Background

The fall of communism in Eastern Europe marked a turning point in foreign investment in the region, notably in Poland, which began transitioning towards economic liberalism. It was in this context that an American national, Mr Vincent Ryan, and two U.S. incorporated companies, Schooner Capital LLC and Atlantic Investment Partners LLC (‘the Investors’), started investing in Poland in the early 1990s.

The conduit for their investment was White Eagle Industries (WEI), a special purpose vehicle incorporated in the United States, and which later acquired shares in three Polish companies, namely Kama, Bolmar and WFM. The Investors later decided to set up a Polish company, White Eagle Industries Poland (‘WEIP’) whose purpose was to invoice commissions in relation to the management services that WEIP would be providing to the three Polish companies on behalf of WEI. The scheme worked as envisaged since commissions were paid to WEIP by the three companies for more than three years and were declared as deductible expenses to the Polish authorities.

In 1996, the Polish tax authorities conducted investigations as to the nature of these management services. This led to various proceedings against two of the Polish companies, Kama and WFM, which were fined and had to face a tax redress. Kama declared its bankruptcy shortly thereafter whereas WFM successfully obtained a reversal of the tax redress decision by the administrative courts.

In 2011, the Investors initiated an ICSID Additional Facility arbitration against Poland (‘the Respondent’) under the U.S. - Poland Bilateral Investment Treaty (the ‘BIT’) and made claims of expropriation, discrimination and violation of other treaty standards, including fair and equitable treatment, full protection and security, and free transfer of funds. Poland in turn raised objections as to the jurisdiction of the Arbitral Tribunal, which had been constituted to determine the claim, the most important being that the BIT contained a carve-out for taxation matters.1

In a long and well-reasoned Award rendered in 2015,2 the Arbitral Tribunal held that it lacked jurisdiction to hear the claims relating to matters of taxation, and relied on the wording of the BIT’s tax carve-out, contained in Article VI(2).3 All other claims were dismissed.

Annulment proceedings of ICSID awards usually take place before ICSID ad hoc committees, following a well-established procedure under the Washington Convention. However, as Poland is not a signatory of the Washington Convention, the Investors had to resort to the ICSID Additional Facility Rules. In those circumstances, the only available recourse against the Award for the Investors was to initiate set aside proceedings before the Paris Court of Appeal, as Paris was the seat of arbitration.

The Paris Court of Appeal decision

An action to set aside the Award was brought by the Investors in December 2016 before the Paris Court of Appeal. The Investors made their application on several grounds for annulment, as provided under Article 1520 of the French Code of Civil Procedure, including:

  • the Arbitral Tribunal wrongly declined jurisdiction;
  • the Arbitral Tribunal ruled beyond its mandate;
  • the Arbitral Tribunal violated due process; and
  • the Award was contrary to international public policy.

On 2 April 2019, the Paris Court of Appeal rejected the Investors’ challenge in its entirety.4 When assessing the Investors’ arguments, the Court took the opportunity to reiterate some general important principles and considerations relevant to all annulment proceedings.

The Arbitral Tribunal rightly declined jurisdiction on matters of taxation

In line with its jurisprudence, the Court of Appeal first considered that the Arbitral Tribunal, when reviewing its jurisdiction, had to take into account all the relevant legal and factual aspects.5 Although the Investors advanced a myriad of arguments to support their assertion that the Arbitral Tribunal wrongly declined jurisdiction in respect of ‘matters of taxation’, each of those arguments was dismissed by the Court.

The Court agreed with the Arbitral Tribunal that the dispute between the parties fell squarely within the matters carved out by the BIT. This prompted the Court to reiterate the importance of States’ consent to arbitration in the context of bilateral investment treaties, and to the specific provisions in this particular BIT. Indeed, the Court ruled that the plain and ordinary meaning of the relevant provisions of the BIT meant that the two signatory States had explicitly agreed to carve out matters of taxation except in three limited instances that were not applicable to the dispute.

