Cocorico! French approach to the OIC Treaty gives cause to crow

Published in GAR on 21 February 2020

“Hamid Gharavi of Derains & Gharavi in Paris explains how French arbitration law and courts enable parties instituting arbitrations under the OIC Treaty to avoid a denial of justice“.

“Cocorico! – French approach to the OIC Treaty gives cause to crow” – By Hamid Gharavi 

“Cocorico is both the onomatopoeic term for a rooster’s crow in the French language and slangy shorthand for French national pride. Those instituting arbitration under the OIC Treaty (the Agreement on Promotion, Protection and Guarantee of Investments amongst the Member States of the Organisation of the Islamic Conference) have good cause to crow. This is because French arbitration law permits French courts to serve as appointing authority in cases of this type, thus avoiding injustice to the investor side arising from the failure of the OIC secretary general to fulfill the appointing role conferred on him in the treaty.

With 57 member states across the Muslim world, the Organisation of Islamic Cooperation, as it is now known, is the second largest intergovernmental organisation after the United Nations. The OIC Treaty was adopted in 1981 to promote and protect investment among member states and entered into force in 1988. It was unused in investment disputes for nearly 25 years, until it was invoked for the first time in 2012 in Hesham TM Al Warraq v Republic of Indonesia.

While the respondent states participated in the constitution of the tribunal in the first two publicly reported OIC Treaty cases that gave rise to awards, Hesham v Indonesia and Kontinental Conseil Ingénierie v Gabonese Republic, the trend in recent years has been for states not to play ball.

A serial defaulter is Libya, which has failed to participate in the constitution of the tribunal in a number of OIC cases. This failure seems to be not unintentional but rather a strategic modus operandi of Libya and its counsel as the state does participate in the constitution of tribunals in arbitrations arising out of treaties other than the OIC Treaty. The state relies on the failure of the OIC secretary general to fulfil his role as appointing authority to render the arbitral process inefficient and create a deadlock.

In recent years, specialised press outlets have reported on the existence of at least six cases in which the OIC secretary general has failed to make the appointments required under the OIC Treaty, including Trasta Energy v Libya; DS Construction FZCO v Libya; Omar Bin Sulaiman v Sultanate of Oman; and three arbitrations brought by Saudi businessman Hashem Al Mehdar and other members of his family against Egypt. The awards in these cases have yet to be made public. In all of them, the OIC secretariat simply did not respond to appointment requests.

What a blow to the effectiveness of a multilateral treaty that remains in force in 29 states! Especially as the OIC Treaty is often the only treaty between the state of the investor and the host state and thus the only avenue to effective and neutral resolution of an investment dispute.

The PCA intervenes

To overcome this obstacle, investors have applied to the secretary general of the Permanent Court of Arbitration in The Hague to step in and constitute tribunals using the most-favoured nation clause of the OIC Treaty.

This was done by UAE-based company DS Construction FZCO in its arbitration against Libya, with the investor reportedly arguing that the MFN clause of the treaty allowed it to apply the more favourable 1976 version of the UNCITRAL Arbitration Rules referred to in the Austria-Libya bilateral investment treaty. PCA insiders have confirmed that the investor also raised the risk of denial of justice and the principle of effet utile.

The 1976 UNCITRAL rules provide that the secretary general of the PCA may designate a new appointing authority when the one agreed upon by the parties refuses to act or fails to appoint the arbitrator within 60 days of the receipt of a party’s request. In light of this rule, and the provisions of the OIC Treaty and BIT, the PCA reportedly deemed itself competent to designate an appointing authority and nominated an arbitration expert to select an arbitrator and cure Libya’s default.

In Omar Bin Sulaiman v Oman, it has been reported that the investor likewise invoked the MFN clause of the OIC Treaty to import the dispute resolution mechanism of other treaties entered by Oman, thus curing the state’s failure to appoint an arbitrator.

More recently, in beIN Corporation v Saudi Arabia, it has been reported that the investor applied directly to the PCA to request its secretary general to serve as appointing authority, without first attempting to resort to the secretary general of the OIC.

In its notice of arbitration dated 1 October 2018, the investor pointed out that ‘the OIC Secretary General has on multiple previous occasions failed to exercise his power to make default appointments of arbitrators in investor-state arbitrations under the OIC Agreement, preventing the constitution of the arbitral tribunal.’

A gamble

Yet, asking the PCA to select a new appointing authority is a gamble. This is because such appointments are without prejudice to the tribunal’s right to decline jurisdiction based on a theory of irregular constitution as well as to the right of annulment and enforcement courts to scrutinise jurisdiction once an award is issued.

While some states participating in OIC Treaty arbitrations have forfeited the right to challenge a tribunal constituted in this way, others have reserved their right to make a challenge and ultimately proceeded with one – like Libya in the DS Construction FZCO arbitration. In that case, the tribunal ruled that it had been properly constituted, a decision which Libya is now seeking to annul in the Paris courts.

Libya’s approach is unsurprising, given that it is open to question whether claimants can import dispute resolution mechanisms through MFN clauses, except in specific circumstances such as when it is more or less expressly foreseen by the relevant clause.

Several tribunals have in fact ruled in principle that MFN provisions allow investors to benefit from substantive investment protections contained in other treaties but do not extend to dispute resolution mechanisms – including the tribunals in Salini Costruttori SpA and Italstrade SpA v Jordan; Plama Consortium v Bulgaria; and Daimler Financial Services AG v Argentina.

Tribunals that have found otherwise include those in Garanti Koza v Turkmenistan and Venezuela US v Venezuela. But the Turkmenistan-UK and Barbados-Venezuela BITs invoked in those two cases, respectively, contain broad language allowing for the application of the MFN clause to all of the treaty’s provisions, including dispute resolution provisions.

