Introduction
Facts
Lower court decisions
Supreme Court decision
Comment
On June 12 2013 the French Supreme Court upheld the validity and enforceability of a bilateral option clause which gave both parties the option to resolve their dispute either by way of arbitration or through domestic courts.(1) The court held that such a clause was valid since both parties were given the option. However, the court considered that reference to an arbitral institution was not sufficient to characterise the arbitration option as a binding arbitration agreement that would prevent domestic courts from asserting jurisdiction. Rather, the court viewed the reference to an arbitral institution as a mere indication of the arbitration rules to be followed in the event that the two parties decided to resort to arbitration. As a result, the court upheld the jurisdiction of the Paris Commercial Court as the forum originally chosen by one of the parties.
While this decision clarifies the French Supreme Court's position regarding bilateral option clauses, it raises concerns as to the validity of sole option clauses.
On July 31 2006 M-Real Alizay (MRA) purchased a piece of equipment from Thermodyn. The price estimate sent by Thermodyn to MRA made reference to Thermodyn's general terms and conditions, which contained a dispute resolution clause that, in relevant part, read:(2)
"Any dispute arising out of or in connection with this contract, including any question regarding its existence, validity or termination will be settled in accordance with this article, and if possible by way of negotiation between the parties. If the dispute cannot be settled by way of negotiation, each party may, after sending a written notice to the other party, submit the dispute to a meeting of the board of directors' representatives of each party, which shall take place within twenty (20) days upon notification. If the dispute is not resolved within thirty (30) days after such meeting or after any other date agreed upon by the parties, each party will have the opportunity to resort to arbitration or to initiate proceedings before the courts of the place of the buyer's place of business. The dispute shall be submitted and finally settled under the rules of the London Court of International Arbitration (LCIA), which are deemed incorporated into this Article by reference."
When MRA accepted Thermodyn's price estimate, MRA made reference to its own general terms and conditions, which contained a choice of jurisdiction clause in favour of the Paris Commercial Court.
Following claims that the equipment was defective, MRA sued Thermodyn for damages before the Paris Commercial Court. Thermodyn challenged the jurisdiction of the Paris Commercial Court and argued that its general terms and conditions prevailed and contained a valid and binding arbitration agreement.
On November 10 2011 the Paris Commercial Court declined jurisdiction on the basis of a prima facie valid arbitration agreement.(3)
MRA lodged an appeal before the Paris Court of Appeal arguing, among other things, that the Paris Commercial Court had misread the dispute resolution clause contained in Thermodyn's general terms. MRA asserted that it contained no binding arbitration agreement per se, but rather a multi-tiered, bilateral option clause with a non-mandatory arbitration alternative.
On May 23 2012 the Paris Court of Appeal ruled in favour of MRA.(4) It held that rather than agreeing to an arbitration agreement per se, the parties had consented to a multi-tiered dispute resolution clause with two rounds of negotiations, failing which the parties had the option to resort to arbitration or to seize the courts of the buyer's place of business. The court held that the reference to the rules of the London Court of International Arbitration did not change the fact that the arbitration alternative was "purely optional" and could be chosen only after the parties had failed to resolve the dispute through negotiation. Therefore, the Paris Court of Appeal concluded that no prima facie arbitration agreement could be invoked to argue against the Paris Commercial Court's jurisdiction. It thus overruled the Paris Commercial Court's decision, finding that the commercial court had jurisdiction.
Thermodyn appealed the decision before the Supreme Court.
On June 12 2013 the Supreme Court upheld the Paris Court of Appeal's decision confirming that the Paris Commercial Court had jurisdiction. The Supreme Court held that the disputed clause did not compel the parties to submit their dispute to arbitration since, as noted by the court of appeal:
- it provided for two alternatives (resorting to arbitration or seizing the domestic courts of the buyer's place of business);
- such options were available to both parties; and
- the reference to the rules of an arbitral institution did not change the fact that the arbitration alternative was purely optional.
Is a bilateral option clause a binding arbitration clause?
Bilateral or multi-lateral option clauses are dispute resolution agreements that either set out a default forum or give the parties the option to choose an alternative forum to which disputes can be referred. These option clauses are becoming more frequent in international commercial contracts and, in particular, in project financing.
