Businesses are not typically fans of court or arbitration proceedings, for various reasons, including the irreparable damage afforded to business relationships, the lack of certainty inherent to legal action and, evidently, costs. This aversion has resulted in the development of alternative dispute resolution mechanisms and it is now relatively common for parties to provide for escalation clauses before initiating proceedings before courts or arbitral tribunals.

On 12 December 2014, the French Supreme Court added to its case law on this type of clauses. The Court is adamant: under French law, conciliation clauses are not a mere formality. They are binding on the parties and claimants who fail to comply with them will see their claims dismissed with no examination on the merits.

1. Failure to comply with an escalation clause renders legal action inadmissible

The French Supreme Court, on 14 February 2003, had already ruled that a commitment to negotiate before initiating court proceedings is a binding commitment that parties must respect. Should a party initiate proceedings without carrying out prior negotiation or conciliation pursuant to their contract, its claims will be inadmissible.1 Yet, this does not prevent this party from re-filing its claim after meeting its conciliation obligations, provided that it is still in a position to do so. Mind statutes of limitations!

The claims will be deemed inadmissible if (i) the conciliation phase has not been completed and (ii) the court considers that the parties did intend for this phase to take place prior to litigation and to be mandatory. If the parties disagree on the meaning of the relevant clause, the court will look at their intention at the time of the signing of the contract, namely, it will examine the wording of the clause.

2. Compliance with the escalation clause after an action before the courts has been initiated is without effect

The 12 December 2014 decision has added to the Court's case law on escalation clauses. The case involved a claimant who had taken legal action without meeting pre-litigation requirements and subsequently attempted to comply with the alternative dispute resolution mechanism found in the contract before the court had time to issue its decision.

The French Supreme Court confirmed the Court of Appeal's decision, concluding that it was not possible for the claimant to cure the procedural defect caused by rushing to go to court. It thus confirmed that a ruling of inadmissibility made against claims filed in disregard for an escalation clause cannot be remedied after the fact.

In essence, the French Supreme Court merely enforced a binding contractual commitment and stated the obvious: if a requirement is compulsory by virtue of a contract and must be met before legal action can be taken, once the court has been seized, it is too late to validly meet this requirement.

The Court's determination is both justified by law and, from a practical point of view, entirely sensible if the door is truly to be left open to the possibility of amicable settlement between the parties at the time when it is the most relevant, i.e., before the courts are involved.

3. Take away points from the decision of 12 December 2014

The key considerations from this decision are as follows:

the French Supreme Court confirmed its position that escalation clauses must be complied with, failing which claims will be declared inadmissible ; non-compliance with an escalation clause cannot be cured after an action before a court of an arbitral tribunal has been initiated; and special care should be given to the drafting of escalation clauses as they will delay the parties' right to initiate proceedings in case a dispute arises.