La Revue Squire

Extending the reach of arbitration clauses


Rédigé par Mark Miller & Stéphanie Robinet-Borgomano le 24 Janvier 2008


On 27 March 2007, the Cour de cassation held , for the first time, as far as we are aware, in favour of the principle of transferring an arbitration clause down a chain of contracts, either “homogeneous” (chain of contracts of a similar nature, eg a succession of sales contracts) or “heterogeneous” (chain of contracts different in nature).

In this case, a complex set of contracts involved many different companies. Alcatel, a French manufacturer of mobile phones worked with the Belgium Company, AME, to manufacture an electronic chip. AME entered into a contract with the American company, Amkor, for the sale of electronic components. An arbitration clause appointing an arbitral tribunal in the USA was inserted into this agreement. Amkor was already bound by another agreement containing an arbitration clause with a Korean manufacturer (of electronic components).

Following certain disagreements, Alcatel and its insurance company issued proceedings before the French Courts against Amkor, its two subsidiaries and Anam Company to obtain damages. The defendants disputed the jurisdiction of the French state court, based on the arbitration clause.

The Cour de cassation had two issues to consider:

1 - the transfer of the arbitration clause down the chain of contracts; and
2- the extension of the application of the arbitration clause.

1 - Transferring the arbitration clause down a chain of contracts

- Previous position

Is an arbitration clause assigning jurisdiction to an arbitral tribunal applicable to the subcontractor, even though he did not negotiate the contract, or have any knowledge of it?

Previous case law used to recognise the validity of the transfer of an arbitration clause down a chain of contracts to the subcontractor, but the transfer was limited to a homogeneous chain of contracts.

Furthermore, the Cour de cassation in the Peavey case protected the subcontractor, notwithstanding the existence of the clause by allowing the subcontractor to dispute its application and validity provided that the subcontractor established he was “reasonably unaware” of this clause.

- The new approach adopted by the Cour de cassation on 27 March 2007

The Peavey case has been extended to all types of chains of contracts (homogeneous or heterogeneous) that transfer an asset. The arbitration clause was deemed to transfer as an ancillary part of the initial contract. In this decision the judges decided to deliberately not apply the exception of “reasonable unawareness”.

The risk is that the subcontractor will no longer be protected against something about which he reasonably and legitimately has no knowledge. The foreseeable nature of the law, especially contract law, is pushed to the limit.

2 - Extending the application of the arbitration clause

In order to facilitate the unencumbered transfer of the arbitration clause, it is possible to extend its application not only to those contracts in the same chain of contracts, but also to parties who did not actually and formally sign any contract forming part of this chain.

- The pragmatic position of the arbitral tribunals

Some arbitral rulings have allowed the extension of an arbitration clause signed by one member of a group of companies to another group company. However, most arbitrators have, on the whole, refused to follow this approach, stating that merely belonging to a group of companies was not sufficient. They instead have based their decisions on the idea of implied or presumed consent to the clause, derived from the participation of the company, in the negotiation, execution or cancellation phase of the contract containing the clause.

This was the approach adopted by the arbitrators in Dow Chemical (ICC Decision n°4131, 1982). Here, the group company had to actively participate in the contract in question, for the arbitrators to agree to extend the effect of the arbitration clause to the said company. This decision is in line with the notion of separate legal identity within a group of companies. It therefore limits the extension of arbitration clauses.

- The new French position is more restrictive than before

Previous French case law used to be more in favour of extending arbitration clauses. Judges used to apply the clause to each group company on the basis of the concept of “economic unity” of the group. This position of the Cour de cassation was very arbitration friendly but did not consider the legal concepts of separate legal personality of each group company.

On 27 March 2007, the Cour de Cassation confirmed the extension of the effect of the clause beyond the signatory parties, taking into account the involvement of the company in the execution of the contract. This new approach is in line with that of some arbitration forums based on the notion of implied consent rather than on an economic unity of the group.

In this recent judgement, the consent of the two subsidiaries is actually almost explicit, considering the fact they were actually both present when the contract was signed.





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