The litigation finance industry has grown rapidly in recent years, including in New York, where a number of major players in this field are based or maintain a substantial presence. In addition to financing new claims, the litigation finance industry has developed a secondary market for the buying and selling of arbitral awards.

Award creditors may face a long and uncertain battle, particularly where enforcement efforts are pursued against sovereign States. For many creditors, a sale-and-assignment transaction can offer an appealing exit strategy (subject, of course, to the need to perform a careful analysis of potential legal obstacles and pitfalls).

The viability of the sale-and-assignment strategy in any given case will depend upon the receptiveness of courts at the place of arbitration, or the place where any award may need to be enforced, to arbitral awards that are no longer “owned” by the original award creditor.

One jurisdiction that is likely to be frequently considered in the context of such analysis is France. A large number of arbitrations are seated in France, where local courts tend to exercise restraint in the context of post-award proceedings.

Two decisions of France's highest court for private law (the Cour de cassation or “Cassation Court”), may, however, be a source of concern to entities interested in acquiring or selling arbitral awards subject to post-award proceedings in France.

In the case of the Democratic Republic of Congo v. FG Hemisphere Associates LLC (1re Ch. civ.), Feb. 28, 2018, n° 16-22.112 and n° 16-22.126), the Cassation Court held that the award debtor, the Democratic Republic of Congo, should have been permitted to petition the lower court, the Paris Court of Appeals, to declare the Democratic Republic of Congo's right to exercise the “retrait litigieux”—a claim extinction procedure—against FG Hemisphere, the award creditor.

The “retrait litigieux”, which is found in Article 1699 of the French Civil Code, enables a debtor to extinguish its debt where the debt has been assigned by the original creditor to a third party. The debt is extinguished if the debtor offers to pay the assignee the same price that the assignee paid to acquire the debt from the original creditor, plus fees, expenses and interest. Under French law, this is an offer that cannot be refused.

The right to make such an offer is available as long as the debt remains, at the time of the exercise of the “retrait litigieux”, contested. For example, subject to applicable law, in the event of an assignment during the pendency of an arbitration proceeding, a party could attempt to exercise the “retrait litigieux” in relation to the debt that is at issue in the arbitration.

Before the FG Hemisphere case reached the Cassation Court, the Paris Court of Appeals had been seized of competing applications for annulment, on the one hand, and recognition and enforcement, on the other hand, in relation to two arbitral awards against the Democratic Republic of Congo (one rendered in France and one rendered in Switzerland). The Paris Court of Appeals deemed the petition inadmissible because the “retrait litigieux” is not one of the grounds upon which French procedural law authorizes the annulment or the denial of enforcement of an international arbitral award.

The Cassation Court overturned the lower court's decision and remanded the case for further proceedings before a new panel of the Paris Court of Appeals, where the case is now pending.

FG Hemisphere acquired the contested arbitral awards by assignment. The awards found the Democratic Republic of Congo liable to a Bosnian company, Energoinvest, for approximately $30 million. FG Hemisphere paid approximately $3.6 million to acquire these awards from Energoinvest.

Thus, if permitted to exercise the “retrait litigieux”, the Democratic Republic of Congo would have had the right to extinguish FG Hemisphere's claim (from the vantage point of French law) for enforcement of the $30 million award by paying FG Hemisphere $3.6 million (plus interest and expenses).

The FG Hemisphere case law can be read as requiring French courts to make available the “retrait litigieux” whenever an assignment has occurred in relation to an award that is brought before the French courts in the context of annulment or recognition and enforcement proceedings.

Those who have entered into sale-and-assignment transactions related to awards subject to post-award proceedings in France should carefully consider their positions. Looking forward, parties seeking support in connection with the enforcement of arbitral awards may wish to consider a more traditional third-party funding structure (i.e., one in which the original creditor retains title while agreeing to share a portion of any future proceeds with the investor).

It will be interesting to learn how the FG Hemisphere case is resolved by the Paris Court of Appeals on remand (a decision should issue at the end of this year or in early 2020).

Aren Goldsmith and Guillaume de Rancourt, members of the New York and Paris Bars, practice in the international arbitration group of Cleary Gottlieb Steen & Hamilton, and are based in Paris.