Arbitration & Compliance – Paris Court of Appeal sets aside an arbitral award enforcing a corrupt settlement agreement

29/12/20
Arbitration & Compliance – Paris Court of Appeal sets aside an arbitral award enforcing a corrupt settlement agreement

In a recent decision of 17 November 2020, the Paris Court of Appeal set aside an ICC arbitral award enforcing a settlement agreement reached during the arbitration on the ground that the settlement agreement was procured by corruption of public officials.

(Paris CA, 17.11.2020, Libya v. SORELEC, No. 18/02568)

 

Key issues:

  • The Paris Court of Appeal confirms the use of the “red flags” test and circumstantial evidence (“faisceau d’indices graves, précis et concordants”) to determine whether the underlying contract was procured by corruption;
  • Relying on the “international consensus” embodied by the 2003 United Nations Convention and the 1997 OECD Convention against corruption, the Paris Court of Appeal holds that “the prohibition of bribery of public officials is one of the principles which violation cannot be disregarded by the French legal system, even in an international context. It is therefore a matter of international public policy”;
  • The fact that a party did not raise the issue of corruption during the arbitration is irrelevant since “compliance with the French conception of international public policy implies that domestic courts have jurisdiction over any alleged infringement of international public policy even if such infringement was not raised during the arbitration proceedings and the arbitrators did not discuss this issue with the parties.

 

In 1979, the French company SORELEC entered into a contract with the Libyan Ministry of Education for the construction of education-related facilities. The performance of the contract gave rise to difficulties that the parties intended to solve through the conclusion of a settlement agreement in 2003.

 

As Libya did not implement this settlement agreement, SORELEC initiated ICC arbitration proceedings against Libya in 2013 based on a bilateral investment treaty between France and Libya. SORELEC requested an award against Libya of more than 109 million euros, plus interest.

 

In the course of the arbitration, the parties entered into another settlement agreement (the “Final Settlement Agreement”), Libya being represented by the Ministry of Justice of the then provisory government.

 

On 20 December 2017, the arbitral tribunal incorporated the parties’ Final Settlement Agreement into a partial award ordering Libya to pay 230 million euros within 45 days from the notification of the award, failing which the arbitral tribunal would render a final award ordering the payment of 452,042,452.85 euros.

 

Libya filed a motion for annulment of the partial award before the Paris Court of Appeal on 26 January 2018. Libya asserted, among other grounds, that that the award breached international public policy under Article 1520, 5°, of the Code of Civil Procedure. Libya claimed that the Final Settlement Agreement was procured by corruption of Libyan public officials as shown by a series of “red flags” that qualified as “serious, specific and consistent” indicia of corruption.

 

SORELEC objected to the admissibility of the corruption allegations on the ground that corruption had not been alleged before the arbitral tribunal. On the merits, SORELEC claimed that the so-called red flags raised by Libya failed short from meeting the adequate threshold to constitute evidence of corruption.

 

First, concerning the admissibility of Libya’s corruption allegations before the Paris Court of Appeal.

 

Referring to “the international consensus” embodied by the 2003 United Nations Convention and the 1997 OECD Convention against corruption, the Paris Court of Appeal held that the prohibition of corruption of public officials ranks among those principles which violation cannot be disregarded, whether in a national or international context.[1] As a result, the fight against corruption must be protected as a matter of international public policy.

 

Consistent with its prior case law,[2] the Paris Court of Appeal then dismissed SORELEC’s argument on the inadmissibility of corruption. According to the Court, “compliance with the French conception of international public policy implies that domestic courts have jurisdiction over any alleged infringement of international public policy even if such infringement was not raised during the arbitration proceedings and the arbitrators did not discuss this issue with the parties.”[3]

 

Second, concerning Libya’s allegations of corruption that may have tainted the Final Settlement Agreement.

 

The Paris Court of Appeal restated its findings highlighted in the Indagro case[4] and held that the Court can “gather, in law and in fact, all the elements needed to rule on the alleged illegality of the agreement to assess whether the recognition or enforcement of the award manifestly, effectively and concretely violates international public policy.[5] The Court further underlined that it can proceed this way without negating the principle whereby the annulment judge must refrain from revisiting the merits of the case.

 

The Paris Court of Appeal also reaffirmed the relevance of the “red flags” methodology, well-known to compliance professionals, and the use of circumstantial evidence in order to prove corruption of public officials. Indicia of corruption highlighted by the Court include:

  • The climate of corruption in Libya at the time, based on reports published by Transparency International[6] and the Libyan Audit Bureau (a financial control authority in Libya);
  • The Libyan Ministry of Justice’s failure to comply with the required procedure under Libyan regulations prior to signing the Final Settlement Agreement;
  • The lack of evidence, whether in the form of written exchanges or meeting minutes, proving that negotiations of the Final Settlement Agreement effectively took place in spite of the importance of the dispute for Libya’s finances;
  • The terms and conditions of the Final Settlement Agreement, which were extremely favorable to SORELEC as they essentially acceded to every claim made by SORELEC despite the dire financial situation of Libya; and
  • The fact that the Final Settlement Agreement was signed at a late stage of the arbitration proceedings and offered little benefit to Libya in terms of legal costs saving or risks assessment given the low probability that an arbitral award would be worse than the agreed financial terms.

This decision is in line with the Paris Court of Appeal’s previous case law and thus elaborates on the growing dimension of compliance in arbitration as was done in previous decisions such as République du Kirghizistan v. Belokon,[7] MK Group v. Onyx,[8] or Alstom v. Alexander Brothers.[9]

 

In addition, by affirming that an award should be set aside if there are sufficient “serious, specific and consistent indicia” (“faisceau d’indices graves, précis et concordants”) that the award enforces a contract tainted with corruption, a test already used twice this year in Samwell International v. Airbus Helicopters[10] and Securiport v. Benin,[11] the Paris Court of Appeal continues to send strong messages to the arbitration community on the public policy dimension of compliance.

