The French Supreme Court employs the principle of procedural loyalty to prevent a jurisdictional challenge

In Tagli'apau v Amrest Holdings and al. (Cass. Civ. 1^ère, 9 February 2022, No. 21-11253), the French Supreme Court reversed the decision of the lower courts to decline jurisdiction in favour of arbitration. It did so on the grounds that the jurisdictional challenge was inadmissible because it had been raised by the parties who had refused to pay their share of the ICC's advance on costs, which had caused the withdrawal of the claims from arbitration. This case is an interesting new application of the principle of procedural loyalty which the French courts established in the late 2000s.

Background and decision

In 2011, Tagli'apau SAS (France) entered into a franchise agreement with Pastificio Service SLU (Spain), which included an arbitration clause. Around the same time, Pastificio was acquired by Amrest Holding SE.

The two companies had several disagreements concerning the performance of the franchise agreement. In 2016, Tagli'apau initiated ICC arbitration proceedings against Pastificio seeking to annul the contract and, claiming damages. . Pastificio and Amrest Holding refused to pay their share of the advance on costs and challenged the jurisdiction of the arbitral tribunal. The parties could not agree on the payment of the advance on costs, and Tagli'apau, which had, by then, filed for bankruptcy, could not advance all the costs itself. The ICC therefore considered the claims withdrawn in accordance with its 2012 Rules.

Tagli'apau subsequently seized the local commercial court of its claims, but the court declined jurisdiction in favour of arbitration, as Pastificio and Amrest Holding relied on the arbitration clause and the principle of competence-competence.

Tagli'apau appealed the lower court's decision, arguing that Pastificio and Amrest Holding's jurisdictional challenge was inadmissible because they had waived their right to have claims under the franchise agreement determined by arbitration when they refused to pay their share of the advance on costs. Tagli'apau also argued that Pastificio and Amrest Holding were estopped from relying on the arbitration clause because of their conduct in the arbitration.

The court of appeal found that Pastificio and Amrest Holding's refusal to pay their share of the advance on costs could not be considered as a final waiver of the arbitration agreement and that the test for estoppel was not satisfied The court of appeal also considered that the ICC Rules did not require the respondent to pay their share of the advance and the claimants could pay the entire advance, especially since separate advances can be set for counterclaims. For the court of appeal, the withdrawal of the claims resulting from the failure to pay the advance on costs also did not deprive the arbitration clause of its effect and applicability. Finally, the court of appeal noted that article 36.6 of the ICC Rules provides that a party could challenge such withdrawal, and in any case nothing prevented the parties from reintroducing an arbitration claim at a later stage.

The Supreme Court overturned the decision, finding that the court of appeal had erred in its interpretation of the ICC Rules, which provide that the advance on costs is split equally between the parties, and that the principle of procedural loyalty prevented the respondents from raising jurisdictional objections in this context.

The principle of procedural loyalty in French law

The principle of procedural loyalty is a close parent of the concept of procedural estoppel, and is rooted in the principle of good faith.

It initially focused on administration of evidence issues: in the early 2000s, the Supreme Court firmly started to sanction parties who "disloyally" waited until the last minute to produce evidence which they had had for months. In the following years, French scholars and courts increasingly extended this principle to pleadings in general to condemn inconsistent legal claims, but the doctrine and case law was not in respect of the existence of a general principle of procedural loyalty.

In landmark cases in 2009, 2010 and 2011, the French Supreme Court, adding and broadening its case law, established as a general principle a French estoppel resembling the Anglo-American "estoppel by representation". It prohibits "parties from contradicting themselves to the detriment of others" and is sanctioned by the inadmissibility of the claim (Cass. Ass. Plén. 27 February 2009, No. 07-19.841; Cass. Civ. 1^ère, 3 February 2010, No. 08-21288, Cass. Com., 20 September 2011, No. 10-22888).

In parallel, the principle of procedural loyalty and estoppel was developed through a number of arbitration-related cases:

• the principle of procedural loyalty has consistently been used in the conduct of arbitration cases subject to French law. It is now so well established that it is codified in article 1464, paragraph 3, of the Code of civil procedure, pursuant to which "parties and arbitrators must act expeditiously and loyally in the conduct of the proceedings";
• the landmark case of Golshani (Cass. Civ. 1^ère, 6 July 2006, No. 01-15912) ruled that a party that had participated in arbitral proceedings without any reservations could not subsequently claim that the arbitral tribunal had ruled without a valid arbitration agreement. French courts examining arbitral awards have since consistently rejected grievances concerning the arbitration proceedings that were not first raised during the arbitration;
• a 2010 case stressed the ties between estoppel and procedural loyalty: "[the company] (…) cannot, without contradicting itself to the detriment of the respondent and thus violate the principle of the loyalty of debates (…)" (Cass. Civ. 1^ère, 8 July 2010, No. 09-14280).

Contribution to the principle of procedural loyalty

Although procedural loyalty and estoppel are now established principles in French law, their scope and limits are still being developed. The case at hand is both the continuation of previous cases, and an interesting development for arbitration practitioners and users - the fact that the decision is published in the Supreme Court's official bulletin is an indication that, while not a landmark case, this decision is considered noteworthy.

First, it should be noted that the Supreme Court could have focused its ruling on jurisdictional pleas per se, on the grounds that some of the respondents to the arbitration had initially challenged jurisdiction, and subsequently reversed their position before the French court. However, the Supreme Court instead focused its analysis on the respondent's failure to pay its share of the advance on costs, followed by its reliance on the arbitration clause to object to the court's jurisdiction. In doing so, the Supreme Court has indicated that procedural loyalty is analysed broadly and subjectively: failure to comply with the duty of procedural loyalty may arise from a behaviour which is not, strictly speaking, inconsistent A party may indeed be unable or unwilling to pay an advance on costs without challenging the agreement to arbitrate. Indeed, many arbitrations have proceeded with a claimant bearing the totality of the advance on costs.

This case is a strong signal from the Supreme Court that its case law and favor arbitratem stance and principles must not be used in bad faith. In the present case, the respondents sought to rely on the principle of negative competence-competence, to prevent Tagli'apau from bringing its claims to courts after they had prevented the claims from being heard in the arbitration forum. For Tagli'apau, this would have amounted to denial of justice, which the Supreme Court would not condone.

Accordingly, where the parties have agreed to submit their disputes to arbitration, arbitration shall of course remain the forum of first intent and an arbitral tribunal should be seized first in accordance with the competence-competence principle. However, where a party's conduct appears intended to somehow prevent or obfuscate arbitral proceedings, the French Courts may step in and invoke the principle of procedural loyalty in order to ensure a fair outcome, even if that means hearing the case in a different forum.

For more information, please contact Emily Fox, Of Counsel, Tiphaine Leverrier, Associate, or your usual Herbert Smith Freehills contact.