The Court did not accept the Investors’ argument according to which the carve-out amounted to a denial of justice. It stressed that an offer to arbitrate in investment treaties is based on the consent of the signatory States, and that the powers of an arbitral tribunal are circumscribed by the extent of that consent.

While assessing the Investors’ arguments, the Court also recalled the importance of Article 1466 of the French Code of Civil Procedure6 according to which a failure to object to an irregularity before the arbitral tribunal shall be deemed a waiver of the right to rely on this irregularity during the annulment phase. This important aspect of French arbitration law seeks to preclude parties from advancing objections for the first time in the context of annulment proceedings. The Court importantly noted that i) this principle is not limited to procedural objections but applies to all grounds of annulment, except to the ground of international public policy violation, and ii) the parties can raise the same objections before the arbitral tribunal and the courts, which are not bound by an arbitral tribunal’s determinations on those objections.

The French Court of Appeal continues to apply this provision rather strictly since it was first codified in the French Code of Civil Procedure in 2011.7 As a matter of practice, the Court regularly reminds litigants that all irregularities should be raised before the arbitral tribunal in a timely fashion.

The Arbitral Tribunal complied with its mandate

The Investors argued that the Award should be set aside because the Arbitral Tribunal had not addressed one of their arguments and had therefore failed to provide a full reasoning in its Award.

Here, the Court recalled that its role was limited to the mere control of the existence of such reasoning, and that the relevance or correctness of such reasoning was not subject to review by the Court.8 Accordingly, by referring to the relevant extracts in the Award on this issue, the Court dismissed this ground without any further examination.

The Arbitral Tribunal respected the due process

Another ground that the Investors used in their attempt to set aside the Award concerned alleged violations of due process, notably an assertion that the Arbitral Tribunal had failed to properly consider evidence submitted in the arbitration.

According to the Investors, two of their investments (purchase of shares in Kama and WFM) had been subject to different treatment by the Polish tax authorities as only Kama was subject to a tax redress, which, they argued, amounted to different treatment and a breach of the BIT.

The Investors considered that the burden of proof had shifted to the Respondent because the difference in treatment between Kama and WFM by the Polish authorities could only be proven by the documents held in the custody of the Polish tax authorities, and thus within the control of the Respondent in the arbitration. However, the Court specifically noted that the Investors had other ways to prove the veracity of their allegations and that the documents in the custody of the Polish tax authorities were not the only possible means to do so.

The Court held that the right to due process requires each party to have the opportunity to present its case, including evidence it may wish to adduce, but also noted that the Arbitral Tribunal did not have an obligation to inform or warn a party that its supporting evidence was insufficient to decide the case in its favour, or to invite that party to adduce additional evidence in order to successfully make its case.9

The Court concluded that this ground ‘can only be dismissed’ because it seeks to revise the merits of the Award.10

The Award does not violate international public policy

As is common practice in annulment proceedings, the Investors in this case also challenged the Award on the basis of an alleged violation of international public policy, on the ground that they had been subject to a retroactive application of a more stringent tax law.

The Court held for the first time that the principle of non-retroactive application of a more stringent law is part of international public policy, which results in widening the scope of application of the French conception of international public policy.11 Turning to its analysis of the Award, the Court held that the Arbitral Tribunal rightly concluded that the Polish tax authorities had properly applied the applicable tax law and that the imposition of a tax redress was solely a consequence of the ‘vacuity’12 of Kama’s case.

The Court noted that the Investors did not object to the application of the more severe methods provided under the newly applicable tax regulations, but were complaining mainly because they were required by the tax authorities to obtain and preserve evidence over and above what was required under the law. Once again, the Court reiterated its position that the Investors bear the burden of proving the facts that support their claims (see supra, third ground on due process).

Accordingly, the Court concluded that the enforcement or recognition of the Award would not violate international public policy and dismissed the challenge.

