The Paris Court of Appeal has once more ruled on the recurring – but still controversial – question of the extension of the arbitration agreement to non-signatories.
An arbitration agreement is, in principle, only binding on signatory parties and its scope does not extend to third parties. Nevertheless, the French courts have long accepted that a third party may be brought into arbitration proceedings when its involvement in the performance of a contract is such that it can be considered as a party to the arbitration agreement included in that contract.
When determining whether to extend the ratione personae scope of an arbitration agreement, the French courts tend to fluctuate between subjective and objective approaches. While under a subjective approach the non-signatory's implicit consent remains the cornerstone of the extension, the objective approach is typically satisfied insofar as the third party's involvement in the contract can be demonstrated as a matter of fact.
In its 23 November 2021 decision the International Chamber of the Paris Court of Appeal appeared inclined to overcome this distinction, which some consider artificial.
In 2006, Kuwait Gulf Link Ports International (KGL), a Kuwait-incorporated company specialised in transport and logistics, entered into a 40-year concession agreement with the Egyptian state-owned entity Damietta Port Authority, to design, build, finance and operate a new container terminal in the Damietta port in Egypt.
For this project, KGL created Damietta International Ports Company SAE (DIPCO), a standalone subsidiary. On 13 April 2007, DIPCO signed a procurement agreement with South Korean company Doosan Company for Heavy Industries and Constructions (Doosan) for the supply of 22 container gantry cranes (the supply agreement).
Significant delays on the container terminal project led to the termination of the 40-year concession agreement by ministerial decree in 2015. As a result, DIPCO was unable to take delivery of or pay for the cranes that Doosan had manufactured. In 2016, Doosan terminated the supply agreement and initiated International Chamber of Commerce (ICC) arbitration proceedings against both DIPCO and KGL.
On 15 January 2018, a Paris-seated arbitral tribunal upheld jurisdiction over KGL – which was not a party to the supply agreement between Doosan and DIPCO containing the arbitration clause – and ordered DIPCO and KGL to pay $75 million in damages.
The arbitral tribunal considered that the arbitration agreement was binding on KGL, because KGL had:
- played a pivotal role in the negotiation of the Supply Agreement;(1)
- been directly involved in its performance;(2) and
- actively participated in settlement discussions.(3)
On 15 October 2018, DIPCO and KGL initiated proceedings before the Paris Court of Appeal to set aside the award pursuant to article 1520(1) of the French Code of Civil Procedure, on the ground that the arbitral tribunal had wrongly upheld its jurisdiction. DIPCO and KGL argued that:
- KGL's role had been that of a "representative" of DIPCO;
- KGL had not been a party to the supply agreement;
- there had been no arbitration agreement between KGL and Doosan; and
- KGL had not consented to the arbitration agreement.
On 23 November 2021, the International Chamber of the Paris Court of Appeal upheld the arbitral tribunal's decision.
After a detailed examination of the factual circumstances of the case, it concluded that "KGL had a significant and decisive role in the negotiation and monitoring of the [supply agreement], directly involving it in its performance and the disputes arising out of it" and that these circumstances "demonstrate its knowledge and implicit consent to the arbitration agreement".(4)
Applicable standard of review
In its 23 November 2021 decision, the Paris Court of Appeal first recalled that in assessing the alleged lack of jurisdiction of an arbitral tribunal, it had to conduct a full review of the facts and law.(5) Under this long-standing rule,(6) the French courts enjoy wide discretion to assess all relevant factual and legal circumstances, without being bound by the arbitral tribunal's findings.
However, the Paris Court of Appeal went on to rely extensively on the arbitral tribunal's reasoning when assessing the circumstances of the case, referring to the award on no less than six occasions. This is unusual practice for French courts. Future decisions will tell whether this should be read as the start of a new trend, whereby the Paris Court of Appeal will follow more closely the findings of arbitral tribunals and incorporate them into its own reasoning.
Provided this does not restrict the French courts' ability to perform their own analysis of circumstances surrounding jurisdiction, increased reliance on the tribunal's (factual and legal) findings may reduce the risk of divergent solutions, which would be a welcome development.
Applicable law to the issue of extension
Under French law, arbitration agreements are governed by specific substantive rules, which the French courts apply in the absence of a choice of law governing the arbitration agreement, irrespective of the law of the seat of arbitration.(7) Using this methodology, the French courts only look into the parties' common intention when assessing the existence, validity and scope of arbitration agreements, without referring to the law that would be applicable under a conflict-of-law approach.(8) Importantly, parties are free to exclude the application of French substantive rules to the question of the extension of the arbitration agreement (even if their arbitration is seated in France), by specifying the law that should apply to the arbitration agreement.
