On 24 October 2023, the Paris Court of Appeal delivered an influential decision for the international arbitration community[1]. It partially annulled an award that had condemned the Bolivarian Republic of Venezuela (“Venezuela”) for breaching the provisions set out in an investment treaty, in the light of public policy considerations and the meeting of the applicable standard.
- Background
In 2001 and 2006, Serafin García R. Armas and his daughter, Karina García Gruber (“the investors”), bought shares in Alimentos Frisa C.A. and Transporte Dole C.A., two food distribution companies based in Venezuela.
In 2010, following inspections and controls, the Venezuelan authorities took administrative measures against these companies, including expropriating of their businesses and imposing restrictions on currency change. The investors’ company Alimentos Frisa C.A. and its Chilean suppliers had been criminally convicted before the Chilean courts for money laundering and tax evasion. In addition, a criminal proceeding is pending before the courts in Venezuela against the investors and their company based on the same allegations. [2]
In 2012, the investors initiated arbitration proceedings against Venezuela under the basis of the bilateral investment treaty between Spain and Venezuela (the “BIT”) claiming that the State measures violated the BIT and requesting compensation for the loss suffered as a result. Venezuela justified its actions based on arguments of public interest, due to the investors’ alleged involvement in illegal activities with Alimentos Frisa C.A.’s Chilean suppliers.
In 2019, the arbitral tribunal ruled in favour of the investors, finding that the measures taken by Venezuela violated the investors’ protections under the BIT (illegal expropriation, violation of the fair and equitable treatment standard, and adoption of arbitrary measures)[3]. The tribunal found that the alleged fraud was not supported by sufficiently solid evidence[4] and thus the full compensation requested by the investors was not hampered. Accordingly, the tribunal condemned Venezuela to indemnify the investors for circa US$ 214 million plus interest, fees and costs.
Venezuela sought to have this award annulled before the Paris Court of Appeal at the seat.
- The Decision of the Paris Court of Appeal of 24 October 2023
The central debate before the Paris Court of Appeal was whether the investors’ alleged illegal activities contravened international public policy and constituted a ground for annulment of the arbitral award pursuant to Article 1520.5 of the French Code of Civil Procedure.
Said activities involved, inter alia, (i) the investors’ alleged participation in a tax evasion scheme in Chile and (ii) an alleged fraud of the currency change system of Venezuela.[5]
The Paris Court of Appeal partially annulled the award on the basis of a violation to the international public order. In short, it found that there were sufficient probative elements to conclude that one of the two illegal activities described above constituted such a violation, whereas the other did not[6].
It held: « L’ordre public international au regard duquel s’effectue le contrôle du juge s’entend de la conception qu’en a l’ordre juridique français, c’est-à-dire des valeurs et principes dont celui-ci ne saurait souffrir la méconnaissance, même dans un contexte international. Ce contrôle s’attache seulement à examiner si l’exécution des dispositions prises parle tribunal arbitral viole de manière caractérisée les principes et valeurs compris dans cet ordre public international ».[7] In other words, there is a ground for annulment of the arbitral award if the arbitral tribunal has violated “in a characterised manner” the international public order, as defined by the French court.
On the one hand, the Paris Court of Appeal judged the fraud against the Venezuelan currency exchange controls “insufficiently characterised”[8] as a violation of the international public order and thus failing to satisfy the test defined above. This decision is based on the lack of evidence against the two companies involved in the arbitral proceedings, Alimentos Frisa C.A. and Transporte Dole C.A, to support the fraud allegations against them.[9] In short, Venezuela did not satisfy its burden of proof.
On the other hand, the Paris Court of Appeal found that the participation of the investors in a large-scale tax evasion scheme in Chile, established by the Chilean judiciary,[10] contributed to contravene in a characterised manner the international public order[11]. This fell within the definition of a violation of international public policy as defined by French courts.[12] Therefore, the Paris Court of Appeal annulled the part of the arbitral award which had compensated the investors for the alleged loss to their investment in Venezuela corresponding to the value of the companies Alimentos Frisa C.A. and Transporte Dole C.A., as such investment had contributed, at least in part, to a tax fraud: « Il apparaît dans ces conditions qu’en accordant une indemnisation pour un investissement ayant contribué, au moins en partie, à la réalisation d’une fraude fiscale de grande ampleur, judiciairement constatée, la sentence heurte concrètement et de manière caractérisée l’ordre public international »[13]. The annulled compensation amounted to circa US$ 76,7 million, corresponding to the guarantees paid to the Chilean suppliers of Alimentos Frisa C.A.[14]
- The Implications of the Decision
Through its 24 October 2023 decision and other recent decisions, the Paris Court of Appeal has confirmed its standpoint on when a violation of international public policy can be retained.
