• The Validity of Unilateral “Hybrid Jurisdiction” Clauses Has Become Less Certain Under French Law
  • December 4, 2012
  • Law Firm: Norton Rose Canada LLP - Montreal Office
  • Unilateral hybrid jurisdiction clauses, or option clauses, are dispute resolution clauses granting to one contracting party the ability to choose between several jurisdictions before which an action may be brought to resolve disputes arising under the contract; while granting the other contracting party only the ability to bring an action before a single jurisdiction.

    Such clauses have become increasingly standard in international financing agreements. A typical clause will specify that the courts of one jurisdiction (typically the same jurisdiction as that of the law governing the contract) will have exclusive jurisdiction to resolve any disputes, but then provide that such exclusivity is stipulated solely for the benefit of financing parties, who may, should they wish, bring an action against the borrower before any other court with competent jurisdiction.1 The purpose of such clauses is to protect the financing parties from being sued by a recalcitrant borrower before the “home courts” of the borrower’s domicile, while granting the financing parties the flexibility of bringing an action against the borrower before the jurisdiction in which the speediest relief may be obtained. The validity of such clauses is thus critical.

    In a highly publicised decision dated 26 September 20122, the French Cour de Cassation (the highest court for civil, commercial and criminal matters) held that a unilateral hybrid jurisdiction clause was null and void on the ground that it was “potestative” and contrary to the purpose of EU Regulation 44/2001 (the Regulation).3

    Mrs. X, a French national residing in Spain, opened a bank account at the Luxembourg based private bank Edmond de Rothschild Europe (the Bank) through the intermediation of a finance company affiliated with the Bank and based in Paris (the Intermediary). Following an alleged decline in the financial performance of her investments, she brought an action for damages against both the Bank and the Intermediary before the Paris courts.

    The defendants challenged the jurisdiction of the Paris courts relying on the following jurisdiction clause:

    Potential disputes between the client and the Bank shall be subject to the exclusive jurisdiction of the Courts of Luxembourg. In the event the Bank does not rely on such jurisdiction the Bank reserves the right to bring an action before the Courts of the client’s domicile or any other court of competent jurisdiction.”4

    The argument of the defendants was that this clause was entirely compatible with Article 23 of the Regulation, paragraph 1 of which reads as follows:

    If the parties, one or more of whom is domiciled in a Member State, have agreed that a court or the courts of a Member State are to have jurisdiction to settle any disputes which have arisen or which may arise in connection with a particular legal relationship, that court or those courts shall have jurisdiction. Such jurisdiction shall be exclusive unless the parties have agreed otherwise.

    However, the trial court did not agree with this analysis, and on 18 October 2011, the Paris Court of Appeal held such jurisdiction clause to be null and void (non écrite) on the ground that, although the Regulation permits a contractual clause which give one party an option to choose between jurisdictions, such a clause may not allow one party to have “discretion to select whatever jurisdiction it wishes”.5

    On 26 September 2012, the Cour de Cassation upheld the Court of appeal’s decision, holding that: “in pointing out that the clause, by reserving the Bank’s right to bring an action in Mrs X’s place of domicile or ‘in any other court of competent jurisdiction’, only restricted Mrs X, who was the only party obligated to commence proceedings in Luxembourg, the Court of Appeal correctly determined that the clause was potestative in nature, for the benefit of the Bank, and therefore was contrary to the objectives and the finality of the extension of jurisdiction provided for in Article 23 of the 44/2001 European Regulation”.

    The decision of the Cour de Cassation was not based on exactly the same reasoning as that of the Cour of Appeal (which had emphasised the total discretion which the contractual clause gave to the Bank to bring an action before any court whatsoever with competence), but rather relied on its interpretation of the contractual clause as being “potestative in nature”.

