Dispute escalation provisions and International Arbitration

This is the first article in Clyde & Co’s latest international arbitration series covering dispute escalation provisions and pre-action ahead of commencing international arbitration across various European jurisdictions. In this piece, associate Sophie Bayrou from our Paris office provides the French legal perspective.

It is a well-known fact that France is a favourable forum for arbitration. This supportive environment extends to other alternative dispute resolution mechanisms as well, as French law strongly encourages parties to resolve their disputes amicably before submitting it to a court or an arbitral tribunal. In fact, in some civil and commercial matters it is even mandatory for parties to attempt to settle their dispute amicably before referring a claim to a French court, and failure to do so results in the claim being inadmissible.[1]

It is against this backdrop that clauses requiring parties to take certain steps before submitting their disputes to litigation or arbitration offer several advantages from a commercial and procedural point of view. An “escalation clause”, also known as a “multi-tiered dispute resolution” clause, is a contractual provision establishing a dispute resolution mechanism on a staged basis. This clause may take different forms but, in general, it requires contracting parties to comply with two obligations when a dispute arises: (i) an “obligation to do”, (“obligation de faire”) i.e., to attempt to reach an amicable resolution through negotiations or use of a third party (expert, conciliator, mediator, dispute board, etc.); and (ii) an “obligation not to do” (“obligation de ne pas faire”), i.e., not to bring the dispute before a judge or an arbitral tribunal before complying with the clause through an amicable settlement process. However, an escalation clause does not impose a performance obligation (“obligation de résultat”) on the parties. In other words, they are not required to compromise or to reach a specific settlement agreement. Attempting to resolve the dispute amicably is enough.[2]

The use of escalation clauses is governed by an evolving legal framework under French law, meaning that careful consideration must be given to the effects of such clauses and care must be taken when drafting them.

The validity of escalation clauses under French law

The French Supreme Court (Cour de cassation) recognised the validity of escalation clauses in the Poiré v. Tripier decision of 14 February 2003. In that case it ruled that the clause containing an obligation to carry out prior negotiation or conciliation before formally starting a dispute is mandatory, and therefore the judge must rule the claim inadmissible if there was no prior attempt at amicable settlement.[3]

Subsequent court decisions have attempted to build up a legal framework around these clauses.

To be enforceable, an escalation clause must be express and precise

If an escalation clause is to be enforceable, it must expressly provide for a mandatory (not an optional) amicable settlement process.[4] In a decision dated 6 May 2003, the French Supreme Court ruled that an escalation clause must be expressly provided for in a contract and cannot, for example, be inferred from model contracts commonly used in a specific trade or profession.[5] In a further decision, dated 6 February 2007, the French Supreme Court upheld an appeal decision which ruled that a clause is not a true escalation clause if it only provides for an obligation for the parties to consult with each other about whether they want to refer their dispute to arbitration, instead of a compulsory preliminary conciliation procedure. Therefore, non-compliance would not result in the inadmissibility of the claimant’s action.[6]

Courts also require an escalation clause to be drafted in a precise manner for its application to be effective, although French case law is not entirely clear on this point. In a decision dated 29 April 2014, the Commercial chamber of the French Supreme Court required the parties to specify in the clause the escalation procedure to be followed, failing which such clause would not be deemed applicable.[7] This solution was confirmed in a decision dated 3 October 2018, in which the same Commercial chamber of the French Supreme Court considered that an escalation clause failing to appoint a mediator directly or to specify, at least, the details of her or his appointment, could not be actioned.[8] However, there were two subsequent decisions by different chambers of the French Supreme Court (the Third Civil chamber[9] and the Social chamber[10]) that appear to have departed from the position of the Commercial chamber by upholding the inadmissibility of the claim brought by a party who did not comply with the disputed escalation clause, even though such clause did not specify how the compulsory preliminary conciliation procedure was to take place. Nevertheless, in a decision dated 11 July 2019, the Third Civil chamber appears to have come into line with the position of the Commercial chamber, ruling that an escalation clause, drafted in “an elliptical manner and in general terms”, does not constitute a valid escalation clause.[11]

Scope of an escalation clause

An escalation clause applies only to disputes covered by its wording, which the French Supreme Court can interpret strictly. For instance, the French Supreme Court has ruled that an escalation clause whose application was limited to disputes relating to the termination of a specific contract would not apply to a tort action based on Article 442-6 I, 5° of the French Commercial Code relating to the brutal termination of established commercial relationship between the parties.[12]

