International arbitration agreement: what effects for the parties, judges and third parties?

Signing an arbitration agreement, whether as a discreet clause in a lengthy contract or as a dedicated agreement after a dispute has arisen, is far from a trivial act. This commitment profoundly alters the legal landscape for the parties and can even have repercussions for players who were not initially around the negotiating table. So what are the practical consequences of this choice for the private settlement of international disputes? How does the arbitration agreement interact with state courts? Can it be extended to third parties, and what happens when the State itself is a party to the contract? This article examines the major effects of international arbitration agreements.

The main effect: eliminating state courts

The first, and undoubtedly most fundamental, effect of the arbitration agreement is to oblige the signatory parties to submit their dispute to an arbitral tribunal, and correlatively, to waive the right to bring their case before the courts of the State. This is the very heart of the arbitration undertaking: choosing private rather than public justice.

French law draws the logical conclusions from this commitment. Article 1448 of the Code of Civil Procedure provides that when a dispute arising under an arbitration agreement is brought before a state court, the latter must declare that it has no jurisdiction if one of the parties so requests. In principle, the court does not have to examine the validity or applicability of the arbitration agreement; it must simply note its existence and refer the parties to arbitration.

There is, however, one important exception: the national court may refuse to decline jurisdiction if the arbitration agreement invoked is clearly none or clearly inapplicable. The word "manifestly" is essential here. It means that the nullity or inapplicability must be obvious, without requiring an in-depth analysis of the facts or the law. If the issue is merely doubtful or requires detailed examination, the judge must refer the case back to the arbitrators. This restrictive approach is intended to protect the effectiveness of arbitration and to discourage dilatory manoeuvres consisting of challenging the clause before the state judge in order to delay the arbitration proceedings.

This rule is closely linked to the principle of "Competence-CompetenceThis principle is enshrined in French law in article 1465 of the Code of Civil Procedure (applicable internationally via article 1506). This principle has two facets:

1. The positive effect: The arbitral tribunal has the power to rule on its own jurisdiction. It is primarily responsible for examining disputes relating to the existence, validity or scope of the arbitration agreement.
2. The negative effect : The national court, seised of a dispute covered by an arbitration agreement (which is not manifestly null and void or inapplicable), must declare that it does not have jurisdiction and allow the arbitrator first to examine his own jurisdiction. The state court's review of the arbitrator's jurisdiction will only take place, if at all, after the fact, in the event of an appeal against the arbitration award.

In some legal systems, in particular common law, the parties can ask the state court for information about their rights. anti-suit injunctions to prevent the other party from bringing an action before a court (foreign or domestic) in breach of the arbitration agreement. This practice is viewed with reluctance in France and within the European Union, as it is considered to undermine the jurisdiction of the courts seized and the principle of mutual trust.

Managing complexity: multi-party arbitration

International commercial disputes are rarely straightforward and frequently involve more than two parties. Think of major construction projects (owner, contractor, subcontractors, suppliers), chains of sales contracts or complex financing operations. If each contract contains a separate arbitration clause, there is a risk that the proceedings will be fragmented: several parallel arbitrations, potentially concerning the same facts, with multiplied costs and, above all, the risk of contradictory decisions.

How does arbitration deal with this complexity? The classic mechanisms used in legal disputes, such as warranty calls or forced intervention by a third party, cannot be transposed as they stand to arbitration, because arbitration is based on the consent of the parties. A party cannot be forced to take part in an arbitration if it has not consented to it. The French Court of Cassation has clearly stated that the existence of an arbitration agreement between certain parties prevents them from being forced to appear before a state court seised by another party, even on the grounds that the disputes are related or indivisible.

The solution therefore lies mainly in contractual anticipation:

• Multiparty arbitration clauses : It is possible to draft specific clauses in the various contracts relating to the same transaction, providing, for example, for the consolidation of future arbitration proceedings before a single tribunal, or mechanisms for appointing arbitrators adapted to a multi-party situation.
• The importance of equality : A major point of vigilance is respect for the principle of equality of the parties in the constitution of the arbitral tribunal. A clause giving a structural advantage to one group of parties over another in the appointment of arbitrators could be considered contrary to public policy and lead to the constitution of the tribunal being irregular (case law Dutco).

Arbitration institutions play an essential role here. Many rules (ICC, LCIA, HKIAC, etc.) now contain provisions allowing, under certain conditions (agreement of the parties, links between the cases, same arbitration agreement or compatible agreements), the consolidation of several pending arbitration proceedings or the intervention of a consenting third party in an existing arbitration. The choice of institutional arbitration can thus offer procedural solutions for effectively managing multi-party disputes.

Can the arbitration agreement be binding on non-signatories?

The basic principle of contract law is that of relative effect: a contract creates obligations only between the parties who have signed it. Arbitration agreements are no exception to this rule. In principle, only the signatories are bound by the commitment to arbitrate.

