France and the unilateral jurisdiction clause

Banking and finance disputes review

Publication November 2015


Introduction

A unilateral jurisdiction clause, also known as an asymmetrical jurisdiction clause or a one-sided jurisdiction clause, provides that one party must sue the other party in the courts of a specified country while the other party remains free to sue the first one in the jurisdiction of its choice. These clauses are very common in financial agreements where they generally provide that the borrower can only sue the lenders in a specific country while the lenders can sue the borrower in that country or in any other country which has jurisdiction over the dispute.

A unilateral jurisdiction clause is therefore an advantage given to the lenders since they may only be sued by the borrowers in their home jurisdiction whereas they can start proceedings against the borrowers in any country which will accept jurisdiction. In particular, this enables the lenders to take action against the borrower wherever its assets are located, in order to facilitate enforcement.

French Supreme Court and unilateral jurisdiction clauses: part 1

On 26 September 2012, in its decision Mme X v Banque Privée Edmond de Rothschild, the Cour de cassation, the French Supreme Court, decided that unilateral jurisdiction clauses are invalid both under the French civil code and the Brussels I Regulation (Regulation No 44/2001, the “Regulation”: note that this has now been replaced by Regulation No 1215/2012, the “Recast Regulation”, but the reasoning in Rothschild should apply also to the Recast Regulation). The Regulation is the principal source of law on jurisdiction for EU Member States. This decision was widely reported and criticized.

Rothschild concerned a jurisdiction clause in an investment management agreement between a Spanish client domiciled in France and a Luxembourg bank which gave the Luxembourg courts exclusive jurisdiction but which also gave the bank the right to bring actions against the client in the jurisdiction of the client and any other courts with jurisdiction. The French Cour de cassation held that the jurisdiction clause was null and void on the grounds that it was “potestative” (see below) and contrary to the purpose of the then applicable provisions of the Regulation.

According to article 1170 of the French Civil Code:

“A potestative condition is one which makes the execution of the agreement depend upon an event that one or the other of the contracting parties has the power to bring about or to prevent.”

Article 1174 of the same Code adds:

“Any obligation is null when it has been contracted subject to a potestative condition on the part of the party who binds himself.”

There appear to be a number of problems with the reasoning of the Cour de cassation. First, these Articles apply to contractual obligations – such as performance, payment, transfer of ownership – but it appears doubtful that they apply to jurisdiction clauses. Furthermore, even if they do apply to jurisdiction clauses, the ‘party who binds himself’ is the party who is bound to take action only in a specific jurisdiction and accordingly the “potestative” condition is not undertaken by him but by the other party to the contract.

Second, the Cour de cassation should have rendered its decision only under the Regulation and not under domestic French law. And it is difficult to see why a unilateral jurisdiction clause should be seen as contradicting the purpose of the Regulation.  On the contrary, the Court of Justice of the European Community held in 1986 that jurisdiction clauses conferring a benefit on one party are valid (Anterist v. Crédit Lyonnais (Case 22/85)).

There was some hope that this decision was motivated by its particular fact pattern: the claimant was an individual French person pursuing a claim against an international bank which actually had used its French affiliate to negotiate the contract but was now seeking to take advantage of a jurisdiction clause to restrain proceedings in France. Many commentators argued that the effect would be limited to such situations.

These hopes have been somewhat dashed by a new case decided by the Cour de cassation.

French Supreme Court and unilateral jurisdiction clauses: part 2

On 15 March 2015, the French Supreme Court held that a unilateral jurisdiction clause entered into between a French company and a Swiss bank was invalid under the Lugano Convention (which is substantially the same in relevant respects to the Regulation and the Recast Regulation).

Unlike Rothschild, the 2015 case involves a more traditional set of financing arrangements between a French corporate borrower and Crédit Suisse, with an on-demand guarantee issued by Société Générale. The credit agreements contained a market-standard jurisdiction clause giving exclusive jurisdiction to the Zurich courts but providing that Crédit Suisse could bring actions against the borrower before any other competent court. Crédit Suisse raised a jurisdictional objection to an action brought against it by the borrower in the French courts, on the basis of the unilateral jurisdiction clause, which Crédit Suisse argued was consistent with the provisions of the Lugano Convention. This objection was sustained by the lower court but, on appeal, the Cour de cassation reversed the result.

