Lexology | 6 April 2021
Paris Court of Appeal finds PCA lacked power to intervene in OIC investor-state arbitration
by Michael Ostrove, Kiera S. Gans , Kathy Ibarra and Mamadou Gacko - DLA Piper
The Paris Court of Appeal recently issued a noteworthy decision that will likely have a significant impact on the use of the Agreement for Promotion, Protection and Guarantee of Investments Among Member States of the Organisation of the Islamic Conference (OIC Agreement). Ratified by 29 countries, the OIC Agreement is one of the largest multilateral investment treaties, and it has gained substantial traction in the last decade after many years of virtual obsolescence.
D.S. Construction FCZO raised claims against Libya in an investor-state arbitration brought pursuant to the OIC Agreement. The claimant’s effort to pursue these claims met a hurdle, however, when Libya refused to appoint an arbitrator, and the OIC Secretary-General – the default appointing authority designated by Article 17 of the OIC Agreement – failed to take action.
This is not the first time this issue has arisen. Rather, there has been somewhat of a trend with cases under the OIC Agreement where the host state fails to appoint an arbitrator and the OIC Secretary-General then fails to take any action to remedy the default.
Using a strategy employed by many similarly-situated OIC claimants, D.S. Construction sought to use the OIC Agreement’s most-favored-nation (MFN) clause to reach into a different investment treaty – one which contains consent to arbitration pursuant to the UNCITRAL arbitration rules – to empower the Secretary-General of the Permanent Court of Arbitration (PCA) to assist in constituting the tribunal.
Here, the Secretary-General of the PCA accepted this strategy and found that he was competent to select an appointing authority. He designated Professor Pierre-Marie Dupuy, who in turn nominated an arbitrator on behalf of Libya. A tribunal was subsequently constituted, and an arbitration took place in Paris, where the parties agreed to seat their arbitration. Libya objected to the Tribunal’s constitution, but the tribunal found that it had been properly constituted in a partial award rendered in 2018 (the Partial Award).
The Paris Court of Appeal’s decision
Libya subsequently sought to annul the Partial Award before the Paris Court of Appeal, the competent jurisdiction for the review of awards rendered in Paris-seated arbitrations. The challenge was made on the basis that the tribunal was improperly constituted – one of the five exclusive grounds on which an international arbitration award can be set aside under French law.
In a judgment dated March 23, 2021, the Paris Court of Appeal agreed with Libya that Article 17 of the OIC Agreement (the dispute resolution mechanism) does not empower the PCA Secretary-General to appoint (or assist in appointing) arbitrators in an arbitration under the OIC Agreement.
The question therefore was whether Article 8 of the OIC Agreement (the MFN clause) could be invoked to bring in the terms of another treaty as a means to authorize action by the PCA Secretary-General.
In a finding that itself is worthy of notice, the Court held that, in general terms, an MFN clause could be used to incorporate the dispute settlement mechanism contained in another treaty. However, in the specific case at hand, the Court reasoned that Article 8 of the OIC Agreement could not be used for this purpose. Critical to the Court’s reasoning was the particular language of the OIC Agreement and the intent of its contracting parties (the Contracting Parties). The Court held that the Contracting Parties’ intent was to create a permanent investment court having jurisdiction over disputes arising from the OIC Agreement. Until a permanent investment court is established – which to date has not occurred – parties to a dispute could rely only upon the gap-filler dispute settlement provisions of Article 17 of the OIC Agreement. The Paris Court of Appeal reasoned that this meant that the Contracting Parties never intended to have another dispute settlement mechanism imported from another treaty. Accordingly, there was no basis for the PCA Secretary-General to act.
Having determined then that the tribunal was improperly constituted, the Paris Court of Appeal was confronted by a further request from D.S. Construction to confirm the tribunal constituted with the assistance of the PCA Secretary-General, for reasons of procedural economy, and consequently to dismiss Libya’s application to set aside the Partial Award. The Court declined to do so, reasoning that French courts’ authority to provide support to parties in respect of the constitution of arbitral tribunals is reserved only to actions in support of arbitration and could not be employed in the context of annulment proceedings. Notwithstanding Libya’s challenge, the arbitral proceedings had moved forward, with hearings scheduled for April 2021. However, it has been reported that the tribunal has suspended the arbitral proceedings.
The significance of the Paris Court of Appeal’s decision
The decision of the Paris Court of Appeal may create some uncertainty for OIC Agreement arbitrations in which the PCA Secretary-General has already agreed to act as appointing authority. It will, however, certainly cause the PCA Secretary-General to hesitate before acting as an appointing authority in future cases brought under this investment treaty.
As mentioned above, historically the OIC Secretary-General has not responded to requests that he act as a default appointing authority. In these circumstances, the PCA Secretary-General has exhibited a willingness to step into this role not only in the case addressed by the Paris Court of Appeal, but also in other cases, including Gargour Family v. Libya (seated in Geneva) and beIN v. Saudi Arabia (seated in London). The Paris Court of Appeal’s recent decision is the first meaningful challenge to the PCA Secretary-General’s ability to act in this way. In light of this finding, the PCA (or other arbitral institutions) may be more reluctant to intervene in the future, particularly in cases where the arbitration might be seated in Paris, and parties will certainly be more cautious to approach the PCA in this respect. Accordingly, what has to date been a fairly successful work-around for claimants seeking to bring claims under the OIC Agreement may now be less available, thus requiring new approaches if claimants are faced with similar inaction by host states and the OIC Secretary-General in the future.
To this end, it should be noted that French law may itself provide an alternative solution. The President of the Paris Civil Court (the Tribunal judiciaire de Paris) is empowered, under Articles 1505 and 1506 of the French Code of Civil Procedure, to facilitate the constitution of the arbitral tribunal where the arbitration is seated in France, or where one party is exposed to a risk of denial of justice. The French Court of Cassation has held the latter condition to be met in situations, such as the case at hand, where the opposing party refused to appoint an arbitrator and all competent national courts refused to assist. French courts have yet to decide whether the risk of a denial of justice alone is sufficient for them to provide assistance in the absence of any connection between the arbitration and France.
Interestingly, in 2020, a UAE company, Trasta, filed a request to have a Paris judge appoint an arbitrator in Libya’s stead in a different OIC dispute. Before the Paris judge could rule on this request, Libya agreed to appoint an arbitrator, meaning that the court did not reach the issue. Consequently, it remains an open question whether OIC investors faced with a similar issue might have this avenue available to them.