Specifically, in March 2022, the French Cour de Cassation rendered the important Belokon decision[15] which participated to the redefining of the violation of international public policy. Indeed, while pursuant to prior decisions this violation had to be “flagrant, actual and concrete” or “serious, effective and concrete” [16] in order to result in an annulment of the award, the Belokon decision marked a turning point: there must be a “characterised” violation of international public policy for an award to be annulled[17]. This was the object of an analysis in Baker McKenzie’s International Arbitration Yearbook of last year.[18]
The judgement rendered by the Paris Court of Appeal on 24 October 2023 aligns with this decision: it applied the same standard, i.e. whether there is a characterised violation of the international public order as a ground for the annulment of the award pursuant to Article 1520.5 of the French Code of Civil Procedure. In our case, the condemnation by the Chilean court of the tax evasion within its jurisdiction was determinative to reach this conclusion; in the Belokon case, it was the benefits obtained by the investors through criminal activities[19].
Overall, over the years French courts have adopted a more inclusive approach, broadening the criteria for characterising a violation of international public policy.[20] Indeed, French caselaw depicts an easing of the previously applied stricter standard (going from “flagrant, actual and concrete” to “characterised”).[21] Further, French courts benefit from increased investigative powers: as long as there is a suspicion of corruption, a French judge can assess compliance with international public policy[22]. The rationale is most likely to protect against, and cover the maximum of, cases of violation of international public order which is a foundation of international law.
The 24 October 2023 decision is the latest illustration of this approach. The reasoning of the Paris Court of Appeal allows a better understanding of current fraud and corruption issues, and how French courts have interpreted them. However, the decision may be criticised insofar as the partial annulment of the award leaves the investors as “partial winners”, despite having engaged in “characterised” fraudulent conduct and benefiting from it.[23] While the strategy and reasoning of the Paris Court of Appeal is clear; will it remain set in stone? Will it rightfully sanction fraudulent conduct?
[1] Paris Court of Appeal, 24 October 2023, n° 19/13396
[2] Id., paras 56 and 59-60
[3] Id., 24 October 2023, n° 19/13396, para 9
[4] Serafín García Armas and Karina García Gruber v. Bolivarian Republic of Venezuela, PCA Case No. 2013-3, Award, paras 477-479
[5] Paris Court of Appeal, 24 October 2023, n° 19/13396, para 54
[6] Id., paras 63 and 80
[7] Id., paras 48 and 49 (emphasis added) (English translation: “The international public order, under which the judge’s review is carried out, agreed with the French judicial system understanding of it, in other words the values and principles that it would not tolerate being disregarded, even in an international context. This review is only linked to examining whether the implementation of the measures taken by the arbitral tribunal violates in a characterised manner the principles and values included in this international public order.”)
[8] Id., para 63
[9] Id., paras 59-62
[10] Id., para 64
[11] Id., para 79
[12] Id., para 66
[13] Id., para 79 (English translation: “It appears in these circumstances that by awarding compensation for an investment that contributed, at least in part, to the perpetration of a large-scale tax fraud, which has been judicially established, the award concretely infringes international public policy in a characterised manner.”)
[14] Id., para III.
[15] Cour de Cassation, 23 March 2022, n° 17-17.981
[16] Paris Court of Appeal, 18 November 2004, n° 2002/19606; Cour de Cassation, 4 June 2008, n° 06-15.320; Cour de Cassation, 29 September 2021, n° 19-19.769 ; Paris Court of Appeal, 19 October 2021, n°18/01254
[17] Cour de Cassation, 23 March 2022, n° 17-17.981, para 14 (English translation: “the enforcement of the award, which would have the effect of giving Mr [K] the benefit of the proceeds of criminal activities, was in clear breach of international public policy.”)
[18] Karim Boulmelh, Marine de Bailleul, Larina Mokaled, Baker McKenzie International Arbitration Yearbook 2022-2023 – France, 1st January 2023, Baker McKenzie International Arbitration Yearbook 2022-2023 – France – Global Arbitration News
[19] Cour de Cassation, 23 March 2022, n° 17-17.981, para 14
[20] Cour de Cassation, 7 September 2022, n° 20-22.118 ; Paris Court of Appeal, 24 October 2023, n° 19/13396, paras 52 and 53
[21] Cour de Cassation, 23 March 2022, n° 17-17.981, para 14; Paris Court of Appeal, 24 October 2023, n° 19/13396, paras 48 and 49
[22] Cour de Cassation, 7 September 2022, n° 20-22.118
[23] Paris Court of Appeal, 24 October 2023, n° 19/13396, para 53