A similar clause was upheld in England in Westfal-larsen & Co A/S v Ikerigi Compania Naviera SA.(5) In France, Thermodyn confirms an older Supreme Court decision in SA Sicaly v Grasso Stacon Koninklijke. In SA Siccaly, the court upheld the validity of option clauses under French law.(6)
However, in Thermodyn, the Supreme Court held that the disputed bilateral option clause – which gave the option to resort to arbitration, but did not compel the parties to submit their dispute to arbitration – could not be considered a binding arbitration agreement per se. Article 1442 of the Code of Civil Procedure provides that "an arbitration clause is an agreement whereby the parties to a contract commit themselves to refer to arbitration the disputes that their contract may give rise to". In Thermodyn, the court considered that resorting to arbitration was "purely optional". In its view, the references to an arbitral institution were not enough to find that the parties had committed themselves to arbitration. In strict application of Article 1442, the court thus concluded that the disputed bilateral option clause was not a binding arbitration agreement. This decision is consistent with previous case law and, in particular, with an October 30 2006 decision in which the Supreme Court refused to consider that a clause which provided that the parties had to consult with each other before submitting their dispute to arbitration was a binding arbitration agreement.(7)
Having concluded that no arbitration agreement compelled the parties to submit their dispute to arbitration, the court found that the Paris Commercial Court did not have to decline jurisdiction. The defendant in Thermodyn had invoked the competence-competence principle, which provides for the arbitrators' power to rule on their own jurisdiction.(8) This principle embodies the corollary that courts should refrain from examining the arbitrators' jurisdiction before the arbitrators themselves have had an opportunity to do so; this is known as the 'negative effect of the principle of competence-competence'.
While the decision of the court not to admit the competence-competence claims should be applauded as it ensured efficiency and good administration of justice, this does not mean that the rule of priority in favour of arbitrators will never apply where there is an option clause. The competence-competence principle is likely to apply when one of the parties opts for arbitration. This means that if Thermodyn had initiated arbitration under the London Court of International Arbitration Rules before MRA commenced proceedings before the Paris Commercial Court, the court would have had to decline jurisdiction.
Are sole option clauses still valid?
While this decision clarifies the French Supreme Court's position regarding bilateral option clauses, it raises concerns as to the validity of sole option clauses. Under a sole option clause, only one of the parties to the agreement has the option to initiate court litigation or arbitration, notwithstanding that the parties have otherwise agreed that disputes between them will, as a default, be resolved through one of those modes of dispute resolution. Sole option clauses are often a feature of contracts where there is an asymmetry of bargaining power between the parties. They are most commonly a feature of loan agreements where the lender (usually a bank) can – as its sole option – commence proceedings in court, notwithstanding an arbitration agreement. They are also regularly found in charterparty agreements, construction contracts and tenancy agreements.
Some authors have wondered whether this recent decision will affect the validity of sole option clauses,(9) even though they have been upheld in the past. For example, in 1974, the French Supreme Court held that a sole option clause was not contrary to French public policy or to any of the international treaties to which France was a signatory.(10) Thermodyn raises concerns as to the validity of sole option clauses because, when the court upheld the disputed bilateral option clause, it noted that the clause provided for an option "available to both parties". According to some authors, the reference to availability to both parties suggests that a sole option clause which reserves the option to only one of the parties to the agreement will be invalid.(11)
These concerns have been fed by another Supreme Court decision, dated September 26 2012, where the court held – on the basis of questionable reasoning – that a unilateral dispute resolution clause that gave one party the option to seize "any court having jurisdiction", while the other party was bound to seize only one specific court, should be set aside on the grounds that it violated Article 23 of EU Regulation 44/2001 on jurisdiction and the recognition and enforcement of judgments in civil and commercial matters.(12) The court refused to give effect to such a clause because it considered the clause to be 'potestative', meaning that the clause – in granting a discretionary right to only one of the parties to choose "any other court of competent jurisdiction" – gave that party entire discretion and control over the choice of jurisdiction, which rendered the terms unenforceable due to a lack of mutuality of obligations.(13)
Another author also queried whether sole option clauses could violate the principle of equality between the parties, which emerged as a fundamental principle of international arbitration since the Supreme Court's decision Dutco.(14) The author suggested that a party to an agreement could, on the basis of such principle of equality, claim that it was entitled to the same choice of jurisdiction as its counterpart.(15)
However, one might also suggest that the French Supreme Court's position regarding the validity of sole option clauses is unlikely to change. The existence and efficiency of arbitration agreements are to be assessed based on the common intention of the parties to refer their dispute to arbitration, regardless of the content of any domestic law applicable to the arbitration clause, except for the French mandatory rules and international public policy provisions.(16) French courts have consistently adopted a very liberal stance towards the prima facie validity of arbitration clauses, as long as it can be demonstrated that the parties consented to arbitration.