    This emphasis on the concept of “potestative” nature is quite surprising. Generally speaking, the concept of “caractère potestatif” is used in French law to describe a situation in which performance of a contract is made subject to occurrence of a condition precedent which it is entirely within the power of one only of the contracting parties to cause to occur or to prevent.6 For example, if performance by a purchaser of goods under a contract is stated to be subject to a condition that the purchaser not decide to buy the same products from another supplier, such condition is “potestative” because it is entirely within the power of the purchaser to decide whether or not to purchase the contractual goods from an alternative source.

    An obligation that is made subject to such a condition potestative is, under the French Civil Code, null and void.7 However, it is not immediately apparent that this principle can be applied to a contractual clause under which both parties submit to the jurisdiction of a particular court (in this case, Luxembourg) and one party only is also provided with the further option of choosing to bring an action before other courts which would ordinarily also have competence. In such case, there are no “obligations” which are subject to a condition potestative, since the obligation of each party to submit the jurisdiction of the contractually chosen court (Luxembourg) is not subject to any condition whatsoever, while the ability of one party to bring actions before any court which would otherwise have lawful jurisdiction over the other party does not impose any obligation on such other party (or at least not one which it would not otherwise have as a matter of law).

    This decision therefore seems to represent a significant departure from the rare decisions of the Cour de Cassation which have previously considered the issue8, and the initial reaction of the learned legal commentary (doctrine) has been to speculate that under the ruling of the court, unilateral hybrid jurisdiction clauses are no longer valid under French law.9 For the moment, and pending further developments, it is not entirely certain whether it was actually the intention of the court to invalidate all unilateral hybrid jurisdiction clauses; indeed, this would be quite surprising since article 23 of the Regulation expressly provides that a choice of jurisdiction “shall be exclusive unless the parties have agreed otherwise”; thus recognising the right for the parties to provide for non-exclusive choice of jurisdiction agreements.10

    It is possible that the emphasis placed by the Cour de Cassation on the fact that the clause granted the Bank the right to bring an action “in any other court of competent jurisdiction” (echoing the Paris. Court of Appeal’s emphasis on the full discretion granted to the Bank “to select whatever jurisdiction it wishes”) can be read as prohibiting only an unlimited choice of potential jurisdictions granted to the Bank, and that the Court would have ruled differently had the additional choice been circumscribed to a limited number of precisely defined jurisdictions (for example, the domicile of the investor).

    Such reasoning has previously been applied by French courts, in decisions which upheld the validity of unilateral hybrid jurisdiction clauses where the choice of jurisdiction granted to one party only was limited to one or several clearly identified national courts or arbitral tribunals (see, e.g., Cass. Civ. 15 May 1974 (n° 72-1406); Paris Court of appeal, 28 October 2010 (n° 10/12534); Grenoble Court of appeal, 28 October 1998; Lyon Court of appeal, 26 January 1996).11

    This interpretation is further supported by the fact that the Cour de Cassation based its disapproval of the clause on the objectives of article 23 of the Regulation, that is the autonomy of the parties to a contract but also the predictability of the rules of jurisdiction. Unilateral hybrid jurisdiction clauses leaving an unlimited choice of jurisdiction to the full discretion of one party are obviously unpredictable. The motivation behind the Cour de Cassation’s decision might thus have been to force the parties to draft clear and limited unilateral hybrid jurisdiction clauses. If this is the case, then a hybrid jurisdiction clause which delineated clearly before which additional court(s) a party could bring an action against the other party would not be invalidated under the court’s reasoning.

    Until further clarification by the Cour de Cassation as to the scope of its decision, jurisdiction clauses in French law contracts should thus be drafted with an increased attention. The following points may be borne in mind:

    • Parties may wish to consider continuing to use a unilateral hybrid jurisdiction clause but, as mentioned above, limiting the ability of the more favoured party to bring actions outside of the chosen jurisdiction to one or more specifically identified jurisdictions rather than to any other competent court. The validity of such clauses seems justified in light of prior decisions of the French courts, although given the currently unsettled state of the law this is not entirely without risk.

