Arbitration costs in France: from funding to their allocation

This is the second article in Clyde & Co’s latest international arbitration series covering the topic of costs in international arbitration. In this piece, Jurist Dilara Khamitova and intern Maxime Delabarre from our Paris office have considered the legal perspective from France.

Funding arbitration proceedings

Issues related to costs may arise at the outset of the arbitration proceedings when payment of a filing fee and advances on costs are required. Individuals and commercial entities facing financial difficulties increasingly turn to third-party funders for support in pursuing or defending their arbitration proceedings.

While French law does not specifically regulate third-party funding, the Paris Bar Council has adopted a resolution confirming that third-party funding is a positive development for access to justice in international arbitration and does not contravene French law.[1] Accordingly, classic contract law principles apply to third-party funding agreements in France. Under Article 11(7) of the 2021 ICC Arbitration Rules, parties are now required to disclose to the ICC Secretariat, the arbitral tribunal, and the other parties to the proceedings, the existence of third-party funding, in order to "assist prospective arbitrators and arbitrators in complying with their duties of impartiality and independence under Articles 11(2) and 11(3)”.

Advance on costs of an impecunious party

Certain parties in international arbitration sometimes use non-payment of advances on costs as a dilatory tactic to deter the other party from pursuing their claims.  The question then arises as to whether an allegedly impecunious party may be excused from participating in the arbitration proceedings and further sabotage the court proceedings by relying on the arbitration agreement.

These issues were the subject of much debate before the French courts in 2022. The French Supreme Court (Cour de cassation) held that the impecuniosity of a party does not render the relevant arbitration clause manifestly unenforceable.  However, the party's failure to pay the advance on costs precludes it from relying on the  arbitration agreement if it then  challenges the jurisdiction of French courts.

In two decisions rendered in 2022,[2] the Cour de cassation held that the principle of procedural loyalty (loyauté procédurale, which has its roots in the principle of good faith and is similar to the concept of procedural estoppel) governs the parties to an arbitration agreement, including where one of them is allegedly impecunious. The Carrefour Proximité France decision rendered on 28 September 2022 reveals that the principle of loyalty is a two-way street involving loyalty on the claimant's part to try to bring the case before the arbitral tribunal in accordance with the arbitration agreement, but also loyalty on the respondent's part to ensure that the arbitration can take place.[3] Hence, the impecunious claimant needs to demonstrate a genuine attempt to commence the arbitration, whereas an impecunious respondent (where it has refused to pay an advance on costs and the claimant has refused to pay both shares of the advance), needs to be ready to submit the proceedings to the jurisdiction of the French courts.

Allocation of costs

Although there are no specific rules under French law regulating the allocation of costs in arbitration, two principles are generally observed in practice.

First, the parties to an arbitration agreement are free to agree the terms and conditions of the allocation of costs, including by reference to specific arbitration rules. For example, under Article 38(5) of the 2021 ICC Arbitration Rules, arbitrators have a broad discretion when awarding costs and may take into account "such circumstances as [they consider] relevant, including the extent to which each party has conducted the arbitration in an expeditious and cost-effective manner."  Hence, the allocation of costs can be used as a tool discouraging unreasonable behaviour such as “excessive document requests, excessive legal argument, excessive cross-examination, dilatory tactics, exaggerated claims, failure to comply with procedural orders, unjustified applications for interim relief, and unjustified failure to comply with the procedural timetable”.[4]

The second principle, which reinforces the first one, is that under French law an arbitral tribunal has a wide discretionary power, including with regard to their decision on the allocation of costs between arbitrating parties. Hence, the ‘costs follow the event’ principle is commonly applied in practice, and in an arbitration seated in France, the tribunal may order a losing party to reimburse all or part of the fees of the opposing counsel.

This approach to discretionary power, which stems from the judicial power of arbitral tribunals and is inherent to their mission, echoes French procedural law.  Article 700 of the Code of Civil Procedure (CCP) allows the judge to order the non-prevailing party to pay some or all of the legal costs of the successful party. That said, this ability is strictly confined by "equity and the financial situation of the unsuccessful party".

This procedural rule may become relevant when one considers the option of pursuing annulment proceedings before the French courts. In cases when annulment requests were rejected, which is in about 75-89% of cases according to different estimations, winning parties were on average granted 58% of the legal costs they sought to recover, amounting to 63,000 euros.[5] At the same time, there are cases where the Paris Court of Appeal has awarded 600,000 euros covering legal costs of respondents in the setting aside proceedings.[6] 

Security for costs

Under Article 28(1) of the ICC Arbitration Rules, a tribunal may grant "any interim or conservatory measures it deems appropriate", including an order for security for costs.

Under Article 1468 of the CCP,[7] tribunals may order interim or conservatory measures, including security for costs, even when the parties have not expressly granted that prerogative to the tribunal. However, parties may withhold this power from the tribunal.[8] The possibility of making an application for interim measures before French courts may also be excluded by the parties.[9]

There has been a debate as to whether an order for interim measures rendered by an arbitral tribunal does in fact qualify as an award, which has consequences regarding the control that a French court may exert and its powers of enforcement. In the Sardisud case, French courts famously held that a tribunal’s decision may only qualify as an award if it “definitively rules upon, in whole or in part, the dispute submitted […], whether on the merits, on jurisdiction or on a procedural ground which leads them to terminate the proceedings.”[10] In the 2011 Tabet case, the Cour de Cassation refused to characterize an order rendered by the arbitrators as an award since it did not “definitively [settle] … the dispute.”[11]

Accordingly, orders for security for costs may not be recognized as "awards" and be readily enforceable by French courts. For example, a decision from an arbitral tribunal to order the deposit of a sum of money has been denied the characterization of an award.[12]