“Justice for the 21st century”: arbitration, ADR and settlement agreements under French law

A new French law, “Justice for the 21st century”,[1] came into force on 20 November 2016.

The areas covered by this law are very broad, but primarily cover civil justice, namely the dematerialisation of proceedings, juvenile justice, proceedings for divorce by mutual consent, class actions, etc. This article will focus on its provisions relating to arbitration and settlement agreements.

Arbitration – The validity of the arbitration clause

Article 2061 of the Civil Code addresses the validity of an arbitration clause. This article, introduced in the Civil Code in 1972, has evolved over the years. Originally, an arbitration clause was invalid unless otherwise provided by the law. The provision was modified in 2001: arbitration clauses were valid in contracts between professionals, except where particular legislative provisions stated the contrary. It should be noted that French courts restricted the scope of this provision to domestic contracts and excluded its application to international contracts. Therefore, an arbitration clause in an international contract involving a non-professional party was not, at least in itself, invalid.

The new Article 2061 of the Civil Code, as redrafted by “Justice for the 21st century,” provides:

The arbitration clause must have been accepted by the party against whom it is invoked, unless this party has succeeded to the rights and obligations of the party who accepted it in the first place.

If one of the parties has not contracted in the context of its professional activity, the arbitration clause cannot be enforced against it.”

With the new law, arbitration clauses are now valid in principle in every contract (Article 2061, para. 1). The remaining restriction concerns only the enforceability of arbitration clauses against a non-professional party (Article 2061, para. 2).

On its face, this article appears to have been redrafted in a manner favourable to arbitration. Yet, in reality, it raises a number of issues.

Regarding paragraph 1, the new condition of acceptance should not modify French practice regarding the implicit acceptance of arbitration clauses, namely in the context of group of contracts or group of companies. In reality, this article is of limited substantive interest, as there is no doubt that the arbitration agreement must have been accepted by both parties, even implicitly.

Paragraph 2 of new Article 2061 will certainly raise more difficulties. It states that, when an arbitration clause is included in a contract to which one party is not a professional, the clause will be valid but will not be enforceable against it.

Should a dispute arise, the non-professional will be free to bring their claim against their professional co-contractor either before an arbitral tribunal or national courts. The professional will have no other option than to follow the choice of the non-professional.

The situation will be more complicated if the claim is brought by the professional against a non-professional. In principle, the professional is compelled to bring their claim before an arbitral tribunal. However, because paragraph 2 of new Article 2061 states that the arbitration clause is unenforceable against the non-professional, the latter may object before the arbitral tribunal to the application of the arbitration clause. Only then will the professional be able to bring their claim before national courts. This has the potential of causing delays in resolving disputes.

It should be noted that, under French arbitration law, a party may not, in principle, raise a legal argument during set-aside proceedings before national courts where it failed to do so before the arbitral tribunal. This rule ensures that the non-professional who failed to raise the unenforceability of the arbitration clause before the arbitral tribunal will be estopped from raising that very argument during set-aside proceedings before national courts. The scope of this principle is, however, restricted by EU consumer law: the jurisprudence of the European Court of Justice (the “ECJ”) requires national courts to set aside an award if the arbitration clause is abusive, even where the consumer did not raise this argument before the arbitral tribunal. Therefore, within the bounds of EU consumer law, a non-professional will not be estopped from raising the unenforceability of the arbitration clause stated at paragraph 2 of new Article 2061 before national courts, despite the fact that it failed to do so before the arbitral tribunal.

More generally, case law will have to answer several questions raised by new Article 2061, in particular:

  • When should the non-professional inform its co-contractor that it refuses the arbitration: before the constitution of the arbitral tribunal, in limine litis, or at any time?
  • Is there a way to force the non-professional to take a position on the application of the arbitration clause before the request for arbitration is made (but after the dispute occurred)? If so, could the arbitration clause organise this?
  • Is this legal provision applicable to contracts between two non-professionals?
  • What about disputes between employees and employers, where both parties have contracted in the context of their professional activities?

New Article 2061 raises additional questions: should this article be applicable to international contracts; and should it be applicable only to arbitration clauses concluded after the entry into force of the new version of Article 2061? Here again, case law will give us the answers. At this stage, we can only hope that case law will continue to consider that this article is only applicable in national matters as was the case before the reform.

“Justice for the 21st century” also corrects some terminology mistakes found in provisions of the Civil Code relating to arbitration, which do not bring any substantial changes to the law.[2]

Settlement agreements

“Justice for the 21st century” also amends the existing legal provisions on settlement agreements.

In order to be valid, a settlement agreement implies reciprocal concessions. This condition was obvious, but not explicitly stated in the Civil Code. It is now featured in Article 2055. This is a welcome addition, as it will clarify French law with regard to an essential condition for settlement agreements.

Article 2052 of the Civil Code has been redrafted. This article previously provided that settlement agreements had the authority of res judicata of a final judgment (“autorité de la chose jugée en dernier ressort”). The idea was understandable, but not necessarily correct in law, as a settlement agreement ends the dispute without judging the matter. Article 2052 also previously provided that the settlement agreement could not be attacked on account of an error of law, nor on the account of substantive inequality of bargain.

The redrafted article now simply provides that:

Settlement agreements prevent the introduction or the continuing of legal proceedings between the parties with the same subject matter.”

This new formulation of Article 2052 sets out the rule in more clear terms without bringing any changes in substance.

Finally, we note that the legislator removed many provisions of the section in the Civil Code relating to settlement agreements, which were mere reiterations of French common civil law. These deletions do not affect the substance of the law.

[1] Law No. 2016-1547 of the 18 November 2016

[2] The word “arbitration” disappears from Article 1592 of the Civil Code, and is replaced instead by “estimation”, the provisions of Article 2412 are now harmonised with the Code of civil proceedings and finally, Title XVI of the Civil Code, which contains the Civil Code arbitration provisions, has been correctly renamed “the arbitration agreement” instead of the “the arbitration clause”.