 In each BIT it is stated that:

(1) Neither Contracting Party shall in its territory subject investments or returns of nationals or companies of the other Contracting Party to treatment less favourable than that which it accords to investments or returns of its own nationals or companies or to investments or returns of nationals or companies of any third State.

(2) Neither Contracting Party shall in its territory subject nationals or companies of the other Contracting Party, as regards their management, maintenance, use, enjoyment or disposal of their investments, to treatment less favourable than that which it accords to its own nationals or companies or to nationals or companies of any third State.

Both MFN provisions also contain a final paragraph, each similarly worded, describing the scope of the provision. In the UK-Turkmenistan BIT the paragraph states that, ‘For the avoidance of doubt it is confirmed that the treatment provided for in paragraphs (1) and (2) above shall apply to the provisions of Articles 1 to 11 of this Agreement [emphasis added].’ In the Barbados-Venezuela BIT, the paragraph states: ‘The treatment provided for in paragraphs (1) and (2) above shall apply to the provisions of Articles 1 to 11 of this Agreement [emphasis added]‘.

In each of the two BITs, the investor-state dispute resolution provision was contained in article 8 and was therefore expressly covered by the MFN clause.

The language of the Turkmenistan-UK BIT and Barbados-Venezuela BIT is thus significantly different from the wording of OIC Treaty article 8, which does not state (or imply) that MFN treatment could apply to dispute resolution mechanisms. So, the risk exists that a tribunal constituted to hear an OIC Treaty case through use of an MFN provision will ultimately decline jurisdiction on the ground that the MFN protection does not apply to procedural rights.

In addition, and independent of this risk, a tribunal that was constituted on this basis and went on to issue an award would need to be held to be validly constituted in proceedings to annul and enforce the award.

The French approach

French arbitration law is to be commended for offering a viable alternative course of action for parties seeking the constitution of a tribunal in an OIC Treaty case. Investors can apply to a French judge acting in support of the arbitration (the juge d’appui) to request the appointment of an arbitrator on behalf of the defaulting state on the ground that there would be a risk of a denial of justice if an application to the secretary general of the OIC proved unsuccessful.

Arguably, investors could even approach the judge directly without having applied first to the OIC secretariat, provided they could demonstrate that it would be futile to apply given the OIC’s track record.

Acting for Trasta, a UAE energy company, in its OIC Treaty dispute with Libya, our firm opted to apply first to the OIC for appointment of a co-arbitrator as anticipated by the treaty before resorting to the French courts. As in other OIC cases, Libya failed to appoint a co-arbitrator and the OIC secretariat likewise took no action, even after a number of requests.

Rather than turning to the PCA secretariat on the basis of the MFN clause of the treaty and the Austria-Libya BIT, our firm at that point filed a request with the president of Paris’s Tribunal de Grande Instance or first-instance court, sitting as juge d’appui, to appoint an arbitrator in place of Libya, pursuant to articles 1452, 1454 and 1505.4° of the French Code of Civil Procedure. This request was made some 93 days after the date by which Libya was required to make the appointment and 75 days from the date when the OIC was first asked to fulfill its role as appointing authority.

The sources of the French judge’s power

The French judge’s power to appoint in such circumstances has its origins in the landmark ruling of the French Cour de cassation or supreme court in National Iranian Oil Company (NIOC) v Israel (1 February, 2005). This held that a judge had jurisdiction to hear NIOC’s application for the appointment of a co-arbitrator on behalf of Israel where the state had refused to appoint, bringing the case to a dead end.

In that case, a pathological arbitration clause in the parties’ contract had provided for ad hoc arbitration but failed to identify a seat of arbitration or provide a way to break the deadlock if one party failed to name an co- arbitrator. The clause stated only that the president of the International Chamber of Commerce should have power to name the presiding arbitrator if the parties didn’t agree.

The Cour de cassation accepted NIOC’s application that it intervene to lift the deadlock, reasoning that ‘the impossibility for a party to be heard by a court, including an arbitral tribunal […] constitutes a denial of justice, which grants extraterritorial jurisdiction [compétence internationale] to the president of the Paris court of first instance to exercise its mission to assist in the constitution of the arbitral tribunal.‘

The court also based its ruling on the fact that there existed a connection, albeit ‘tenuous’, between the arbitration and France, as the arbitration clause provided that possible disagreements between the party- appointed arbitrators, including with respect to the appointment of the president of the tribunal, should be decided by the president of the ICC, a Paris-based body.

Article 1505.4° was added to the French Code of Civil Procedure in 2011 to incorporate and broaden the principles set forth in the Cour de cassation’s decision. The article provides that, unless otherwise stipulated, there will be a French juge d’appui not only for international arbitrations seated in France or submitted to French law or French jurisdiction by agreement of the parties but for any arbitration where ‘one of the parties is submitted to a risk of denial of justice.’

Parties may thus apply to that judge, named as the president of the Paris court of first instance, in support of arbitration proceedings even if they bear no connection to France.

In other words, the French judge is granted universal jurisdiction to prevent parties who have agreed to submit their disputes to arbitration being denied access to an arbitral tribunal.

In the case of Trasta, our firm did not need to go so far. Merely triggering proceedings and the scheduling of a hearing before the French first-instance court proved sufficient to drive Libya to agree to appoint a co-arbitrator just before the scheduled hearing, given strong prospects of success. Thus the tribunal was constituted in an uncontroversial fashion and an effective precedent and avenue established for other investors to avoid a denial of justice.

Alors, cocorico!“