared to accept the possibility that their request may not be upheld.

It has been also suggested that the Reims Court ruling is reasonable insofar as a contrary solution would render a timely request for disqualification before the ICC a precondition of an action to set aside an award. [9] Even though this proposition holds true on its merits, it seems to ignore the very considerations that lie behind the adoption of the requirement to respect the time limit prescribed by the rules. At the end of the day, one should wonder what is more preferable: to reward faith to the contractual obligations or to favor the mischievous party that dishonestly attempted to benefit from the challenge of the arbitrator.

Another interesting point in the Reims Court decision was the proposition that the judge’s power to second-guess the disqualification issue is based on the fact that the relevant decision of the ICC Court is of an administrative nature and therefore it does not have a res judicata effect. This proposition was nevertheless not rejected by the Court of Cassation. In this author’s view, this reasoning is problematic, insofar as it implies that the outcome would be different if the determination for the disqualification was rendered in the form of, for instance, an interim award. As a matter of fact and law, the judge admittedly can get into the merits of the disqualification decision and reconsider the issue, irrespective of the legal nature of the decision.  A judge is therefore entitled to set aside an award on the ground of an arbitrator’s lack of independence despite the institution’s opposite decision. Having said that, it is necessary to make the following distinction, which is also implied in the Court of Cassation ruling: it is one thing that a judge is not bound by the findings of the ICC Court as to the outcome of an application to disqualify an arbitrator, and another to suggest that the judge is not bound by the 30-day limit of the institutional rules.[10]

VI. The “raise it or waive it” principle and the duty of diligent enquiry in acquiring information related to the arbitrators

The position advanced by the French Court of Cassation further represents a reiteration of the principle of good faith to the arbitral procedure. Even in the absence of an explicit time limit in the institutional rules, a party seeking to challenge an arbitrator should be expected to raise the grounds of challenge as soon as it becomes aware of them; otherwise it should be prevented from bringing the question at a later stage as a means to challenge a disfavoring award.

Swiss courts have even gone one step further by developing a standard of diligent enquiry that each party should exercise at the start of the arbitration.[11] In a case before the Federal Court, the claimant sought the annulment of a Court of Arbitration for Sport (CAS) award because of irregular composition of the arbitral tribunal.[12] The party challenging the award asserted that it became aware of the professional relationship between two of the three arbitrators and one of the Respondent’s counsels only after the issuance of the arbitral award. The Court explained that even if the party requesting annulment had not been aware of the alleged ground of challenge, he could have become aware by using the required attention. The Court further observed that staying in ignorance may in certain cases be considered as an inacceptable manoeuvre, comparable to deferring the announcement of a challenge.

According to the Court, elementary prudence would require from each party to investigate and ensure that the appointed arbitrators present sufficient guaranties of independence and impartiality; they could not simply rely on the general statement of independence made by each arbitrator on the ad hoc form. As the relevant information was publicly available and given the small size of the sports community, the Court held that the claimant was able to do such an enquiry within less than thirty days after the receipt of the arbitral award. Accordingly, the Court concluded that the claimant’s right to raise the irregular composition expired, be it because he knew the grounds for challenge at the time, be it because he should have known them by means of a diligent enquiry into the arbitrators’ background.

Concluding remarks

The solution advanced by the Court of Cassation confirms that judges should give deference to the arbitration rules agreed by the parties. This ruling is essential insofar as it reinforces the legal status of the arbitration rules and the underlying principles of predictability and certainty. Moreover, it rewards the party that does not engage in dilatory and lurking tactics.  It further provides a solution that is in accordance with Article 1456 3° of the French Code of Civil Procedure which sets a 30-day limit to challenge an arbitrator. This solution is also in accordance with Article 1466 of the same Code, which provides that the party, who knowingly and without lawful reason fails to invoke timely any irregularity before the arbitral tribunal, is deemed to have waived their right.

This is not to imply, however, that the judge may not limit the binding nature of the procedural rules, if questions of public policy require such deviation.[13] Having said that, one cannot treat the present case as falling within the limited pool of those instances, where the judge will have to bypass the rules agreed by the parties in order to correct any ‘imbalances’ that might be inherent in the rules. The French Court of Cassation therefore sends a strong message on the legal power of the institutional rules selected by the parties: a limitation of the judge’s powers and an acknowledgement of the prominence of party autonomy.

 

Chrysoula Mavromati

The author is a Class of 2015 LL.M. student in the International Business Regulation, Litigation and Arbitration program at the New York University School of Law. After receiving her law degree from Aristotle University of Thessaloniki, Greece, in 2012, she pursued graduate studies at the University of Barcelona and then gained working experience in the European Commission and in the International Trade and Investment group of a renowned international law firm in Brussels. She is admitted to the Thessaloniki Bar.

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[1] Société Tecnimont SPA v. S.A.J. & P. Avax, Cass 1er civ, 25 June 2014.

[2] S.A.J. & P. Avax v. Société Tecnimont SPA, CA Reims, 2 November 2011.

[3] S.A.J. & P. Avax v. Société Tecnimont SPA, CA Paris, 12 February 2009.

[4] Société Tecnimont SPA v. S.A.J. & P. Avax, Cass 1er civ, 4 November 2010.

[5] Because it reversed the Reims Court ruling on the issue of admissibility, the Court of Cassation did not enter into the question of the extent of an arbitrator’s duty to disclose facts and circumstances relating to his independence and impartiality.

[6] Jean-François Poudret and Sébastien Besson, Comparative Law of International Arbitration,  Sweet & Maxwell (2007), pp 69-70

[7] Christopher Koch, Standards and Procedures for Disqualifying Arbitrators, Journal of International Arbitration, Vol. 20 No 4 (2003), p. 330

[8] Alexis Mourre, Institutional Arbitration Rules: Do they Deserve More Deference from the Judiciary? Comments on Tecnimont and other cases, in “The Practice of Arbitration: Essays in Honour of Hans van Houtte, edited by Patrick Wautelet, Thalia Kruger and Govert Coppens, Hart Publishing (2012), p.156

[9] Id at p.156

[10] Id. at p. 155

[11] Antonio Crivellaro, “Does the Artibtrators’ Failure to Disclose Conflicts of Interest Fatally Lead to Annulment of the Award?” The Approach of the European State Courts.” The Arbitration Brief 4, no.1 (2014), p. 136

[12] X. v. Y., I. Zivilabteilung, 4A.506/2007, 20 March 2008

[13] See Siemens AG/BKMI Industrieanlagen GmbH v. Dutco Construction Company, Cass, 7 January 1992. The French Court of Cassation annulled an award because it considered that the ICC rules did not protect the equality of parties, insofar as they were requiring from the two Respondents to jointly appoint a single arbitrator in a multiparty arbitration, while those parties’ interests were not entirely aligned in the contract. The Court held that the principle of equality of parties is a question of public policy that can only be waived after arbitral proceedings have been initiated. The Court of Cassation was of the view that in this way the arbitral tribunal placed Dutco in a better position to affect the outcome of the arbitration.

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