Survival of an escalation clause

In the event of the termination of a contract, Article 1230 of the French Civil Code states that “termination does not affect clauses relating to the settlement of disputes, nor those intended to be effective even in the event of termination, such as confidentiality and non-competition clauses”. Termination therefore does not affect escalation clauses. The French Civil Code is silent on whether an escalation clause survives in the event of the nullity of the contract. However, that would be logical, given Article 1447 of the French Civil Code, which provides for the independence and the survival of an arbitration clause in these circumstances.[13]

Effects and sanction

Non-compliance with escalation clause in domestic proceedings

Since the Poiré v. Tripier decision mentioned above, failure to comply with an escalation clause is sanctioned by the dismissal of the proceedings, which are deemed inadmissible. This plea of inadmissibility or “fin de non-recevoir”[14] can be invoked by the party even for the first time on appeal[15] and, unlike in other jurisdictions,[16] may not be regularised during the proceedings.[17] However, the party which has refused to participate in the mediation prior to the start of the proceedings may not invoke the plea of inadmissibility.[18]

It should be noted that the dismissal of the proceedings in the event of a failure to comply with an escalation clause only applies to actions on the merits before the domestic courts and not to actions brought before an interim relief judge (‘juge des référés’)[19] since the provisional nature of the interim decisions does not affect the merits of the dispute.[20]

There is uncertainty as to whether such an escalation obligation also applies to civil enforcement procedures. Although the First Civil chamber of the French Supreme Court upheld the application of escalation clause to “any legal proceedings, whatever their nature” including to the enforcement of the attachment of a property,[21] the Second Civil chamber took the opposite view when it ruled that an escalation clause, in the absence of an express provision to that effect, cannot prevent the performance of enforcement measures.[22]

Counterclaims are not subject to the application of an escalation clause, unless expressly provided for in the clause.[23]

The activation of an escalation clause suspends the limitation period. Indeed, according to article 2238, 1st paragraph of the French Civil Code, “the limitation period is suspended from the day when, after a dispute has arisen, the parties agree to have recourse to mediation or conciliation …”. The suspension begins from the day a letter was sent to the conciliator[24] or from the day of the first conciliation meeting, according to legal scholars.[25] However, a simple negotiation, even if conducted in good faith, or an informal mediation, will most likely not stop the limitation period from running.

Non-compliance with escalation clause in arbitral proceedings

National courts and arbitral tribunals have reached a variety of inconsistent results in addressing issues related to escalation clauses.[26] A claim that a party has failed to comply with contractual pre-arbitration requirements can be considered as (a) a “jurisdictional” defence (an arbitral tribunal does not have authority until the pre-arbitration procedural requirements have been complied with), (b) an “admissibility” defence (the arbitration agreement provides jurisdiction, but does not permit assertion of substantive claims until after specified requirements have been satisfied), or (c) a “procedural” requirement (the pre-arbitration requirements merely concern the procedural conduct of the dispute resolution mechanism, but do not affect either the tribunal’s jurisdiction or the parties’ substantive rights). [27]

The relevant chamber of the Paris Court of Appeal dedicated to arbitration matters[28] has ruled several times that the failure to comply with an escalation clause goes to the admissibility of claims before the arbitral tribunal, not its jurisdiction, and therefore is not subject to the review of the French judge in charge of setting aside arbitral awards under article 1520 of the French Civil Procedure Code.[29]

Can the disgruntled party seek damages?

Unless the parties have provided for the payment of liquidated damages in the contract in case of a breach of escalation clause (which does not seem to be very common in France), it will be difficult for a claimant to prove, before the judge or an arbitral tribunal, the loss caused by their opponent’s failure to comply with the escalation clause. Certain legal scholars have suggested that specific performance such as the award of a fine (“astreinte”) until compliance by the defaulting party with the escalation clause may be considered.[30]

Practical implications

Escalation clauses need careful drafting to be commercially useful and enforceable. As explained above, since French case law is not entirely clear as to how escalation clauses should be applied, contracting parties in France should keep in mind the following points when drafting escalation clause and to strictly follow the established procedure when enforcing their claims:

  • State explicitly the mandatory nature of the amicable settlement process;
  • Define widely the scope of the clause;[31]
  • Consider providing for the consequences of non-compliance (e.g., express prohibition of referral of the claim to a court or an arbitral tribunal to ensure that the disputed clause will be qualified as an escalation clause, provide for liquidated damages, etc.);
  • Set a time-limit for the amicable process;
  • Define the specific requirements as to negotiations between the parties (e.g., meetings between senior managers of the parties);
  • Identify specific rules of mediation or a particular dispute resolution institution, and in case of ad hoc procedure, the terms of appointment of the mediator/conciliator. Helpfully, the ICC provides on its website a model mediation clause which can be used prior to arbitration or other proceedings. [32]
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