DNO and others v. Ministry of Oil and Minerals of Yemen and others - Judgment of the Paris Court of Appeal, 5 October 2021

On 5 October 2021, the Paris Court of Appeal (the Court) dismissed an application to set aside an arbitral award which ordered foreign investors to pay damages to the Ministry of Oil and Minerals of Yemen (the Ministry) and a Yemeni state-owned entity active in the oil sector. The award withstood the challenge notwithstanding allegations that its enforcement would lead inter alia to violations of international and European anti-terrorism sanctions.

The decision offers valuable guidance as regards the scope of review of the annulment judge when setting aside proceedings are initiated on grounds of violation of international public policy, in particular in cases of alleged breaches of human rights and international humanitarian law as well as of economic sanctions.

In 1997, the Ministry and Dove Energy (Dove), a company incorporated under English law,² entered into a production sharing agreement (PSA) for the exploration, development and production of an oil block in Yemen.³ In accordance with the PSA, Dove and the Yemen Oil and Gas Corporation (YOGC), a wholly-owned subsidiary of the Ministry,⁴ entered into a joint operating agreement (JOA), which defined the parties’ rights and obligations as regards operations to be conducted at the oil block.⁵ Thereafter, several companies incorporated outside of Yemen and active in the oil sector, namely DNO Yemen AS (DNO), Petrolin Trading (Petrolin), and MOE Oil & Gas Yemen (MOE),⁶ also became parties to the PSA and the JOA.⁷

In 2014 and 2015, all four foreign investors withdrew from the project,⁸ following which the Ministry initiated arbitration proceedings under the rules of the International Chamber of Commerce (ICC) against all parties to the JOA and the PSA, namely Dove, DNO, Petrolin, MOE and YOGC, disputing the validity of the latters’ withdrawal from the PSA and the JOA and claiming damages.⁹ Shortly thereafter, YOGC filed a separate request for arbitration against the other parties to the JOA.¹⁰

In 2019, the arbitral tribunal issued an award in which it ordered Dove, DNO, Petrolin and MOE to jointly and severally pay to the Ministry and to YOGC various sums totalling approximately USD 30 million (the Award).¹¹

DNO, Petrolin and MOE (the Appellants) initiated annulment proceedings against the Award before the Paris Court of Appeal (the Court). The Award was challenged on three grounds.

One of these grounds, on which the present Case Comment focuses, was that the Award was contrary to international public policy (“l’ordre public international”) (Article 1520, 5° of the French Code of Civil Procedure (CCP)) as its enforcement would allegedly result in funds being made available to entities controlled by persons and entities responsible for human rights and international humanitarian law violations and subject to sanctions imposed by the United Nations (UN) and the European Union (EU).¹²

Indeed, the Appellants argued that funds payable under the Award would benefit a ministry belonging to a government which collaborated with and financed Al-Qaeda and other terrorist groups,¹³ which had been condemned by both the international community and the EU,¹⁴ and which was associated with the perpetration of human rights violations and war crimes and could use the sums awarded to finance the same.¹⁵ They also maintained that the Award would benefit a company (YOGC) controlled by the Houthi rebellion, itself guilty of violations of human rights and international humanitarian law as well as of war crimes, and whose main leaders were subject to UN and EU sanctions.¹⁶

The Appellants concluded that the Award should therefore be set aside inter alia on grounds of breach of international public policy.

Pursuant to Article 1520, 5° CCP, annulment proceedings are open if the recognition or the enforcement of an award is contrary to international public policy.

As pointed out by the Court, the concept of international public policy in light of which the annulment judge carries out its review, must be understood as encompassing values and principles whose violation cannot be tolerated by the French legal order, even in an international context.¹⁷ The Court confirmed that the fight against violations of human rights law (as enshrined in the European Convention on Human Rights and Fundamental Freedoms and the International Covenant on Civil and Political Rights) and of international humanitarian law (as enshrined in the Geneva Conventions), as well as international and European economic sanctions, which are intended to contribute to the maintenance and the restoration of international peace and security, form part of French international public policy.¹⁸

