Applying an arbitration clause to a third party
(French Court of Cassation, 1st Civil Division, 26th October 2011, No. 10-17.708)
In a ruling of October 26th, 2011, the First Civil Division of the Court of Cassation ruled on whether an arbitration clause included in a contract entered into between the prime contractor and the first-tier subcontractor could be extended to a lower-tier subcontractor.
A firm which were commissioned to build two yachts had subcontracted the painting work to a firm governed by Swedish law, which had in turn subcontracted the work to a firm governed by German law.
Under the first subcontracting agreement, an arbitration clause provided that for any disputes were to be referred to an arbitration tribunal governed by the rules of the Association Française d’Arbitrage (French Arbitration Association).
In the subcontracting agreement entered into between the Swedish firm and the German firm, a clause stipulated that the contractual conditions applicable between them were the same as those provided for between the prime contractor and the first-tier subcontractor.
A dispute between all three parties raised the issue of whether the arbitration clause was binding upon the second-tier subcontractor.
Upholding the competence of the national judge, the Court of Appeal ruled that if the second-tier subcontractor had been aware of the arbitration clause, that clause should have been expressly accepted, in the form of initialling or signing on the initial contract in order for it to be binding upon that subcontractor.
The Court of Cassation quashed that ruling, in view of Article 1493 of the French Code de Procédure Civile and laid down the principle whereby the effect of an international arbitration clause stipulated in the initial contract, extends to the subcontractor, who was made aware of that clause on signing their own contract, and who is directly involved in performing the first contract.