On 9 November 2016 and for the first time, the French State Council (Conseil d’Etat) set aside an international arbitral award. The award related to a public contract performed in France. The award was partially set aside on the ground that the arbitral tribunal failed to apply a mandatory rule of domestic French public law.¹

Introduction

The decision of the Conseil d’Etat comes after an intriguing battle as to which of France’s highest appellate courts should have jurisdiction to determine the challenge made to the arbitral award in question.

Courts vying for jurisdiction is not a new phenomenon. The history of the common law world is replete with examples. But in France, this situation is partly formalised as between civil and administrative courts, and has been for some time.

The French system is divided between the civil and administrative orders. Each order has its own supreme court: the Court of Cassation (Cour de cassation) and the Conseil d’Etat, respectively.

Where there is a jurisdictional issue between the two legal orders, the matter is resolved by the Court of Jurisdictional Conflicts (Tribunal des conflits), a role it has fulfilled for over 150 years. In this case, the Tribunal des conflits ruled in favour of the Conseil d’Etat, which in turn paved the way for the decision reported in this alert.

Historically, the administrative court system has been, and has been seen to be, an extension of the French administration. That is much less the case today, although ties between the Conseil d’Etat and the administration are still close. For example, the judges of the Conseil d’Etat often follow the same educational path as their civil service peers.

Given its historical and cultural background, the Conseil d’Etat’s first decision on annulment of an international arbitral award was much anticipated by the French arbitral community. Would the Conseil d’Etat disturb the legal position carefully developed over the years by the Cour de cassation and the Paris Court of Appeal? Or would it chart a different route?

The case

Gaz de France, a state-owned public industrial and commercial institution, entered into a contract with the STS group formed by several foreign companies for the construction of a methane terminal in France. The contract was later transferred from Gaz de France to Fosmax LNG, a private company. The parties then amended the contract to include an ICC arbitration clause.

A dispute arose between the parties. On 13 February 2015, an award was issued in favour of the STS group. Fosmax LNG filed annulment proceedings with the Conseil d’Etat.

After staying the proceedings and referring the matter to the Tribunal des conflits, which confirmed the Conseil d’Etat’s jurisdiction to hear the claim, the Conseil d’Etat set aside the award. It did so on the basis that the arbitral tribunal had failed to apply a public policy rule applicable to administrative contracts.

Before coming to its conclusion, and recognising that this was its first decision annulling an international award, the Conseil d’Etat first set out its considered grounds for setting aside an international arbitral award:

1. Arbitrability: Where the arbitration clause or agreement is illegal. The principal ground considered here was the situation where the public body concerned enters into an agreement to arbitrate in violation of the general prohibition against public bodies resorting to arbitration (as opposed to the administrative courts). This was a matter that the Conseil d’Etat was required to address, of its own motion if necessary.
2. Irregularities: Where the arbitral process is affected by irregularities. The relevant irregularities cited are where the arbitral tribunal (i) wrongfully upholds or declines jurisdiction, (ii) is not properly constituted (including as to matters of independence and impartiality), (iii) rules ultra petita, (iv) does not respect due process or (v) does not give reasons.
3. Award in breach of public policy: Where the award violates public order rules. The examples cited by the Conseil d’Etat are (i) an award on a contract whose purpose is illegal or which is fundamentally flawed because, inter alia, of the way the parties consented to it, (ii) the award does not take into account mandatory rules and rights applicable to public bodies, e.g., the principle of inalienability of certain property rights, and the principle that prerogatives in the public interest cannot be waived or (iii) the award does not take into account EU public order rules.

