French Council of State strikes down international arbitration award

The Council of State is the highest court in France dealing with public law cases. This is the first time it has taken a decision on an international arbitration award relating to a public contract.  It is particularly worth noting because any arbitral award involving a public entity in France is now likely to be reviewed by the Council, which may use a different approach to the civil courts.

The award concerned a 2004 contract between French state-owned company Gaz de France and the STS Group, for the construction of a methane terminal in the Fos peninsula in the south of France. In 2008 Gaz de France transferred the contract to one of its branches, called Fosmax, and in 2011 the contract was amended to include an International Chamber of Commerce (ICC) arbitration clause.

During the contract, Fosmax asked STS to perform extra works. When STS refused, Fosmax appointed a third company to do the work at STS's expense, and initiated arbitration to resolve the dispute.

In February 2015 the arbitration tribunal mostly ruled in favour of STS and ordered Fosmax to pay STS for any delay Fosmax had caused, amounting to around €128 million, while at the same time agreeing that STS should pay about €69 million to Fosmax for the delay it itself had caused. Crucially, the tribunal rejected a €36m claim from Fosmax for the expense it had incurred by hiring a third party to do additional work.

Fosmax appealed to the French Council of State in March 2015 seeking the annulment of part of the arbitral award requiring it to pay STS, and requesting that the decision rejecting Fosmax's €36m claim be annulled as well.

After establishing with the French Jurisdiction Tribunal that the case did fall within its jurisdiction, the Council of State confirmed most of the arbitration award, but annulled the decision to reject Fosmax's claim for €36m because, it said, the arbitral tribunal had ignored a rule of public policy which applies in a contract signed with a public entity. It remanded this claim to the parties for agreement or possible re-arbitration.

The fact that the Jurisdiction Tribunal said a dispute between a private entity and a state-owned entity fell within the jurisdiction of the Council of State rather than the civil system, is significant. It reached that decision because the contract was originally entered into with a public entity and because of its own 2010 ruling where it decided that the administrative courts were competent only for cases relating to the application of rules of public policy, public procurement or public property. As one of the grounds of appeal of Fosmax related to rules of public policy, the Jurisdiction Tribunal concluded that this case fell under the jurisdiction of the Council of State.

More importantly, this is the first time that the Council of State has considered the extent of its power to review international arbitral awards and indeed decided to set part of one aside.

The Council of State said that it can control an arbitral award in terms of the legality of the arbitration agreement itself, because public bodies are generally prohibited from being parties to an arbitration. It can also rule on procedural matters, such as the jurisdiction and constitution of the tribunal, and on the compliance of any award with French public policy rules, it said.

In this case, the Council of State said the arbitration tribunal had failed to take note of public policy rules in the part of the decision that it annulled. In an administrative contract for public work, if the project manager has formally requested the contractor to undertake the work that the contractor has committed to do, and the contractor then fails to do so, the project manager can hire a third party to complete the work at the expense of the contractor, whether or not the main contract has been terminated. The arbitrators had failed to consider this rule, the Council of State said. That was the reason for the annulment, and for referring the dispute back to the parties for agreement or possible re-arbitration.

This judgment should be borne in mind whenever dealing with a contract in France involving a French state-owned body or with a private body that was previously state-owned, where the contract explicitly contemplates arbitration. In such a situation, a review of any French public policy rules which may apply to a dispute should be included in the risk analysis when seeking legal advice.

Leonardo Carpentieri is an international arbitration expert qualified in English and French law with Pinsent Masons, the law firm behind Out-Law.com.