In its decision, the Court confirmed that to reach the conclusion that an arbitral award is incompatible with principles of international public policy, the annulment judge must have determined that, at the time of its decision, recognition or enforcement of the award is manifestly, effectively and concretely contrary to such principles.¹⁹ Are not to be taken into account hypothetical future events – including future circumstances involving the use of sums awarded by an arbitral tribunal – that might lead to breaches of values and principles protected by international public policy.²⁰

In casu, as regards the Appellants’ allegations of human rights and international humanitarian law violations, the Court noted that it had not been argued, be it in the course of the arbitration proceedings or in the course of the annulment proceedings, that the PSA or the JOA – further to which the Appellants had been ordered by the arbitral tribunal to pay certain sums – had been concluded in breach of human rights or international humanitarian law, that these agreements allowed the parties to act in disregard of such rights or law, or that they enabled them to derive any benefit in breach of human rights or international humanitarian law.²¹

As a result, the Court dismissed the Appellants’ claim that the Award violated human rights and international humanitarian law and therefore was in breach of international public policy.²²

As regards the Appellants’ claim that the recognition or enforcement of the Award could violate economic sanctions in place, the Court first noted that neither the Ministry nor YOGC was listed among individuals and entities targeted by international and European sanctions (listed persons),²³ and added that the annulment judge may not extend existing sanctions to non-listed persons.²⁴

The Court on the other hand acknowledged that it was within its remit, in order to determine whether the recognition or enforcement of an award violated principles of international public policy, to examine whether the Award made funds directly or indirectly available to listed persons in breach of economic sanctions in place²⁵ (in casu, in breach of UN and EU sanctions imposed against Al-Qaida and other terrorist organizations as well as UN and EU sanctions related more specifically to the situation in Yemen). In the words of the Court, “[t]his verification must be made with regard to the situation assessed on the day the judge rules and must thus be based on serious, precise and concordant indications which make it possible to conclude that the enforcement of the award would be in breach of sanctions.”²⁶

As regards the meaning of the terms “making funds indirectly available”, the Court relied on the case law of the Court of Justice of the European Union (CJEU). It noted that while the expression “to make available” had a broad meaning, intended to encompass any act whose performance enables a person to use any given asset,²⁷ funds may be considered to have been made indirectly available to a listed person only if such funds can actually be transferred to that person or the latter has the power to make use thereof as a result of the existence of a legal or financial relationship between the person in question and the beneficiary of the funds.²⁸ The Court further noted that according both to the case law of the CJEU and the Sanctions Guidelines of the Council of the EU as updated on 4 May 2018, funds may be considered to be made indirectly available to a listed person inter alia if they are made available to a non-listed person that is owned or controlled by a listed person.²⁹

The Court concluded that in the case at hand, for funds to be considered to have been made indirectly available to a listed person, it would have to be established that the Ministry and YOGC were effectively acting in the name, under the control or upon the instructions of listed persons, and that the Ministry and YOGC intended to use the funds in question for the benefit of listed persons.³⁰

In casu, however, the Court found that no evidence had been provided that the Ministry – which represented the legitimate Government of Yemen under the presidency of Mr. Hadi, itself recognized by the international community – would be acting in the name, under the control or upon the instructions of listed persons.³¹ As regards YOGC, while the evidence showed that both the legitimate government and the Houthi rebellion claimed to have control over that company, it was not established that these two branches were working in tandem and that the legitimate government was under the control or acting upon the instructions of the Houthi rebellion.³²

As a result, the Court rejected the Appellants’ claim that the enforcement of the Award would be in breach of international and European sanctions, hence in breach of international public policy.

All other grounds of appeal were dismissed as well, and the Court therefore rejected the appeal.

As far as annulment proceedings filed on grounds of alleged breaches of international public policy are concerned, the decision is instructive in several respects.

First, it clarifies the scope of review of the annulment judge by clearly stating that setting aside is warranted only in cases in which violations of international public policy would result directly from the recognition or enforcement of the award, and that alleged violations of international public policy are therefore to be assessed at the time of the determination by the annulment judge. Hypothetical future violations, reprehensible and consequential as they might be, cannot lead to the annulment of an award. Accordingly, it would be beyond the scope of the Court’s mission to examine whether a party might in the future use, in breach of international public policy (for instance, by carrying out human rights abuses or by violating international humanitarian law), money that it has been awarded in arbitration proceedings. By the same token, only a transfer of money that would be in breach of economic sanctions in place may lead to the annulment of an award on grounds of breach of international public policy.