Although a number of grounds were advanced for annulment in the case itself, the Conseil d’Etat rejected all but one. The result was that the Conseil d’Etat partially annulled the award on a (3)(ii) ground. For the Conseil d’Etat, Fosmax had a mandatory legal prerogative to substitute the STS group with a third party to complete the works, independently of any question of termination of the contract. This prerogative right existed in and for the public interest. The result was that the award survived intact for the amounts ordered, becoming definitive and final in that regard. But the arbitral tribunal’s dismissal of Fosmax’s claim for €36,359,758 of third party works was set aside. The arbitral tribunal’s ruling on this point was based on the contract in that Fosmax was not entitled to substitute for STS group without first terminating the contract. This ruling ignored Fosmax’s mandatory prerogative right to substitute, contrary to public policy. This part of the decision was thus vacated for future re-determination by arbitral process, or by agreement of the parties.

Comments

In the interest of unifying the French judicial approach to the matter of annulment and enforcement of international arbitral awards, arbitration practitioners had hoped to avoid seeing annulment proceedings involving state bodies being allocated to the Conseil d’Etat, preferring instead to see these matters reserved to the Paris Court of Appeal and Cour de cassation.

But that hope was extinguished for the time being by the Tribunal des conflits. Allocation to the Conseil d’Etat was justified by the fact that public contracts are subject to particular rules to protect the public interest and by the perception that such rules are better enforced by administrative courts.

The decision of the Conseil d’Etat in this case reveals some notable divergence of approach between the two legal orders. It is clear that the Conseil d’Etat will look further into the arbitral process than the Cour de cassation.

• First, the question of arbitrability will be more closely scrutinised by the Conseil d’Etat, and of its own motion if necessary. Clearly, public bodies will not be allowed to validly contract for arbitration, except where expressly authorised by the law.
• Second, while reassuringly aligning itself to annulment grounds for irregularities described in the 1952 New York Convention, the Conseil d’Etat went beyond this and held that lack of reasoning may be a ground for annulment. Depending on the case, this could become tantamount to trespassing on the merits of the award. Developments here will be closely watched.
• Third, rules of public order can be invoked by the state body to undermine the arbitral process, as happened in this case. The main concern here remains the identification of the relevant French public order rules and of the public contracts in issue. For the Cour de cassation, only a very limited class of international public order rules can be taken into account. For the Conseil d’Etat, acutely attuned to the notion of public interest, the margin of appreciation here will clearly be broader. In his report, the advocate general assisting the Conseil d’Etat went into more detail on this aspect. But there is no exhaustive list that a contracting party will be able to rely on. Developments here will also be closely watched.

As appears from the above, while the Conseil d’Etat will adopt a more profound control over international arbitral awards than its civil court counterpart, the impact of this decision will likely be limited in the immediate term. Perhaps the single most obvious reason for this is that the general rule remains that French state bodies are not empowered to agree to arbitrate. It is thus not the general custom for arbitration clauses to feature in contracts with French state entities. However, the trend is no doubt towards an opening up of restrictions in this area, as the advocate general remarked in the case. This troubled area has been the subject of considerable recent debate, with legislation almost being passed in 2016 that would have reversed the general rule. The matter is now back before a parliamentary committee for further debate. The legislative possibility that the Cour de cassation will become the single and final arbiter in this area also remains alive.

The other point to bear in mind is that this decision is only directly relevant to certain public contracts with French state bodies performed in France. While there will no doubt be further developments, which may expand on matters, this is not a decision that should directly influence the outcome of any annulment proceeding where Paris is chosen as the seat of arbitration for foreign parties, even where French law applies and even where one of the parties is a foreign state entity. At the jurisdictional level, annulment and enforcement in such cases should anyway come before the Paris Court of Appeal/Cour de cassation, not the Conseil d’Etat, although we have undoubtedly not heard the final word on that aspect from both legal orders.

How Reed Smith can help

Reed Smith can assist in reviewing contracts where arbitration is included as the preferred dispute resolution mechanism. Such review will maximise chances that the relevant provisions will stand up to scrutiny, particularly where a state entity is involved. Reed Smith can also assist in filing both annulment and enforcement proceedings in respect of international awards.

1. Conseil d’Etat, Assemblée du contentieux, 9 November 2016, n° 388806

Client Alert 2016-318