REUTERS | Jorge Silva

French court vetoes PCA default-appointment under the OIC Agreement

In a recent ruling of earlier this year (No. RG 18/05756 – D v. K, Paris Court of Appeal), the Paris Court of Appeal annulled a partial award rendered by a tribunal confirming its proper constitution under the 1976 United Nations Commission on International Trade Law (UNCITRAL) Rules of Arbitration within the context of an appointment under the Agreement on Promotion and Protection and Guarantee of Investments among Member States of the Organization of the Islamic Conference (OIC Agreement). 

By way of background, the case involved an individual investor, K, and an OIC member state, D. In an attempt to pursue investment claims against D under the OIC Agreement, K sought to proceed in arbitration against D pursuant to article 17(2) of the OIC Agreement.  Article 17(2) allows recourse to arbitration in the event that the disputing parties are unable to conciliate their dispute. Importantly, the option to arbitrate only operates pending the establishment of an “Organ for the settlement of disputes arising under the Agreement” within the meaning of article 17 of the OIC Agreement, which once established is understood to have exclusive competence to deal with investor-state disputes under the OIC Agreement. For the avoidance of doubt, no such “organ” has as yet been established. As regards the constitution of an OIC tribunal in the interim, in accordance with article 17(2) of the OIC Agreement, the parties are required to refer to the OIC Secretary General for any default-appointments. In this context, it is important to note that historically speaking, the OIC Secretary General has routinely failed in his default-appointment functions under article 17(2).

D having failed to appoint its arbitrator within the prescribed time-limit of 60 days following service of K’s notice of arbitration under article 17(2) of the OIC Agreement, K applied to the Secretary General of the Permanent Court of Arbitration (PCA) in The Hague, The Netherlands, for default-appointment of D’s arbitrator within the meaning of article 7(2) of the UNCITRAL Rules. In doing so, K relied upon a combined reading of Art. 8 of the OIC Agreement, a most favoured nation (MFN) clause, and a dispute settlement mechanism providing for UNCITRAL arbitration in the terms contained in a bilateral investment treaty concluded by D with a third country (Third Party BIT). Despite D protesting, the Secretary General of the PCA proceeded with the appointment of a default-appointment authority, which in turn appointed an arbitrator for and on behalf of D, hence facilitating the full constitution of the tribunal. Upon D’s request, the tribunal exercising its powers of kompetenz-kompetenz, and applying the UNCITRAL Rules in terms agreed by the parties,  found that it had been validly constituted (Partial Award on Jurisdiction). In an earlier procedural order, the tribunal also decided upon Paris as the seat of the arbitration.

Dissatisfied with the tribunal’s findings, D applied for nullification of the Partial Award on Jurisdiction before the French courts. In the ruling under consideration, the Paris Court of Appeal found that the tribunal’s constitution had been in violation of article 17(2) of the OIC Agreement and that K could not rely upon the MFN clause at article 8 of the OIC Agreement read together with the Third-Party BIT, in order to import into the operation of the OIC Agreement the default-appointment mechanism provided for under article 7(2) of the UNCITRAL Rules. Albeit acknowledging that article 8 qualified as an MFN clause within the meaning of the 2015 Report of the United Nations’ International Law Commission on the Most Favoured Nation Clause (see ruling, at paras 87-92), according to the Paris Court of Appeal, it could and did not find application in the present context on the following grounds:

  • In accordance with article 31 of the Vienna Convention on the Law of Treaties, which applies to the interpretation of international treaties and conventions, the proper operation of the dispute resolution mechanism provided for under article 17 of the OIC Agreement must be interpreted in the light of the main dispute resolution objective pursued by the OIC Agreement, that is to establish a permanent, specialist dispute resolution body to deal with any investor-state disputes arising from the Agreement . Pending the establishment of such a body, the OIC Agreement expressly provides for an autonomous, ad hoc procedure both for default-appointment, at the hands of the OIC Secretary General, and for the conduct and course of the ensuing arbitration process (with the Tribunal deciding on the venue and time of its meetings as well as other matters pertaining to its functions). As a result, the substantive investment protections afforded by the OIC Agreement are complemented by a procedural protection that takes the form of the establishment of a specific dispute resolution procedure.
  • Absent any express wording to the desired effect in article 17 of the OIC Agreement, the MFN clause contained at article 8 of the OIC Agreement, which is limited in scope to economic investment activities within the meaning of the OIC Agreement, is not capable of extension to more favourable dispute resolution mechanisms provided for in third-party BITs, such as the Third-Party BIT. According to the Paris Court, there was also no prior agreement or subsequent practice by the contracting parties to confirm an intention on their part to extend the application of article 8 to the dispute resolution context. Importantly, the Court expressly distinguishes the precedents of Al Warraq v. Indonesia and Kontinental v. Gabon, both of which proceeded on the basis of validly constituted tribunals under the UNCITRAL Rules.
  • Nor can the Preamble to the OIC Agreement, which refers to the provisions of the OIC Agreement as ones that afford a minimum treatment to the capital and investments originating in an OIC Member State, displace the restrictive interpretation of article 17, which provides for the establishment of a “closed and self-sufficient” dispute resolution system, without jeopardising the trust placed by the parties in the ad hoc constitution of an OIC tribunal.
  • Finally, in the event that the default-appointment mechanism under article 17(2) of the OIC Agreement fails, the aggrieved party will be free to seek recourse before the competent curial courts, such as the French juge d’appui.

In our view, the Paris Court adopted an unnecessarily strict interpretation of the MFN clause contained at article 8 of the OIC Agreement, in circumstances in which the appointment of a functioning tribunal will more likely than not be frustrated by the inoperability of the OIC Secretary-General’s default-appointment function and the questionable curial competence of any municipal courts in OIC arbitration, which is typically delocalised. In the instant proceedings, K could not have realistically engaged the French courts as curial courts, Paris having been designated as the seat of the arbitration by a tribunal that was subsequently found to be invalidly constituted. The courts at the place of business of the OIC Secretary General, even if possibly competent, are unlikely to process matters where the OIC Secretary General has defaulted. The only remaining wild card: article 1505.04 of the French Code of Civil Procedure, which empowers a French juge d’appui to intervene in any arbitration, whether domestic or international (even if the arbitral proceedings in question do not exhibit any nexus to France), in circumstances in which “one of the parties is exposed to a risk of denial of justice”. This mechanism has been used on one occasion before, to facilitate the appointment of a co-arbitrator for Libya where Libya itself and the OIC Secretary General failed to do so in Trasta Energy Limited v. Libya, albeit that in that case, once notified of the French court proceedings before the juge d’appui, Libya decided to co-operate in the constitution of the tribunal of its own motion.

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