Second, the Award confirms that human rights and international humanitarian law, as well as international and EU sanctions form part of French international public policy. The decision is consistent with the Court’s ruling in a 2020 judgment, in which it had held that unlike US economic sanctions against Iran, which do not form part of French international public policy, UN and EU sanctions do.³³ Should the recognition or enforcement of an award violate such sanctions, the award might therefore be set aside.

This is crucial information not just for parties and their attorneys at the annulment stage, but also upstream, for parties, counsel and arbitrators during the arbitration proceedings, in particular in the context of proceedings seated in France and in which sanctions invoked by one of the parties are external to the applicable substantive law.

A transaction may well fall within the scope of a given sanctions program and the latter may therefore purport to prohibit the contract’s conclusion or performance even if the applicable substantive law is not the law of the sanctioning state. If a party that is prohibited by a sanctions program from performing a transaction raises, in the context of arbitration proceedings, the existence of such sanctions to escape its contractual obligations, the question arises whether the sanctions at issue ought to be given effect. Depending on the approach taken by arbitrators, sanctions that are external to the applicable law may be regarded as data (i.e. as factual elements) or as foreign overriding mandatory rules (i.e. as legal elements). Either way, knowing that an award that would disregard sanctions in force at the seat of the arbitration would be considered to be in breach of the seat’s international public policy and therefore risk being annulled, is a relevant factor (admittedly among others) at the arbitration stage to determine whether such sanctions ought to be given effect.

The Court’s confirmation, in the present case, that EU sanctions (in addition to UN/international sanctions), including EU autonomous sanctions, form part of French international public policy and that an award that would disregard such sanctions might be set aside in accordance with Article 1520, 5° CCP, is undoubtedly likely to enhance the incentive for arbitrators seated in France, who must be concerned with the efficiency of arbitral awards, to carefully examine the scope of sanctions, including those that are external to the applicable law, and whether they should indeed be given effect.

Third, the Court’s decision shows that even though UN and EU sanctions are deemed to form part of French international public policy, the mere existence of such sanctions and of a risk of breach thereof, at some point in time, is insufficient to warrant an annulment. An award may be set aside only if it is established that sanctions effectively in place prohibit, at the time of the Court’s decision, funds awarded from being transferred to the successful party.

In the case at hand, having acknowledged that UN and EU sanctions were intended to prevent funds from being made available, be it indirectly, to sanctioned individuals and entities, the Court engaged in a detailed analysis to determine whether there was “serious, precise and concordant evidence”³⁴ that the funds awarded would directly or indirectly be made available to such individuals or entities. As the Appellants had failed to establish that either the Ministry or YOGC was in fact acting in the name, under the control or upon the instructions of listed persons, the Court dismissed the claim that the enforcement of the Award would be in breach of UN and EU sanctions, despite evidence that both the legitimate government of Yemen and the Houthi rebels claimed to have control over YOGC.

As confirmed by the Court, it is, today, beyond question that UN and EU sanctions form part of French international public policy and that an award whose recognition or enforcement would breach such sanctions might be set aside. As shown, however, by the Court’s detailed and rigorous analysis of the scope of sanctions in place, the specific terms of each sanctions program and the timing of annulment proceedings are of the essence: an award will only be set aside if its recognition or enforcement is actually in breach (not if it merely risks at some point in time being in breach) of sanctions in place at the time of the decision. This also implies that annulment might be denied even if an award was in conflict with sanctions when it was issued, if the sanctions have effectively been lifted by the time the award is challenged. As the Court pointed out in a 2006 decision, the Court is not the judge of the trial but that of the award and must therefore carry out an extrinsic control to determine if the award’s recognition or enforcement, at the time of the Court’s decision, is in conflict with international public policy.³⁵ In light of this legal framework, the post-award potential impact of economic sanctions might very much differ from that of other, more permanent and immutable, elements of French international public policy.