Importance of clear and unequivocal wording
By highlighting that the clause provided for only two alternatives, the Supreme Court seems to suggest that bilateral option clauses are valid as long as they provide for a limited range of options. In practice, bilateral option clauses governed by French law, or where French courts could have jurisdiction, should limit the number of alternatives offered to each party and set out alternatives as clearly as possible. In sum, although the Supreme Court confirmed that bilateral option clauses are valid and enforceable, care must be taken in drafting such clauses, as complexity may bring ambiguity and render the clause void.
For further information on this topic please contact Elie Kleiman or Julie Spinelli at Freshfields Bruckhaus Deringer LLP by telephone (+33 1 44 56 44 56), fax (+33 1 44 56 44 00) or email ([email protected] or [email protected]).The Freshfields Bruckhaus Deringer LLP website can be accessed at www.freshfields.com.
Endnotes
(1) Cass Civ 1, June 12 2013, [2013] I Bull Civ, 121.
(2) Translation from the original:
"Tous les différends, provenant du présent contrat ou en rapport avec celui-ci, y compris toutes les questions concernant son existence, sa validité, ou sa résiliation seront réglés par cet article, et si possible par négociation entre les parties. Si un différend ne peut être réglé par le biais de ces négociations, chacune des parties peut, après notification par écrit, soumettre le différend à une réunion de représentants de la Direction de chaque partie devant se tenir dans les vingt (20) jours après la notification. Si le différend n'est pas réglé dans les trente (30) jours après la réunion ou toute autre date que les parties ont déterminé, chaque partie pourra choisir de recourir à l'arbitrage ou à une action devant la cour du lieu du siège de l'acheteur. Le différend devra être soumis et réglé de façon définitive par le règlement d'arbitrage de la London Court of International Arbitration (LCIA), qui est intégré dans cet Article par référence. "
(3) Paris Commercial Court, November 10 2011, RG 2010-090193.
(4) Paris Court of Appeal, May 23 2012, Sté Thermodyn v StéM-Real Alizay, 11/21520. Thermodyn did not challenge the fact that Paris was not the court of the buyer's place of business, but only that its terms and conditions contained an arbitration agreement. See J Barbet, note under Cass Civ 1, June 12 2013, (2013) 4 Rev Arb, p 1012.
(5) Westfal-Larsen & Co A /S v Ikerigi Compania Naviera SE; The Messianiki Bergen [1983] 1 All ER 382.
(6) Cass Civ 1, May 15 1974, SA Sicaly v Grasso Stacon Koninklijke March Fabrieken NV, [1974] I Bull Civ, 143; see also Angers Court of Appeal, 25 September 1972, (1973) Rev arb, 164.
(7) Cass Civ 1, October 30 2006, [2006] I Bull Civ, 441.
(8) Article 1448 of the Code of Civil Procedure provides that domestic courts must decline jurisdiction in favour of arbitration, unless the arbitration agreement is manifestly void or inapplicable.
(9) See E Loquin, "La confirmation de la validité des clauses d'arbitrage optionnelles bilatérales", (2013) RTD Com, p 478, L Weiller, "Compétence du juge étatique en présence d'une clause de résolution des litiges complexe", (2013) 8 Procédures, p 20, R Libchaber, "Retour sur les clauses alternatives, attributives de juridiction" (2013) 4 Revue des contrats, p 1376.
(10) Cass Civ 1, May 15 1974, SA Sicaly v Grasso Stacon Koninklijke March Fabrieken NV, [1974] I Bull Civ, 143; see also Angers Court of Appeal, September 25 1972, (1973) Rev arb, 164.
(11) See E Loquin, "La confirmation de la validité des clauses d'arbitrage optionnelles bilatérales", (2013) RTD Com, p 478, L Weiller, "Compétence du juge étatique en présence d'une clause de résolution des litiges complexe", (2013) 8 Procédures, p 20, R Libchaber, "Retour sur les clauses alternatives, attributives de juridiction" (2013) 4 Revue des contrats, p 1376.
(12) Cass Civ 1, September 26 2012, [2012] I Bull Civ 176.
(13) J Klein, RDC 2013, p 565.
(14) Cass Civ 1, 7 January 1992, [1992] I Bull Civ, 2.
(15) E Loquin, "La confirmation de la validité des clauses d'arbitrage optionnelles bilatérales", (2013) RTD Com, p 478.
