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In a decision of 3 June 2020, the Paris Court of Appeal examined whether an arbitral tribunal’s alleged failure to take into account international sanctions should be considered as a breach of French international public policy and lead to the setting aside of its award.
Background
The case involved a dispute between a French company (the “Contractor”) and an Iranian company (the “Owner”) relating to a contract for the conversion into underground storage of a gas field located near Tehran.
Difficulties arose and the Owner, alleging the existence of contractual breaches, terminated the contract and called on two guarantees put in place by the Contractor.
The Contractor responded by initiating ICC arbitration proceedings (seated in Paris), alleging that the contract’s termination was improper and that the Owner was not entitled to the amounts received under the guarantees. The arbitral tribunal ordered the Contractor to pay approximately USD 1 million to the Owner.
The Contractor applied to the Paris Court of Appeal for annulment of the award.
Issues before the Court
The Contractor invoked several grounds in support of its challenge. We, however, focus exclusively on its second argument; that recognition of the award would be contrary to international public policy as it failed to take into account international sanctions against Iran.
The place of international sanctions in French international public policy
The Contractor alleged that because the contract required it to supply a guarantee issued by an “international bank” in US dollars, it triggered the application of international sanctions in place against Iran which, in turn, made it impossible for the Contractor to perform this obligation. The Contractor submitted that the arbitral tribunal should have taken these sanctions under consideration as overriding mandatory rules, and that its failure to do so resulted in an award contrary to French international public policy in that it gave effect to a contract which could not be performed without breaching said sanctions.
As a first step of its careful analysis, the Paris Court of Appeal set out to determine whether the international sanctions invoked by the Contractor could constitute overriding mandatory rules. In doing so, it took care to distinguish between the different types of sanctions invoked according to their sources:
(i) UN sanctions: the Court recalled that resolutions adopted by the Security Council under Chapter 7 of the UN Charter constitute norms of international law, which Member States undertake to accept and apply, and that as such the fact that they have not been directly transposed into the French legal order is not sufficient to deny them any effect. The Court found that the UN resolutions at issue constitute foreign and/or “truly international” overriding mandatory rules, and that these resolutions, in aiming to preserve peace and international security, carry rules and values which fall within French international public policy.
(ii) EU sanctions: the Court found that since EU regulations are directly applicable in the French legal order, the sanctions they enact constitute French overriding mandatory rules. Since those measures also seek to preserve peace and international security, they fall within the French conception of international public policy.
(iii) US sanctions: the Court recalled that foreign overriding mandatory rules can only be considered to fall within French international public policy insofar as they carry values and principles which the French legal order cannot accept to see breached, even in an international context. As US sanctions could not be considered to reflect an international consensus, and are opposed by both European and French authorities, they do not form part of French international public policy.
The Paris Court of Appeal then went on to examine whether the arbitral tribunal’s failure to consider UN and EU sanctions amounted to an “effective and concrete” violation of French international public policy.
It is noteworthy that the Court made no reference to any requirement that the alleged breach of international public policy be also “manifest”. This may signal an evolution in the test applied by French courts in their assessment of breaches of international public policy, although that remains to be seen in future decisions.
In the present case, however, the Court found that the dispute did not fall within the material and/or temporal scope of the sanctions invoked by the Contractor, and that the arbitral tribunal’s failure to consider them accordingly did not constitute a breach of French international public policy.
Comment
This case provides a very instructive insight into the manner in which French courts may approach the applicability of foreign extraterritorial laws. It could also signal a willingness of French courts to look more closely at alleged breaches of French international public policy, by abandoning the requirement that such breaches be “manifest” in order to lead to an award’s annulment.
Click here for a copy of the decision (in French).