The fate of impecunious parties in international arbitration

December 15 2015

The impoverished state of a party bound by an arbitration clause does not make the clause obviously inapplicable. The arbitration tribunal retains jurisdiction to ensure that the parties are granted proper access to justice.

Co-written in French by Laurence Lepinoix and Rajeev Sharma Fokeer, Partners, FTPA (Paris); translated into English by Rajeev Sharma Fokeer

A recent Court of appeal decision (1) has confirmed the principles set out back in 2013 in the Pirelli (2) and Lola Fleurs (3) cases, restating that the obvious inapplicability of an arbitration clause cannot be deduced from the alleged impecuniosity of a party (in this case, the claimant party under Court-led liquidation), such that the arbitration tribunal retains jurisdiction to ensure proper access to justice. This decision does not address all issues arising in the aftermath of the 2013 cases, which also introduced the concept of “inseparability”, in respect of counterclaims. It does however provide an opportunity to remind ourselves of their implications, both from the claimant and respondent party’s perspective.

The impecunious respondent
In the Pirelli matter, the French Cour de Cassation (Supreme Court) ruled that the impecunious respondent, who was not in a position to bear the burden of his share of the advance on costs in arbitration proceedings, remained entitled to make counterclaims. The arbitrators accordingly retain jurisdiction to examine such claims where they are deemed “inseparable” (4) from the principal claims. In practice, arbitrators will examine the subject matter and purpose of counterclaims (arguments in defense or fresh claims) in deciding whether or not they are admissible to be assessed on the merits. Failing such examination, the award would be exposed to an annulment or could be deemed ineffective at the enforcement stage. The insolvent respondent therefore has the benefit of the examination of his own claims by the arbitration tribunal, under the subsequent supervision of the Court at the enforcement stage, to guarantee his access to justice.

The impecunious claimant
In institutional (for example, ICC arbitration) arbitration and excluding, for present purposes, ad hoc arbitration, each party must pay a share of the advance on costs, typically calculated by taking into account the monetary value of claims (and counterclaims) (5). This means that the financially deficient claimant’s position is different: if he is unable to pay the advance on costs, his claims may not be examined at all. The Lola Fleurs matter related, precisely, to a claimant alleging to have insufficient funds to initiate arbitration proceedings and claim damages from its contracting party, just as in the above more recent Court of Appeal case in 2015, where the claimant was under Court liquidation proceedings.

In both instances, the Court of Appeal ruled that the arbitrators retain jurisdiction to resolve the dispute involving the parties bound by an arbitration clause, thus limiting the role of the French Courts to a subsequent review of the conformity of the award with international public policy.

In light of the above cases, French Courts, unlike a German Court but in the context of an internal arbitration matter (6), refuse to substitute themselves to the arbitral tribunal chosen by the parties. The position of the French Courts, which is perfectly in line with the current state of the law and international treaties, can provide an efficient filter against manifestly frivolous or artificial claims.

It is unlikely that the French Courts will reverse their position and be led to infer that the proven impecuniosity of a party renders the arbitration clause obviously inapplicable under article 1448 of the French Code of Civil Procedure.

All the same, a number of other solutions can be foreseen.

First, it is always possible for the other party to advance the full amount of costs, although this is rare (where such party has raised counterclaims and/or sought injunctive relief). Secondly, the relevant arbitration law or rules could expressly exclude the applicability of an arbitration clause or render it inoperative where the impecuniosity of a party bound by the clause is established.

Furthermore, the impecunious party can now resort to third party financing providers. More recently, crowdfunding platforms have been created which allow litigants to finance a trial by donations collected directly from the public. These methods of financing litigation imported from common law systems might appear to contravene the French procedural principle “nul ne plaide par procureur”, where in practice, the litigant party loses actual control of the trial.

Lastly, the parties themselves could agree to expressly exclude the applicability of the arbitration clause, when agreeing to arbitration, by stating in the clause that it shall not apply where a party justifies its impecunious state.

  1. Arrêt n° 392 du 28 mars 2013 (11-27.770) – Cour de cassation – Première chambre civile
  2. CA Paris, Pôle 1 – Chambre 1, 26 février 2013, SARL Lola Fleurs c/ Société Monceau Fleurs et autres, RG n°12/12953, ASA Bull. 4/2013, p. 900
  3. CA Paris, 7 avril 2015, RG 15/00512
  4. voir par exemple les articles 36 et 37 du réglement CCI et l’appendice III
  5. Bundesgerichtshof, 14 septembre 2000, III ZR 33/00, Yearbook Comm. Arb., vol. XXVII, 20002, p. 265