Arbitration Bulletin #2

The grounds of the arbitration award

On 30 November 2023, the French newspaper Le Journal du Dimanche reported a disturbing fact: half of French citizens no longer trust the justice system.

Five days later, on 5 December 2023, the Paris Court of Appeal rendered a decision that dealt specifically with the obligation to state reasons for international arbitral awards. In our view, this decision should be interpreted as a genuine expression of the confidence placed in arbitral tribunals by the French Courts, which will hopefully enable litigants to boost their confidence in the justice of… arbitration.

The requirement for arbitral awards to state the reasons on which they are based is laid down in article 1482 of the French Code of Civil Procedure – applicable to both domestic and international arbitration by reference to article 1506 of the same Code – which provides that:

“The arbitral award shall succinctly set out the respective claims of the parties and their arguments.

It shall state the reasons on which it is based (free translation).

The question that immediately arises is what sanction, if any, should be attached to this obligation to state reasons for the award. In this respect, in domestic arbitration, the said obligation is imposed by article 1483 of the Code of Civil Procedure, failing which the award is null and void:

The provisions of article 1480, those of article 1481 concerning the names of the arbitrators and the date of the award, and those of article 1482 concerning the statement of reasons for the award are prescribed on pain of nullity of the award.

However, the omission or inaccuracy of a statement intended to establish the regularity of the award shall not render it null and void if it is established, by the pleadings or by any other means, that the legal requirements have in fact been complied with” (underlining and emphasis added to a free translation).

In its ruling of 5 December 2023, the Paris Court of Appeal reiterated that “the obligation that reasons be given for judicial decisions is an element of the right to a fair trial“. However, the second paragraph of Article 1483 of the French Code of Civil Procedure paves the way to a kind of flexibility in assessing compliance with the said obligation, since an in concreto analysis of the arbitration proceedings will make it possible to “save” the regularity of the arbitral award.

It was precisely on the scope of the obligation to state reasons that the Paris Court of Appeal had the opportunity to rule in the Raiya Group case and its ruling of 5 December 2023, which pitted the Iraqi company Raiya Group against the British Virgin Islands company Crest Foods International Ltd (hereafter “Crest Foods“) related to the execution of a regional development agreement for the opening of cafés operating the Nestlé and Toll House brands in Iraq.

In this case, Raiya Group, the claimant in the action for annulment of the international arbitration award rendered in Paris under the aegis of the ICC, raised an argument that deserves a particular attention.

Raiya Group argued that, by disregarding the order of claims in relation to the status of the parties, and specifically by examining Crest Foods’ counterclaims before its own claims, the arbitral tribunal had failed to comply with its terms of reference and had violated the principle of contradiction.

In detail, Raiya Group raised the following arguments:

  • Crest Foods was a defendant in the arbitration proceedings and formulated counterclaims which the tribunal examined prior to the main claims before it;
  • in doing so, it distorted the structure of the dispute and the status of the parties in the arbitration proceedings, in violation of the ICC Rules of Arbitration and the parties’ will as expressed notably in the Terms of Reference;
  • this attitude led the arbitral tribunal to favour the point of view of Crest Foods to the detriment of that of Raiya Group, which it treated as a derivative of the latter and subordinate to it;
  • this reversal was never addressed by the arbitral tribunal, and the award contains no explanation of it.

In response, the Paris Court of Appeal stated that “if it follows from the combined provisions of articles 1482 and 1506 of the French Code of Civil Procedure that an international arbitration award must state the reasons on which it is based, unless the parties have agreed otherwise, no principle of French arbitration law imposes any requirement as to the form in which such reasons must be given, or as to the order in which the arbitral tribunal examines the claims submitted to it, since arbitrators are not required to submit for discussion by the parties the order in which they intend to rule on these claims” (underlining and emphasis added).

This reasoning calls for several comments.

To begin with, it states that in international arbitration, the obligation to state reasons is not excluded from the scope of negotiations and matters on which the parties may have a deal. This is a reminder that arbitration is first and foremost a consensual method of dispute settlement, and that this is an essential feature of arbitration.

Secondly, it gives the chance to point out that international arbitration is sometimes subject to a less restrictive regime than domestic arbitration.

With regard to the obligation to state reasons, the sanction of nullity provided for in domestic arbitration under article 1483 of the French Code of Civil Procedure is not applied in international arbitration, even though the said obligation for domestic arbitration awards is not subject to a formal requirement in the same way as for international arbitration awards.

Another example of the relative flexibility granted to international arbitration compared to domestic arbitration is the one relating to the form of the arbitration agreement.

Indeed, when it comes to domestic arbitration, the arbitration agreement must be in writing while no formal requirements exists for the arbitration agreement in international arbitration.

We welcome this consistency, as it allows, at least in theory, a degree of flexibility in international arbitration, insofar as international trade interests are at stake in these proceedings, which requires a favorable, i.e. flexible, legal environment for its development.

Furthermore, this decision implies that the arbitral tribunal is free to reason in any order it deems useful and relevant, which once again recalls a key principle of arbitration, namely the judicial nature of the mission entrusted to arbitrators.

Indeed, this rejection of the argument that the arbitral tribunal’s mission had been disregarded may be seen not only as confirmation of the trust placed by French law in arbitration and arbitral tribunals, but also as recognition of the judicial nature of their mission, which implies that the arbitral tribunal must settle the disputes referred to it and that, to do so, it must conduct a reasoning that is not imposed.

Admittedly, the fact that the Paris Court of Appeal intends not to interfere with the arbitral tribunal’s intellectual process seems desirable to us, insofar as appeals are not an opportunity to review the award on the merits and must be examined within the limits of the grounds for appeal laid down in the French Code of Civil Procedure.

However, it is interesting to note that the Paris Court of Appeal asserts that there is no principle in French arbitration law that would require the arbitral tribunal to examine the claims submitted to it in a particular order. In fact, this is in contrast to French case law on state-court litigation which institutes the obligation to rule according to the order determined by the parties’ claims, in the presence, for example, of a principal claim and an alternative claim.

Therefore, the Paris Court of Appeal clearly reiterates that litigation and arbitration are two distinct matters, and that arbitration is governed by its own substantive rules, which can be interpreted as evidence of genuine confidence in arbitration and a desire to create a legal environment conducive to its development in France.

Eventually, while the obligation to state reasons for arbitration awards must be unconditionally defended, in that it avoids arbitrary decisions and, at the same time, enables the parties to understand the decision rendered, it is inherent to the judicial nature of the arbitrator’s mission which implies, according to the Paris Court of Appeal, that the arbitrators reason freely, to such an extent that there is no need to control the order in which claims are examined in order to comply with their mission and the principle of contradiction.

Komon Avocats and its international arbitration team remain available to provide readers with further details and discuss theses issues with arbitration practitioners.