 

All in all, the case law evolution of the Paris Court of Appeal so far this year appears rather logical and coherent.

 

In the Samwell case, a sole arbitrator had refused to enforce a contract after applying certain red flags derived from the US compliance practice although the contract was governed by French law. By dismissing the motion for annulment against the arbitral award, the Court gave arbitral tribunals the necessary flexibility to apply a compliance methodology suited to each specific case. In its reasoning, the Court first underlined that while the arbitral tribunal relied on certain red flags not previously cited in French case law, it remains that the tribunal based its decision from the perspective of French law, such that it did not exceed its mission. The Court added that the list of red flags identified in its previous case law is not to be viewed as constituting an exhaustive list under French law. This is sensible to the extent that arbitrators should not be limited to a frozen red flags list when deploying their investigative powers to detect corruption.

 

In the Securiport decision, when explaining its refusal to cancel the arbitral award, the Court expressly outlined that it does not have the task of reexamining anew the indicia of corruption identified by the arbitral tribunal, but only to verify if these indicia are sufficiently “serious, specific and consistent” to deny the insertion of the award in the French legal system. In doing so, the Court marked the limits of its control, ensuring that it is not seen as intruding into the pertinence of the award motivation.

 

With the Libya v. SORELEC decision, the Court consolidates the construction of its jurisprudence by making it clear, in substance, that it is never too late to raise the issue of corruption since an inadmissibility argument cannot have the effect of enabling the recognition of an award that would violate international public policy. A clear message here is that a waiver logic whereby a party would be treated as having waived its right to invoke corruption by failing to do it in front of the arbitral tribunal shall be inoperative. This is an important confirmation considering the provisions of article 1466 of the Code of Civil Procedure[12], which states that a party who knowingly and without legitimate purpose fails to invoke in due time an irregularity in front of the arbitral tribunal shall be deemed to have waived its right to rely on it.[13]

 

A question that the Court did not address in this decision is whether the arbitral tribunal is entitled ex officio to raise the issue of corruption during the arbitration proceedings if it has reasons to believe that a contract was secured through illicit means. In any event, it is a well-established principle that arbitrators are free to raise the issue of corruption if they suspect wrongdoings and that they can use their investigative powers to seek all necessary clarifications, providing that they comply with the adversary principle and provide both parties with an equal opportunity to be heard.[14] From this perspective, the Libya v. SORELEC decision will likely create another incentive for arbitral tribunals to be watchful if they come across indicia of corruption.

 

The decision of the Paris Court of Appeal is available here.

 

Key contacts in international arbitration:

 

 

 

 

[1] For similar decisions, see CA Paris, 28 May 2019, Alstom Transport SA v. Alexander Brothers Ltd, No. 16/11182; CA Paris, 27 October 2020, Securiport v. Bénin, No. 19/04177.
[2] CA Paris, 18 November 2004, Thalès Air Défense v. GIE Euromissile : Rev. Arb 2003, p. 751 (decision involving violation of competition laws); Cass. Civ. 1, 13 September 2017, Société Indagro v. Sté Ancienne Maison Marcel Bauche, Nos. 16-25.657, 16-26.445 (decision involving allegations of corruption in connection with an award rendered in London, which had not been challenged in England and for which recognition was pursued in France). See also, Ch. Séraglini & J. Ortscheidt, Droit de l’arbitrage interne et international (LGDJ 2nd ed. 2019) para. 1000.
[3]Le respect de la conception française de l’ordre public international implique que le juge étatique chargé du contrôle puisse apprécier le moyen tiré de la contrariété à l’ordre public international alors même qu’il n’a pas été invoqué devant les arbitres et que ceux-ci ne l’ont pas mis dans le débat.”
[4] CA Paris, 27 September 2016, SA Ancienne Maison Marcel Bauche v. Indagro, No. 15/12614; see also CA Paris, 10 April 2018, Alstom Transport SA v. Alexander Brothers Ltd : Rev. arb. 2018, p. 574; CA Paris, 16 January 2018, Sté MK Group v. SARL Onix : Rev. arb. 2018, p. 401; Ch. Séraglini & J. Ortscheidt, Droit de l’arbitrage interne et international (LGDJ 2nd ed. 2019) para. 1000.
[5] “Il appartient au juge de l’annulation (…) de rechercher en droit et en fait tous les éléments permettant de se prononcer sur l’illicéité alléguée de cet accord et d’apprécier si la reconnaissance ou l’exécution de la sentence viole de manière manifeste, effective et concrète l’ordre public international”.
[6] The court referred to the 2013 report of Transparency International placing Libya at rank 172 out of 177 among the countries most affected by corruption issues.
[7] CA Paris, 21 February 2017, No. 15/01650.
[8] CA Paris 16 January 2018, No. 15/21703.
[9] CA Paris, 10 April 2018, No. 16/11182.
[10] CA Paris, 15 September 2020, No. 19/09058.
[11] CA Paris, 27 October 2020, No. 19/04177.
[12] Applicable to international arbitration by virtue of article 1506.3°.
[13] “La partie qui, en connaissance de cause et sans motif légitime, s’abstient d’invoquer en temps utile une irrégularité devant le tribunal arbitral est réputée avoir renoncé à s’en prévaloir”.
[14] E. Gaillard ‘La corruption saisie par les arbitres du commerce international’ (2017) 3 Revue de l’Arbitrage 836.
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