Annulment of an award for breach of due process: substitution of grounds without previous discussion with the parties.

On 15 March 2016, the Paris Court of Appeal annulled an award for breach of due process (Article 1520, 4° of the French Code of Civil Procedure) on the grounds that, without inviting the parties to discuss the issue, the Arbitral Tribunal had replaced a claim for the allocation of the principal of a sentence in appeal by a compensation for loss of profits during the supreme court proceedings that followed thereafter.

At the beginning of this case, PGM’s textile manufacturing factory, whose capital was held by Belgians and Luxembourgians, caught fire and was looted. In order to be compensated for this loss, PGM applied to its insurance company, Ny Havana, whose majority shareholder is the Republic of Madagascar.

After the refusal of Ny Havana to indemnify the loss, PGM brought its case before the Madagascan courts and was successful in first instance and in appeal. Thereafter, its insurer referred the court of appeal’s decision to the Madagascan supreme court.

According to Madagascan law, such an action does not suspend enforcement and thus, PGM should in principle be allowed to enforce the court of appeal’s decision without having to wait for the outcome of the procedure before the Madagascan supreme court. However, in the case at hand, enforcement has still been stayed because a second action, “in the interest of the law”, has been brought before the supreme court by the public prosecutor.

In these circumstances, PGM initiated arbitration under the aegis of the International Chamber of Commerce (ICC), on the basis of the arbitration clause contained in the bilateral investment treaty (“BIT”) for the protection of investments between the Republic of Madagascar and the Belgo-Luxembourgian Economic Union, to obtain payment of the principal of the sentence in appeal.

In an award dated 29 August 2014, the sole arbitrator decided notably that the action “in the interest of the law” was brought “for the sole purpose of suspending enforcement of a decision unfavorable to an insurance company  whose majority shareholder is the Republic of Madagascar” and ordered the State to pay damages for the loss incurred by the investor during the proceedings before the supreme court.

At the Republic of Madagascar’s request, the Paris Court of Appeal set aside the award under Article 1520, 4° of the French Code of Civil Procedure on the grounds that “the Arbitral Tribunal breached due process […] by granting damages for the profits that the applicants could not obtain, when no such claim had been made, the arbitrator has thus substituted the basis of the claim without inviting the parties to discuss such modification”.

The Paris Court of Appeal’s decision fully complies with the French Cour de cassation’s decision rendered in 2011 : “the arbitrators substituted a compensation […] for loss of profit that seemed inadequate, with a compensation for the loss of opportunity to see the project completed, [that the claimant] had not invoked and that this substitution did not constitute a simple loss assessment method, but modified the basis of [the claimant’s] compensation; the Paris Court of Appeal thus properly ruled that, by failing to invite the parties to comment on this issue, the arbitrator breached due process” (First Civil Chamber, 9 June 2011, No. 10-23.321).

The Paris Court of Appeal’s decision is no less surprising than the Cour de cassation’s 2011 decision, considering that due process is fundamental to the conduct of a procedure. These two decisions, perfectly legally founded, nonetheless raise the issue of why arbitrators sometimes take the risk of substituting the grounds in their awards without inviting the parties to discuss beforehand, thereby risking the annulment of their award.

Should this not be seen as a sign of some arbitrators’ “frustration” when the “fair” solution lies in a ground not raised by the parties? In accordance with French law, the arbitrator cannot invite the parties to discuss other grounds because if those grounds do not pertain to (international) public policy, the arbitrator risks infringing the principle of equality between parties.

The decision is available here.

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