Applicable standard to the issue of extension
The standard applicable to the extension agreement was first elaborated in a seminal Dow Chemical ruling in 1983.(9) The Paris Court of Appeal applied a subjective approach, based on the research of the third party's implicit consent. It considered that the arbitration agreement could be:
extended to parties directly involved in the performance of the contract . . . provided it is established that their contractual situation, their activities and the normal commercial relations existing between the parties allow to presume that they have accepted the arbitration clause, the existence and scope of which they were aware of.(10)
The French courts followed the Dow Chemical approach until a landmark ABS ruling in 2007, in which the French Court of Cassation adopted a more objective approach. It agreed to extend the arbitration agreement to "parties that were directly involved in the performance of the contract",(11) without reference to the acceptance and knowledge of the arbitration clause.
Since then, French case law has fluctuated between these objective and subjective approaches.(12)
In the case at hand, the Paris Court of Appeal relied on both ABS and Dow Chemical, citing both decisions one after the other.(13) This elicits the following observations.
Firstly, this is not the first time the Paris Court of Appeal has slightly moved away from ABS. In several cases, it has reverted to requiring both involvement in the performance of the contract and knowledge of the arbitration agreement.(14)
Secondly, the reference to the Dow Chemical ruling was in line with recent decisions.(15) This suggests that the third party's (implicit) consent to the arbitration agreement remains a relevant condition to the extension.
Thirdly, by relying explicitly on both ABS and Dow Chemical successively (allegedly for the first time), the Paris Court of Appeal appears inclined to do away with the distinction between the objective and subjective approaches. If followed, this would be a welcomed confirmation that:
- determining whether to extend an arbitration agreement is essentially a fact-based exercise; and
- the relevant areas of inquiry are:
- the involvement in the performance of the contract, from which implicit consent to the arbitration agreement may be derived; and
- knowledge of the arbitration agreement.
This would finally settle French case law on this issue and provide clarity to parties, their counsel and commentators as to the applicable criteria for extension.
For further information on this topic please contact Alexandra van der Meulen or Quentin Herruel at Freshfields Bruckhaus Deringer by telephone (+33 1 44 56 44 56) or email ([email protected] or [email protected]). The Freshfields Bruckhaus Deringer LLP website can be accessed at www.freshfields.com.
Gaspard Fiévet, trainee, assisted with the preparation of this article.
(1) ICC Case No. 21880/ZF/AYZ, Doosan Heavy Industries & Construction Co, LTD v Damietta International Port Company SAE and Kuwait Gulf Link Ports International, final award, 15 January 2018, paras 99-108.
(4) Paris Court of Appeal, 23 November 2021, No. 18/22323, paras 40 and 41.
(5) Paris Court of Appeal, 23 November 2021, No. 18/22323, para 23.
(6) See Cass civ 1, 6 January 1987, rev arb 1987, p 469, note P Leboulanger; JDI 1987, p 638, note B Goldman.
(7) See, on this issue, E Gaillard, "Les vertus de la méthode des règles matérielles appliquées à la convention d'arbitrage (les enseignements de l'affaire Kout Food)", rev arb 2020, p 701.
(8) Cass civ 1, 20 December 1993, No. 91-16.828, Dalico.
(9) Paris Court of Appeal, 21 October 1983, Dow Chemical, rev arb 1984, p 98.
(10) Paris Court of Appeal, 21 October 1983, Dow Chemical, rev arb 1984, p 98; see also, Paris Court of Appeal, 30 November 1988, Société Korsnas Marma v Société Durand-Auzias and Paris Court of Appeal, 14 February 1989, Société Ofer Brothers v The Tokyo Marine and Fire Insurance Co ltd et autres, rev arb 1989, p 691, note P-Y Tschanz.
(11) Cass civ 1, 27 March 2007, No. 04-20.842, Alcatel Business Systems (ABS), Bull civ I, No. 129.
(12) See, for example, Paris Court of Appeal, 23 June 2020, No. 17/22943, Société Kout Food Group v Société Kabab-Ji SAL (requiring involvement in the performance of the contract, knowledge of and consent to the arbitration agreement); Paris, 26 November 2019, No. 18/20873, Axa France IARD (requiring involvement in the performance of the contract and knowledge of the arbitration agreement only); Paris, 2 March 2021, No. 18/16891 (requiring involvement in the performance of the contract only, without reference to knowledge and consent).
(13) Paris Court of Appeal, 23 November 2021, No. 18/22323, paras 21 and 22.
(14) See, for example, Paris Court of Appeal, 26 February 2013, No. 11/17961, M J Sprecher and others v M K A Bughsan and others, rev arb 2014, p 82; Paris Court of Appeal, 18 December 2018, No. 16/24924; Paris Court of Appeal, 26 November 2019, No. 18/20873, Axa France IARD.
(15) See, for example, Paris Court of Appeal, 23 June 2020, No. A4/2019/0944, Société Kout Food Group v Société Kabab-Ji SAL, rev arb 2020, p 701; Paris Court of Appeal, 10 June 2021, No. 20/07754; Paris Court of Appeal, 15 June 2021, CNAN Group v SARL CTI Group, rev arb 2021, p 955.