However, international business practice and the complexity of contractual arrangements have led French case law, which is particularly liberal in this area, to accept that, in certain circumstances, the effects of the arbitration agreement may be extended to persons or companies who have not formally signed it. This extension remains exceptional and is based essentially on the search for an implicit will or direct involvement.

The main recognised cases of extension or transmission are :

• Company groups : A parent company or another company in the group, although not a signatory, may be bound by an arbitration clause signed by a subsidiary if it was directly involved in the negotiation, performance or termination of the main contract, and if the circumstances establish that it was aware of the clause and consented, even implicitly, to be bound. The analysis is made on a case-by-case basis, examining the economic reality and the behaviour of the companies.
• Chains of contracts transferring ownership : In a succession of sales or contracts of enterprise relating to the same thing, the case law considers that the arbitration clause is transmitted with the contractual action in warranty or liability, which is itself an accessory to the right of ownership transmitted. This means that the clause signed by the original seller may be invoked against (or may be relied upon by) the sub-purchaser, unless the sub-purchaser proves that it was reasonably unaware of its existence (case law Alcatel).
• Assignment of contract or claim : The assignee of the contract or claim is also bound by the arbitration clause attached to it.
• Subrogation : The insurer subrogated to the rights of its insured is bound by the arbitration agreement signed by the latter.

On the other hand, transfer is generally excluded for guarantors (such as sureties), unless they have expressed their acceptance of the arbitration clause contained in the main guaranteed contract in one way or another. This is because the guarantee is considered to be a separate contract.

The State and public entities faced with international arbitration

The question of whether a State or public entity can validly enter into an arbitration agreement has long been debated. While French domestic law establishes a principle of prohibition (article 2060 of the Civil Code), case law has established a different solution for international arbitration.

Since the Galakis (1966), it is accepted that a legal person governed by public law, whether French or foreign, may validly enter into an arbitration agreement provided that it relates to an international contract entered into for the purposes of and under conditions customary in international trade. The mere international nature of the economic transaction is sufficient to set aside the prohibition of principle in domestic law.

This capacity to compromise has a major consequence: by accepting arbitration, the State or public entity implicitly but certainly renounces its jurisdictional immunity. He can no longer invoke this immunity to escape the jurisdiction of the arbitral tribunal.

The question ofimmunity from execution is more complex. Immunity from execution protects the assets of a foreign state from seizure on French territory. This immunity is not absolute. It may be waived:

• If the seized assets are specifically assigned to an economic or commercial activity governed by private law that is the source of the claim established by the award.
• If the State has waived its immunity from execution. Recent case law requires a waiver express (Civ. 1ère, 13 May 2015), abandoning a previous requirement for "special" renunciation (targeting specific assets). Legislative developments ("Sapin 2" bill at the time of the sources of the PDF, now law) may have reintroduced stricter conditions for certain property, particularly diplomatic property, requiring prior judicial authorisation.

Finally, theemanation sometimes allows an award against a State to be enforced against the assets of a separate public entity (public company, agency, etc.). To do this, it must be shown that the entity has no real autonomy from the State and that their assets and liabilities merge, which is strictly assessed by the courts.

Arbitration and international conventions

Although international conventions do not directly govern the entire arbitration procedure, some contain key provisions on the effects of the arbitration agreement itself.

• La 1958 New York ConventionThe Convention on the Recognition and Enforcement of Foreign Arbitral Awards, although mainly focused on the recognition and enforcement of awards, requires Contracting States to recognise the validity of written arbitration agreements (Art. II.1) and to oblige their courts to refer parties to arbitration if they are seised of a dispute covered by such an agreement, unless the agreement is "null and void, inoperative or incapable of being performed" (Art. II.3). It also contains rules on the capacity and validity of the agreement as part of the review of grounds for refusal of enforcement (Art. V).
• La 1961 European Geneva Convention (less widely ratified) also confirms the capacity of legal persons governed by public law to compromise (Art. II.1) and the principle of competence-competence (Art. V.3).

These agreements strengthen the effectiveness of the arbitration agreement on the international stage.

In conclusion, an international arbitration agreement has powerful legal effects. It confers jurisdiction on arbitrators while, in principle, precluding the jurisdiction of state courts, and may, under certain conditions defined by constructive case law, bind parties beyond the initial signatories, including state entities.

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The effects of an arbitration agreement often extend beyond the circle of initial signatories. Anticipating these consequences is essential. Our firm can help you analyse the scope of your commitments and defend your interests.

Sources

• Code of Civil Procedure (in particular articles 1448, 1455, 1465, 1505, 1506, 1520, 2060)
• New York Convention on the Recognition and Enforcement of Foreign Arbitral Awards (1958) (in particular Articles II, V, VII)
• European Convention on International Commercial Arbitration (Geneva, 1961) (in particular Articles II, V, VI, VII)
• Key case law (listed by way of illustration: Cass. Civ. 1ère, 2 May 1966, GalakisCass. civ. 1ère, January 7, 1992, DutcoCass. Civ. 1ère, March 27, 2007, Alcatel)