France: Third Party Successfully Challenges Arbitral Award

Introduction In France, a procedure exists whereby a third party (X) affected by a judgement between two other parties (Y,Z), may challenge that judgement by way of third party action (tierce opposition), where that judgement affects its rights. In this respect French law takes a different approach to English law. Under English law, judgements are personal to the parties and affect only the parties to the proceedings, unless the judgement in question can be characterised as in rem.

In France, if a claimant foresees the possibility of tierce opposition, it may be well advised to join the third party in question (if it can) into the main proceedings, to avoid the inconvenient outcome of potentially having to litigate the same matter twice.

But how does one deal with this issue where the main claim is subject to an arbitration clause, but the third party is not bound (and indeed is not entitled) to be brought into the arbitration? This question recently arose in a recent Supreme Court case involving a share purchase agreement and a guarantee given by the transferor's parent company.

Case The subsidiary transferor entered into an SPA for the sale of shares in another company to the transferee, a holding company. Various guarantees were given to the transferor in the SPA. The SPA contained an arbitration clause, in which the arbitrators were mandated to resolve disputes as 'amiable compositeur', and in last resort.

Alongside the SPA, the parent company provided the transferor with a guarantee as surety, guaranteeing the obligations of the subsidiary transferor. The guarantee did not contain an arbitration clause.

Difficulties arose under the SPA and the transferee commenced arbitration against the subsidiary transferor. An arbitral award duly issued in favour of the claimant transferee.

The successful claimant then made demand under the guarantee against the parent. The parent failed to pay and, instead, challenged the arbitral award under the tierce opposition procedure. The transferee thus found itself in the positon of a defendant in tierce opposition proceedings brought by the parent.

At first instance (including on appeal), it was held that the guarantor offered no new legal argument and, in any event, was bound by the arbitral award based on the principle that parties who are jointly and severally liable are deemed to mutually represent one another in any proceedings where the joint and several liability is raised and adjudged. The guarantor parent's application was thus inadmissible.

The Supreme Court overturned the lower court's decision. For the Supreme Court, the right to a fair trial enshrined, inter alia, at article 6 of the European Convention of Human Rights required that the guarantor be allowed its day in court. The matter was remitted back for decision by the lower court.

Comment The applicability of French tierce opposition proceedings to arbitral awards has been the subject of considerable debate over the years. Some had suggested that such a third party challenge could only succeed if the third party could show new grounds, not capable of being advanced in the original arbitral proceedings. Some support for this position could be drawn from earlier Supreme Court case law.

However, by this decision, the Supreme Court would appear to be drawing a stark line in the sand where arbitration is concerned. Where a third party is affected by an arbitral award, in circumstances where it could not have participated in the underlying arbitration (because not a party to the arbitral agreement), then its challenge to the arbitral award is likely to succeed.

Where, as here, the arbitral tribunal was required to rule as amiable compositeur, this outcome is all the more intriguing given that one is recognising that the arbitral clause does not bind or entitle the third party guarantor. The guarantor's position presumably falls to be judged by reference to the law, and not some amiable decision of an arbitral tribunal. Perhaps this was the result intended by all the parties, but it has clearly given rise to considerable practical difficulties.

Practical responses to the situation can be imagined. In the case in point, dovetailing the SPA and the guarantee with appropriate arbitral provisions in both agreements would have avoided this outcome. The transferee would have been able to avail itself of a one-stop dispute resolution process in arbitration. Alternatively, an appropriate choice of jurisdiction clause in the SPA and/or in the guarantee would perhaps have succeeded in heading off a tierce opposition challenge. Finally, the wording of the guarantee itself could be looked at, making it expressly respond to an arbitral award under the SPA, if that was what was in fact sought by the parties.

Of all these, probably the first option would have offered the most security to the disgruntled transferee, together with sufficient flexibility to satisfy the guarantor parent.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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