    • Exclusive jurisdiction clauses (i.e., clauses in which both parties agree that only one court will have jurisdiction to hear any actions) are unaffected by the ruling of the Cour de Cassation and remain valid. Such clauses are, for example, specifically authorised under Article 23 of the Regulation. In this respect, it should be noted that the conclusion of an exclusive jurisdiction clause does not prevent a party from bringing an action for provisional and protective measures such as seizure/arrest of assets12 or, naturally, from enforcing security granted over an asset pursuant to a separate security agreement subject to its own governing law and jurisdiction clauses. Nor will an exclusive jurisdiction clause prevent a party which has obtained a favourable judgement before the court which has been granted such jurisdiction from bringing an action in another country to enforce such judgement.

    • Bilateral (rather than unilateral) non-exclusive jurisdiction clauses (i.e., in which each party agrees that a certain court will have jurisdiction but that actions may also be brought before any other court with jurisdiction) are also specifically authorised under Article 23 of the Regulation.


    Footnotes

    1. Typically the clause will go on to say that the financing parties may, to the extent permitted by law, bring proceedings concurrently in more than one jurisdiction.

    2. Cass. civ (1ère chambre) 26 September 2012, n° 11-26.022.
    3. Council Regulation (EC) No 44/2001 of 22 December 2000 on jurisdiction and the recognition and enforcement of judgments in civil and commercial matters.
    4. Original French: “Les relations entre la banque et le client sont soumises au droit luxembourgeois. Les litiges éventuels entre le client et la banque seront soumis à la juridiction exclusive des tribunaux de Luxembourg. La banque se réserve toutefois le droit d’agir au domicile du client ou devant tout autre tribunal compétent à défaut de l’élection de juridiction qui précède.”
    5. Original French : « il n’autorise pas une clause à abandonner à une partie le choix d’une quelconque juridiction à sa discrétion » (Cour d’Appel de Paris, 18 October 2011, N° de RG: 11/03572). The facts of the case as outlined by the Court of Appeals are quite revealing: the plaintiff’s sole dealings were with the Intermediary in France, and the hybrid jurisdiction clause was contained in a document which was supplied by the Intermediary: the transaction in question thus had significant connections with France in addition to the nationality of the plaintiff. However, the decision of the Cour de Cassation did not reiterate such facts. Note that the Court of Appeals decision did not refer to the doctrine of “caractère potestative” in its decision; this doctrine was referred to only in the decision of the Cour de Cassation.
    6. French Civil Code, art. 1170.
    7. French Civil Code, art. 1174.
    8. See for example Cass. Com. 15 May 1974 (n° pourvoi 72-17406) and 4 December 1990 (n° pourvoi 89-16047).
    9. See e.g. Cédric Tahri, Illicéité d’une clause attributive de juridiction purement potestative, Dalloz Actualités 15 October 2012.
    10. Article 17 §5 of the 27 September 1968 Brussels convention on jurisdiction and the enforcement of judgments in civil and commercial matters (1968 Brussels’ Convention) expressly provided that an agreement may confer jurisdiction “for the benefit of only one of the parties”, thus recognizing the validity of unilateral hybrid jurisdiction clauses. This article was replaced by the article 23 of the Regulation, which does not include this specific provision on unilateral choice of jurisdiction clauses. The authorisation granted by the article 23 of 44/2001 European Regulation to provide for non-exclusive choice of jurisdiction agreements remains, however, sufficiently wide to include both multilateral and unilateral choice of jurisdiction clauses.
    11. Conversely, the French courts have deemed null and void clauses granting full discretion to choose non-identified jurisdictions to one party either because they are considered potestatives (Aix-en-Provence Court of appeal, 11 October 2007; Rouen Court of appeal, 17 January 1991) or because such clause could lead to a fraud aimed at impeding the good administration of justice (Paris Court of appeal, 5 July 1989) or because a jurisdiction clause must be clear enough to allow the parties to identify the chosen jurisdictions (Rennes Court of appeal, 26 September 1990).
    12. Regulation, art. 31: “Application may be made to the courts of a Member State for such provisional, including protective, measures as may be available under the law of that State, even if, under this Regulation, the courts of another Member State have jurisdiction as to the substance of the matter.”