THE AUTHOR:
Zyad Loutfi, Elève-avocat at ReedSmith LLP
Successful challenges to arbitral awards are statistically rare as setting aside procedures, unlike appeals, do not entail a de novo review of the merits of the case and do not allow for a review of the arbitrators’ factual findings. Hence, an error in judicando that results in the potential unfairness of an award without affecting its validity under any of the available annulment grounds under the lex arbitri cannot give rise to a successful claim. Yet, in practice, challenges to arbitral awards seem to be gaining considerable momentum and traction despite the limitations on the judicial review of arbitral awards.
On August 26, 2023, the Cairo Court of Appeal (the Court), third commercial circuit, (Challenge No. 55/Judicial Year 139 and No.1/Judicial Year 140) has set aside an ad hoc arbitral award and, in doing so, has confirmed the availability of inter alia due process and public policy as grounds for setting aside arbitral awards under the Egyptian Arbitration Law (EAL) no 27 of the year of 1994.
For the uninitiated, the 1994 EAL was mainly modelled after the UNCITRAL Model Law; a choice driven by the need to offer investors familiar provisions to govern their potential disputes. Although there are similarities, it is worth noting that the EAL diverges slightly from the UNCITRAL Model Law. For instance, in annulment proceeding, one of its distinctive features, as per article 53(1)(d), is that an award may be set aside if the tribunal had excluded the law chosen by the parties to govern the merits of the dispute. It is important to note that the Court has reiterated, on several occasions (See Challenge No. 88/Judicial Year 126, Hearing dated June 26, 2012; Cairo Court of Appeal, Challenge No. 54/Judicial Year 130), that article 53 of the EAL contains an exhaustive list of only eight annulment grounds available for potential challenges of awards. However, one should pay particular attention to the wording of article 53(1)(g) which provides that “an arbitral award may be annulled only: […] g) If the arbitral award itself or the arbitration procedures affecting the award contain a legal violation that causes nullity”; an article which is known to be used expansively in annulment proceedings before Egyptian courts and one which the Court, in the decision under scrutiny, does not seem to shy away from mobilizing.
Background
The case at hand pertains to a dispute between two Egyptian real estate development companies over the performance of their partnership agreement concluded in 2015. In early 2022, Claimant commenced ad hoc arbitral proceedings against Respondent before the Cairo Regional Centre for International Commercial Arbitration (No. 1553/Judicial Year 2022) seeking damages and termination of the contract. However, since January 4, 2022, Respondent has been under the legal custody of the Committee for seizing and managing the funds of terrorist groups and terrorists (the Committee) in accordance with law no 22 of the year 2018. Despite having custody over Respondent, the Committee was not a party to the dispute, and Respondent was instead represented by its director in the proceedings.
Consequently, Respondent defaulted in the proceedings and did not attend the only hearing on September 5, 2022, which resulted in the Tribunal ordering on September 26, 2022, in default proceedings, the termination of the contract and the payment of 10 million EGP in damages to Claimant. As the Court highlights in its annulment decision, Respondent did notify the Tribunal on September 12, 2022, about its litigation incapacity and the need for the Committee to join the proceedings to represent its interest. Nevertheless, the Tribunal bluntly refused Respondent’s demands claiming that it should have brought this defense before the closure of the proceedings for adjudication. This led to both the Respondent and the Committee to seek to vacate the award in two parallel annulment proceedings, which the Cairo Court of Appeal chose to consolidate.
Cairo Court of Appeal’s Annulment Decision
The Court, which capably navigated through very complex procedural issues, opted to set aside the award rendered against respondent for two main reasons.
First of all, the Court admitted that given that Respondent had no litigation capacity, the Tribunal should have suspended proceedings, under article 38 of the EAL and articles 130 to 133 of the Code of Civil and Commercial Procedures (CCCP) and should have allowed the Committee to join the proceedings. Firstly, the Court explained that, by virtue of law, proceedings are required to be suspended following the incapacitation of one of the parties unless the case has been fully tried and adjudicated. Under the CCCP, a case is deemed to be fully tried and adjudicated once the parties have submitted their final arguments to the court before the reason for incapacity has risen, which was not the case here. Secondly, the Court noted that the judge usually has discretionary power to reopen proceedings, and that it is by no means a right of the parties. However, the Court carefully clarified that if, after closure of the proceedings, one party presents substantive evidence like the one pertaining to its incapacity and legal standing, the court should have no discretionary power to refuse to suspend the proceedings; any other decision would be violating the principle of due process and the party’s right to be heard. Finally, the Court highlighted that any arbitral proceedings against an incapacitated party would vitiate the arbitral proceedings and, consequently, expose the award for annulment proceedings under article 53(1)(g). For these reasons, the Tribunal erred in not ensuring that respondent had the capacity to represent itself during the arbitration, in refusing to re-open the proceedings given the new evidence presented after closure, and in not accepting the joinder of the Committee to represent Respondent’s interests in the arbitration.
Following this meticulous analysis of the application of due process, the Court swiftly brushed upon the notion of public policy – ordre public – to further supplement and complement the reasoning of its annulment decision. On such account, the Court stated that law no 22 of the year 2018 gives the Committee the sole power to pursue all legal and administrative claims of any person, physical or moral, from the moment that it takes custody over it. Moreover, the Court clarified that the ratio legis behind this legislation is to protect the political, social and economic interests of the nation, thus making its provisions closely related to Egypt’s public policy. Accordingly, the Court found the Tribunal to have unfairly deprived and barred Respondent from its public policy defense.
Commentary and Conclusion
The Cairo Court of Appeal’s stance is a testament to the indispensable role of the judiciary in supporting the legitimacy and development of arbitration and its commitment to aligning Egypt with best practices in this field. Indeed, article 53(1)(d) of the EAL had a long history of being used expansively to vacate arbitral awards. As illustrated in the case discussed here, the article could be regarded as a catch-all provision encompassing a myriad number of key principles of procedural fairness like due process, the right to be heard and public policy. However, since 2018, the Egyptian Court of Cassation explained in a landmark case (Court of Cassation, Challenge No. 9968/Judicial Year 81, Hearing dated January 9, 2018). 1 that an arbitration-friendly application of this ground involves a two-prong test; (i) the existence of invalid arbitral procedures; and (ii) if such invalid arbitral procedures have affected the validity of the arbitral award itself. In doing so, the Egyptian Court of Cassation put an end to a series of cases that led to the much frowned upon expansive application of this distinctive annulment ground under the EAL (see Court of Cassation, Challenge No. 4623/Judicial Year 66, Hearing dated December 18, 1997).
Even if the Court, here, did not follow suit with the reasoning of the Court of Cassation and apply the two-prong test, it must be noted that it had nonetheless navigated carefully through the procedural intricacies of this dispute. The Cairo Court undoubtedly seized an opportune moment to showcase its support for credible arbitration proceedings and its protection of the parties from the occasional injudicious conduct by arbitral tribunals that could lead to violations of due process and public order.
ABOUT THE AUTHOR:
Zyad Loutfi is an élève-avocat at ReedSmith LLP (Paris office), where he focuses on international commercial arbitration and dispute settlement. He is admitted to practice in Egypt and in the State of New York. His expertise and scholarship span international arbitration, intellectual property law, and investment law. He holds a Ph.D. in private law from the University of Paris City and is also a graduate of Cornell Law School (where he was President of the Cornell International Arbitration Society), the University of Paris Descartes, the University of Paris-Est Créteil, and Cairo University.
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