Decision of the French Supreme Court on the binding nature of escalation clauses under French law

Businesses may seek to avoid court or arbitration proceedings for various reasons, including the risk of irreparable damage to business relationships, the lack of certainty inherent in legal action and, obviously, costs. This aversion has contributed to the development of alternative dispute resolution mechanisms and it is now relatively common for parties to provide for escalation clauses before initiating proceedings before courts or arbitral tribunals.

On 12 December 2014, the French Supreme Court added to its case law on this type of clauses. The Court is adamant: under French law, conciliation clauses are not a mere formality. They are binding on the parties and claimants who fail to comply with them will see their claims dismissed with no examination on the merits.

  1. Failure to comply with an escalation clause renders legal action inadmissible

The French Supreme Court, on 14 February 2003, had already ruled that a commitment to negotiate before initiating court proceedings is a binding commitment that parties must respect. Should a party initiate proceedings without carrying out prior negotiation or conciliation pursuant to their contract, its claims will be inadmissible.1 Yet, this does not prevent this party from re-filing its claim after meeting its conciliation obligations, provided that it is still in a position to do so. Particular attention should be paid to statutes of limitation and the applicable limitation period.

The claims will be deemed inadmissible if (i) the conciliation phase has not been completed and (ii) the court considers that the parties did intend for this phase to take place prior to litigation and to be mandatory. If the parties disagree on the meaning of the relevant clause, the court will look at their intention at the time of the signing of the contract, namely, it will examine the wording of the clause

  2. Compliance with the escalation clause after an action before the courts has been initiated is without effect

The 12 December 2014 decision has added to the Court's case law on escalation clauses. The case involved a claimant who had taken legal action without meeting pre-litigation requirements and subsequently attempted to comply with the alternative dispute resolution mechanism found in the contract before the court had time to issue its decision.

The French Supreme Court confirmed the Court of Appeal's decision, concluding that it was not possible for the claimant to cure the procedural defect caused by rushing to go to court. It thus confirmed that a ruling of inadmissibility made against claims filed in disregard for an escalation clause cannot be remedied after the fact.

In essence, the French Supreme Court merely enforced a binding contractual commitment and stated the obvious: if a requirement is compulsory by virtue of a contract and must be met before legal action can be taken, once the court has been seized, it is too late to validly meet this requirement.

The Court's determination is both justified by law and, from a practical point of view, entirely sensible if the door is truly to be left open to the possibility of amicable settlement between the parties at the time when it is the most relevant, i.e., before the courts are involved.

   3. Take away points from the decision of 12 December 2014

The key considerations from this decision are as follows:

• the French Supreme Court confirmed its position that escalation clauses must be complied with, failing which claims will be declared inadmissible;
• non-compliance with an escalation clause cannot be cured after an action before a court or an arbitral tribunal has been initiated; and
• special care should be given to the drafting of escalation clauses as they will delay the parties' right to initiate proceedings in case a dispute arises.

Multi-tiered clauses (or escalation clauses) are becoming more and more popular in domestic and international transactions, especially when parties contemplate submitting disputes arising out of their contract to arbitration. Under these clauses a the parties agree first to resolve amicably – or at least try to – a dispute before going to arbitration. The idea is to “freeze” a situation and to take the time to negotiate, with or without the help of a third party, prior to the commencement of adversarial, time-consuming and costly arbitration proceedings. This French Supreme Court decision highlights again the need to pay special attention to these clauses, particularly regarding the level of detail in drafting them, as this may have an impact on the admissibility of claims made before an arbitral tribunal.

For further information, please contact Clement Dupoirier, Partner, Gregory Travaini, Associate or your usual Herbert Smith Freehills contact.

Footnote

(1) Cass. Ch. Mixte, 14 February 2003, no. 00-19.423 – "in the presence of a contractual clause providing for a compulsory conciliation phase to be carried out prior to litigation and during which the applicable limitation period is suspended, any court consulted by the parties must find their claims inadmissible." The same position was taken in later French Supreme Court cases (Com. 17 June 2003; Civ. 1ère, 30 October 2007; Civ. 1ère, 9 November 2006).