Confirmation of arbitrators’ jurisdictional immunity, subject to personal faults of a particular gravity

French Supreme Court, First Civil Chamber, 15 January 2014, n°11-17.196

On 15 January 2014, the French Cour de cassation upheld the famous decision of the Paris Court of Appeal of 1 March 2011, according to which “the failure to raise ex officio the legal ground of lack of coherence in legal reasoning”, which resulted in the award be annulled does not suffice “to characterize [a] personal fault equivalent to a guilty mind or constitutive of a fraud, gross negligence or denial of justice” required to hold an arbitrator liable.

In the present case, the parties to a share purchase agreement had signed an ancillary agreement giving the transferor the option to keep all or parts of the clientele of the company object of the transfer. Difficulties having arisen during the exercise of this option, the transferee initiated arbitration proceedings.

In a first award, the Arbitral Tribunal ordered the rescission of the agreements and of the acts [measures] taken for their implementation at the expenses of the transferor, ordering him to return the sums he had received in exchange for the transferred shares.

The transferor then initiated a second arbitration before the same Arbitral Tribunal seeking an additional award on the consequences of the rescission on the grounds of the transferee’s responsibility for the harm he incurred due the shares’ depreciation.

Four new awards were rendered, overturning the first award and taking into account the new situation brought on by the transferee’s fraudulent acts.

These four awards were subsequently annulled by the Paris Court of Appeal, which held that the issue of the shares’ depreciation had already been put forward during the first arbitration proceedings. As a result, the claims made in the second arbitration should have been declared inadmissible in accordance with the principle of “coherence in legal reasoning”.

The transferee then decided to bring a civil suit against the arbitrators for allowing the second arbitration to proceed, in violation of the res judicata principle. First dismissed before the Court of first instance and the Court of appeal, the motion was brought before the French Cour de cassation, which confirmed that the arbitrators, deciding in amiable composition on the basics of new facts, had not committed any fault which could constitute a ground for liability. According to the Court, the arbitrators could not be held liable for their failure to raise, ex officio, the legal ground of lack of coherence in legal reasoning.

This case confirms that a mere mistake of law by an arbitral tribunal which award is annulled for violation of res judicata is not a ground to seek the arbitrators’ liability: a contrary solution would be too great a risk for arbitrators to bear. It is also the opportunity for the French Cour de cassation to remind that arbitrators are immune from jurisdiction and that an arbitrator’s liability may only be sought for a “personal fault equivalent to a guilty mind or constitutive of a fraud, gross negligence or denial of justice”.

The decision is available here.

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