The Cour de cassation held that the lower court reached its conclusion without considering whether the imbalance criticized by the borrower – namely, that the clause granted the bank the right to bring proceedings before “any other competent tribunal” but did not specify the objective basis on which this alternative jurisdiction was founded – was contrary to the objectives of foreseeability and legal certainty underpinning the Lugano Convention. Interestingly, the Cour de cassation (probably well aware of the criticism of its earlier decision) made no mention of the “potestative” principle in its decision, despite the argument having been made by the appellant. Instead it focused on: (i) the absence of objective criteria setting out the basis for any alternative jurisdiction, and (ii) the fact that the unbalanced nature of unilateral jurisdiction clauses was, in its view, contrary to the aims of the Lugano Convention. Therefore, the Cour de cassation overturned the decision of the Court of Appeal.

Once again, the reasoning of the Cour de cassation, even if based only on the article 23 of the Lugano Convention without reference to French law and particularly to the “potestative” condition, is difficult to understand. On the face of it, unilateral jurisdiction clauses do not appear to be contrary to the object and purpose of the Lugano Convention (or the Regulation). In fact, the decision of the Cour de cassation seems to result from philosophical and sociological rather than purely legal considerations. It considered that the weaker party must be protected and therefore a clause which gave an advantage to a bank – which is seen by the Cour de cassation as the stronger party – must be rendered null and void.

French Supreme Court and unilateral jurisdiction clauses: part 3

On 7 October 2015, the Cour de cassation rendered yet another decision on unilateral jurisdiction clauses, holding this time that a particular unilateral jurisdiction clause was not contrary to the Regulation.

In this case, Apple Sales Ltd (“Apple”), an Irish company in the Apple Computers group, signed an agreement with a French reseller containing the following clause:

This Agreement and the corresponding relationship between the parties shall be governed by and construed in accordance with the laws of the Republic of Ireland and the parties shall submit to the jurisdiction of the courts of the Republic of Ireland. Apple reserves the right to institute proceedings against Reseller in the courts having jurisdiction in the place where Reseller has its seat or in any jurisdiction where harm to Apple is occurring.”

When the reseller brought an action against Apple alleging anticompetitive practices before the French commercial court, Apple argued that this was in violation of the jurisdiction clause and requested that the French court decline jurisdiction. Unsurprisingly, the reseller made the argument that the clause was “potestative” and that it should be disregarded, meaning that under ordinary jurisdiction principles, the reseller was entitled to bring an action in France, where the harm to the reseller occurred.

The Cour de Cassation held that the jurisdiction clause permitted the identification of jurisdictions before which an action could be brought with respect to the performance of the contract, and therefore complied with the requirement of predictability with which jurisdiction clauses must comply. The Court made no mention whatsoever of the “potestative” nature of the clause.

This is a favourable development which suggests that these clauses may be upheld in France if drafted appropriately. However, the jurisdiction clause was more limited than the usual “you can sue me only before my home court but I can sue you wherever I find a court that will accept jurisdiction” type clause often found in international contracts. Apple’s right to sue the reseller was limited to the courts of the reseller’s corporate seat (in this case France) or “any jurisdiction where harm to Apple is occurring”. This limitation may be what enabled the Cour de Cassation to determine that the clause “permitted the identification of jurisdictions before which an action could be brought with respect to the performance of the contract” and so was sufficiently predictable.

Conclusion

Financial institutions can mitigate the legal risk by using a clause that specifically sets out all the jurisdictions in which they have the right to sue the other party. This avoids the criticism of uncertainty which was the main argument used by the Cour de cassation. Another alternative, if it is commercially practicable, is to use a hybrid arbitration clause rather than a unilateral jurisdiction clause – these clauses have previously been upheld by the Cour de cassation.

The Recast Regulation did not take the opportunity to remove this uncertainty – if anything, it has increased it. One change in the Recast Regulation is that a jurisdiction clause must meet not only the formal requirements of the Regulation but also that it must be valid under the law of the Member State whose courts have been designated by the parties. Therefore, applying this new rule, a court undertakes a multi-stage process. First, it must determine whether the jurisdiction clause is valid under the Recast Regulation. Then it must determine what law governs the jurisdiction clause. And then, having decided the governing law, it must then decide whether the clause is valid according to that governing law. This new approach may increase the risk of nullity of a unilateral jurisdiction clause.

Clearly, prudence must now be the order of the day in France as far as unilateral jurisdiction clauses are concerned. Any party to a contract with a connection to France must be aware of the fragility of such clauses. Such a connection would include any party to the contract being domiciled in France or any obligations under the contract being performed in France.


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