19 July 2010
In France, when bankruptcy proceedings are instituted against a party involved in a pending arbitration it can result in conflicts between the applicable arbitration and insolvency rules. In that context, an arbitral tribunal sitting in France may be confronted with determining the extent to which they must defer to mandatory insolvency rules.
A recent decision by the French Cour de cassation1 provides clear guidance on this matter. In the case of Liquidateurs of Sté Jean Lion v. Sté International Company for Commercial Exchange Income,rendered on May 6, 2009,2 the highest French judicial authority confirmed the general principle that arbitrators must apply when confronted with the bankruptcy of a party to an arbitration in France. The Court ruled that an arbitral tribunal may only render a decision deciding the amounts owed by the insolvent party, and that, under French bankruptcy law, the tribunal cannot order the bankrupt party to pay any amount. Failure to respect these principles will lead French courts to set aside the resulting award if the seat was in France, or to refuse to recognize and enforce the award in the French legal system.
The facts of the case brought before the Cour de cassation were as follows: Jean Lion, a French company, concluded three contracts containing an arbitration clause with Income, an Egyptian company. In 2001, Income initiated arbitration proceedings in London against Jean Lion, under the Rules of the Refined Sugar Association. While the arbitration proceedings were pending, Jean Lion was declared bankrupt in France and subjected to judicial liquidation.
In 2004, the arbitral tribunal ruling upon the dispute rendered an award in favour of Income, ordering Jean Lion to pay certain sums. The arbitral award was declared enforceable in France by a judgment of the Paris First Instance Court in 2006. In 2008, the Paris Court of Appeal confirmed that the arbitral award was recognised and enforceable in France. At the request of Jean Lion’s liquidators, the Cour de cassation eventually reversed the decision of the Paris Court of Appeal and declared that the award violated French principles of international public policy under Article 1502.5 of the Code of Civil Procedure.
Jean Lion’s liquidators argued two main legal grounds before the Cour de cassation. The first ground was an alleged procedural defect, namely the liquidators claimed they were not validly summoned in the arbitration and therefore the proceedings should not have resumed. In the second ground, Jean Lion’s liquidators contended that an arbitral tribunal may decide the value of the debt owed by the insolvent party but may not, in any case, require the debtor to pay the amounts.
The Cour de cassation rejected the first argument on the basis of estoppel. However, the second argument successfully persuaded the Court.
The Court found that, by recognizing an arbitral award in which Jean Lion was ordered to pay certain amounts to Income, despite being bankrupt, the Court of Appeal breached article L. 621-41 of the French Commercial Code (now article L. 622-22) and violated the fundamental principle of equality between the creditors in insolvency proceedings.
Interestingly, Income had argued before the Court of Appeals that this principle would not be applicable as it had only requested recognition of the arbitral award, not enforcement, in France. In effect, Income had clearly stated that it would not seek its enforcement.
Relying on that representation, the Court of Appeal decided that “in order to be unlawful, the recognition or enforcement of an award should constitute an effective and concrete violation of international public policy rules. This is not the case when there is a purely formal violation of the prohibition of condemnation of a legal entity that was declared bankrupt.” The Court of Appeal reiterated a well-known concept of French arbitration law that requires a “blatant, concrete and effective violation of international public order” to set aside international arbitration awards with a seat in France or to oppose their recognition and enforcement in France.
However, the Court of Appeal’s decision was also quashed by the Cour de cassation for breach of article L. 621-41 of the Commercial Code (now article L. 622-22). The Cour de cassation stated in broad terms that “with respect to bankruptcy matters, the stay of proceedings is a rule of both national and international public policy.” Even in the context of an international arbitration, as long as bankruptcy proceedings are filed in France against a party, an arbitral tribunal must apply French international public policy rules. Therefore, because the award did not respect such rules, the Court of Appeal should have denied recognition and enforcement of the award. The Cour de cassation held that its finding was not affected by the creditor’s representation that he would not seek the enforcement of the award. As a matter of international public policy, it does not matter whether the creditor decides to abandon the enforcement of the award or if enforcement is not possible if the debtor has no assets.
The Cour de cassation’s decision is therefore a strong confirmation of the limits set by French law to an arbitral tribunal’s jurisdiction and powers, even with a seat outside France, if one party is subject to insolvency proceedings in France while the arbitral proceedings are pending. Although somehow strict, the approach of France’s highest court allows for harmonious coexistence of bankruptcy and arbitration laws in France as well as in arbitrations involving parties subject to French bankruptcy proceedings.
1. The Cour de cassation is France’s highest legal authority.
2. Civ. 1ère, May 6, 2009, n°08-10.281, JCP Ed. Gen. 2009, n°20, May 13, 2009, act. 135.