To arbitrate or not to arbitrate – The pertinent question for non-signatory third parties - France

This piece is the second in a series which explores the key considerations for non-signatory third parties in relation to arbitration agreements. Clyde & Co’s European international arbitration teams have prepared various jurisdictional perspectives on this topic and associate Léonor d'Albiousse covers the position in France.

France is well known for its arbitration-friendly approach. It is in this context that French courts have recognized the possibility of extending an arbitration agreement to non-signatory third parties. Such an extension is permitted when it can be established that the non-signatory had knowledge of the arbitration agreement and implicitly consented to arbitrate potential disputes.

On this basis, the extension of the arbitration agreement has been successful in the context of a group of contracts and where several companies from a same group take part in a complex contractual relationship.

This principle is often referred to as “the group of companies doctrine”. However, as discussed below, the mere existence of a group of companies does not automatically lead to the extension of the arbitration agreement. French courts permit this only when the non-signatory had the relevant knowledge and consent to be bound by the arbitration agreement.

Determining that a non-signatory had knowledge of the arbitration agreement within a group of contracting parties or a group of companies is rarely an issue. As for the implicit consent, French courts have established that it can be presumed from the non signatory third-party’s participation in the negotiation, performance and/or termination of the contract containing the arbitration agreement.  

The consequences of this principle are twofold:

• as a positive, it may allow a claimant to benefit from an arbitration agreement to which it is not a party; and
• as a negative, a non-signatory party may be compelled to arbitrate a dispute even though it is not a party to the underlying arbitration agreement.

The overarching principles

Two basic principles of French law should be kept in mind when considering the extension of the arbitration agreement by or to a non-signatory party:

• firstly, the arbitration agreement is considered as a contract in its own right, and its validity and effect is independent of the underlying contract;[1] and
• secondly, privity of contract provides that any contract,[2] including an arbitration agreement, only binds the parties to that contract.[3]

To some extent, the extension of the arbitration agreement to non-signatories constitutes an exception to the second principle. However, commentators agree that it is justified by the practical necessity of resolving in the same forum all disputes arising out of the same contractual framework and relationship. In particular, it guarantees uniformity of decision-making and avoids multiple parallel proceedings relating to disputes that involve different parties but are nevertheless related.

The French test to extend the arbitration agreement to a non-signatory

Under French law, an arbitration agreement must be considered as a contract in its own right, independent of the contract to which it is attached[4]. Although privity of contract applies to the arbitration agreement, the independent status of the latter has allowed French judges to introduce some exceptions, for practical reasons. As a result, in the event of complex contractual structures, there are instances where the arbitration agreement may extend to a non-signatory party.

As explained in more detail below, the test applied by French courts is twofold:

• firstly, the non-signatory must have some knowledge of the arbitration group. This presumption is rarely at issue within a group of companies;[5] and
• secondly, one must then determine the non-signatory’s implicit intention to be part of the arbitration agreement, which is presumed by the non-signatory’s involvement in the negotiation, performance and/or termination of the underlying contract/ interrelated contract.

The Dow Chemical case is often cited as a reference. In the 1982 Dow Chemical ICC case,[6] the arbitrators extended the arbitration agreement to a subsidiary and a parent company. The award stated that it was the mutual intention of all the parties to be bound by the arbitration agreement, by virtue of the third party’s role in the conclusion, performance, and termination of the contracts containing the arbitration clauses. In this case, the non-signatory company was the supplier of the products ordered under the main contract, and its representatives negotiated and notified the termination of the main contract.

This case is important because the judges have referred to the “economic reality” that constitutes a group of companies to justify the decision to extend the arbitration agreement to a non-signatory company within a group of companies. 

Since then, the French Cour de cassation has repeatedly held that “the effect of the international arbitration clause extends to the parties directly involved in the performance of the contract and the disputes that may arise therefrom.”[7] The Paris Court of Appeal further considered that the arbitration agreement may extend to parties involved in the performance of related obligations resulting from an interrelated contract.[8]

As a result of this principle, the Court of Appeal has also annulled arbitral decisions which denied jurisdiction over non-signatories, even though implied consent could be established.

In the 2008 Abela Foundation case, the Paris Court of Appeal annulled an award in which the arbitral tribunal declined a request to extend the arbitration agreement to non-signatories.[9] The French Cour de cassation confirmed the decision. In this case, the arbitration agreement was included in the company articles and bound the shareholders of a company. The non-signatories were not actually shareholders of the company, but the Court of Appeal found that they had acted as such by entering into a liquidation agreement, which is a formal act normally reserved to actual shareholders. As a result, they were to be bound by the arbitration agreement.

A similar annulment decision was reached in relation to a 2016 arbitration, in which a main contract had been entered into by a company (Avicenna) representing a consortium of investors and two other companies (NECA and EPIC).[10]  Those latter two companies brought a claim against the member companies of the consortium, even though they were not actually signatories to the main contract. The arbitration tribunal declined jurisdiction over the non-signatories after it determined that they did not intend to be bound by the arbitration agreement. In 2018, the Court of Appeal partially annulled the decision of the arbitration tribunal and found that the arbitration should be extended to some of the non-signatories parties who participated in the execution of the main contract pursuant to contractual obligations under an interrelated contract. In practice, an MOU that had been signed to organize the consortium of investors provided that some of the investors would participate in the main contract. The Court of Appeal further noted that the non-signatories had participated in meetings and sent emails and recommendations/instructions to NECA and EPIC.

On this basis, the Court of Appeal does not hesitate to apply the relevant doctrine. Within a group of companies or a group of contracts, one should keep in mind that a party may be subject to an arbitration agreement, even though it has not consented to it.  If a party does not wish to be in this position, it should therefore expressly state that it does not intend to be bound by the arbitration agreement.

This series will continue next week with our third article on the English law perspective and the considerations for non-signatory third parties to arbitration agreements.