Conclusion

In its decision, and in line with its well-established jurisprudence, the Court was careful not to trespass on the Arbitral Tribunal’s authority to determine the issues in dispute. For each of the grounds of annulment presented by the Investors, the Court rigorously applied its jurisprudence before dismissing those grounds.

The Court also warned litigants to be cautious in the litigation and pre-litigation phases. It reminded the Investors that they were estopped from advancing objections that they could have but did not raise during the arbitral proceedings, and recalled that arbitrators did not have an obligation to inform parties as to how to present their case. Set aside proceedings, moreover, should not be considered as a second attempt to make up for a lack of success in the arbitration.


1
Carve-out provisions in BITs are meant to exclude certain subject matters from their scope of application. The Paris Court of Appeal referred to the carve-out provision as a ‘clause d’exclusion’.

2
Vincent J. Ryan, Schooner Capital LLC, and Atlantic Investment Partners LLC v. Republic of Poland, Award, 24 November 2015, ICSID Case No. ARB(AF)/11/3. Available at: https://www.italaw.com/sites/default/files/case-documents/italaw7440.pdf

3
Article VI(2) of the BIT reads as follows: ‘Nevertheless, the provisions of this Treaty, and in particular Articles IX and X, shall apply to matters of taxation only with respect to the following:(a) expropriation, pursuant to Article VII;(b) transfers, pursuant to Article V; or (c) the observance and enforcement of terms of an investment agreement or authorization as referred to in Article IX(l) (a) or (b), to the extent they are not subject to the dispute settlement provisions of a convention for the avoidance of double taxation between the two Parties, or have been raised under such settlement provisions and are not resolved within a reasonable period of time’.

4
Vincent Ryan, Schooner Capital LLC, Atlantic Investment Partners LLC v. République de Pologne, CA Paris, 2 April 2019, n°16/24358.

5
See République bolivarienne du Vénézuela v. Société Gold Reserve, CA Paris, 7 Feb. 2017, n°14/21103; République du Congo v. Commission Import Export, CA Paris, 12 June 2012, n°10/22161; République de Moldavie v. Société Komstroy, CA Paris, 12 April 2016, n°13/22531.

6
Article 1466 of the French Code of Civil Procedure reads as follows: ‘A party which, knowingly and without a legitimate reason, fails to object to an irregularity before the arbitral tribunal in a timely manner shall be deemed to have waived its right to avail itself of such irregularity’ (transl. by E. Gaillard, N. Leleu-Knobil, D. Pellarini’s, http://www.iaiparis.com/lois_en.asp).

7
See Société J&P Avax SA v. Société Tecnimont SPA, CA Paris, 12 April 2016, n°14/14884; M. Ch. Di Sabatino et autres v. Société Animated Ventures et autres, CA Paris, 7 Oct. 2014, n°13/05894; SAS Exponens Conseil et Expertise v. SARL d’expertise comptable VB Conseil et autres, CA Paris, 18 March 2014, n°12/22314.

8
See Monsieur Augustin Roquette v. Madame Lieu Le, CA Paris, 27 Nov. 2018, n°17/01628; Ministère des Finances d’Irak et autres v. Société Instrubel NV, CA Paris, 20 Nov. 2018, n°16/10379; Société Wilkes Participações SA v. Companhia Brasileira de Distribuição, CA Paris, 29 May 2018, n°15/23187.

9
CA Paris, 2 April 2019, pp. 9-10.

10
CA Paris, 2 April 2019, p. 10. The French courts have consistently refused to uphold setting-aside actions aimed at revisiting the merits of an arbitral award. See for instance, Société d'économie mixte Botas v. Société Tepe, Court of Cassation, 19 Dec. 2012, n° A 11-13.269.

11
CA Paris, 2 April 2019, p. 10.

12
The Paris Court of Appeal referred to the ‘vacuité du dossier’.