French Supreme Court strikes down a one-way jurisdiction clause

December 2012

The French Supreme Court has invalidated a one-way jurisdiction clause concluded between a French national and a Luxembourg bank. This important and controversial ruling may require banks and other institutions to rethink their dispute-resolution clauses where there is a nexus with France.

French Supreme Court, First Civil Chamber, 26 September 2012, Ms X v Banque Privée Edmond de Rothschild, No 11-26.022

On 26 September 2012, the French Supreme Court handed down a decision, in which it struck down a one-way jurisdiction clause on the basis that it was potestative.

In this case, the claimant, Ms X was a French national and resident of Spain. Ms X had opened a bank account with a Luxembourg bank (the Luxembourg Bank) via a French sister company of the Luxembourg Bank. Ms X considered that the sum deposited in her Luxembourg bank account was not yielding expected returns. Ms X sued both her French bank and the Luxembourg Bank in the First Instance Court in Paris. The Luxembourg Bank, however, challenged the jurisdiction of the French courts on the basis of a jurisdiction clause contained in the contractual documentation signed by Ms X when opening her bank account in Luxembourg, and which provided for the exclusive jurisdiction of the Luxembourg courts but allowed the Luxembourg Bank to litigate in "the courts of the client's domicile or any other competent court".

The jurisdictional challenge was dismissed in both the trial court and the Court of Appeal on the basis that the clause was in conflict with the object and purpose of jurisdiction clauses set out in Article 23 of EC Regulation 44/2001 (the Brussels Regulation). No reference was made to the ECJ.

The French Supreme Court subsequently dismissed the appeal brought by the Luxembourg Bank and held that the jurisdiction clause in its entirety (rather than just the section of the clause that gave the Luxembourg Bank the option to apply to "any other competent court") was invalid. It held that: "given that the Court of Appeal noted that the clause, according to which the bank reserved the right to sue at Ms X's domicile or "before any other competent court", was, in reality, only binding upon Ms X, who was the only one bound to apply to the Luxembourg courts, the Court of Appeal accurately deduced that the clause was 'potestative' for the bank, so that it was in conflict with the object and purpose of a choice of jurisdiction contemplated under article 23 of the Brussels I Regulation". The court did not refer to any consumer requirements when reaching its decision.

The Supreme Court here used the French legal concept of potestativité to invalidate the clause under Article 23 of the Brussels Regulation. This should not be understood as an application of French law to the validity of this jurisdiction clause, however. Rather, the Supreme Court interpreted Article 23 of the Brussels Regulation in light of the French concept of potestativité.

It is quite striking that the Supreme Court uses this concept of potestativité as it does not relate to jurisdictional issues but derives from the French legislation governing conditions precedent. A potestative condition precedent is one "which makes the fulfilment of the agreement dependent upon an event which one of the contracting parties has the power to make happen or to prevent from happening". Obligations entered into subject to such conditions precedent are void under French law (provided certain requirements are met).

Given the wording used by the Supreme Court and given that one-way jurisdiction clauses, by definition, only bind one party to sue in the designated forum, the ruling of the French Supreme Court may be read as invalidating all such clauses, irrespective of their wording. Clauses that would allow one of the parties to sue in "any other competent court", "any other competent court that has jurisdiction over the claim pursuant to the otherwise applicable rules on jurisdiction", or that would simply give an additional option to that party (eg the client is bound to sue in Luxembourg but the bank can sue in Luxembourg or in London) may arguably also be considered to have been invalidated by this ruling.

The ruling is surprising because clauses that benefit one party only have been considered valid in the past by the French courts when outside the scope of the Brussels Regulation or its predecessor, the 1968 Brussels Convention and were also expressly provided for in the 1968 Brussels Convention. In addition, although there is no express reference in the Brussels Regulation to the possibility that one party may have more flexibility than the other, its Article 23 was until now commonly understood as permitting such clauses.

Drafting dispute-resolution clauses in light of the Supreme Court decision

This French Supreme Court decision has consequences for banks or other institutions that use one-way jurisdiction clauses in contracts that have a nexus with France. There are, however, limited sets of circumstances where complexities may arise as a result of this decision. These are where:

• the jurisdiction clause does not permit the counterparty to sue in the French courts but the counterparty nevertheless seeks to bring such proceedings and French courts retain jurisdiction over the case (the scenario that was before the Supreme Court here); or
• the jurisdiction clause confers jurisdiction on the French courts (which would otherwise not have had jurisdiction) and the bank or institution brings proceedings before French courts relying on such clause but the counterparty challenges the jurisdiction of the French courts on the ground that the clause is not valid.

In either of those scenarios, it should be borne in mind that, so far as proceedings in the French courts are concerned: –– this ruling calls into question any one-way jurisdiction clauses governed by the Brussels Regulation, no matter how they are drafted;

• by analogy, this ruling is also likely to impact one-way jurisdiction clauses (also irrespective of their drafting) governed by the 2007 Lugano Convention as its provisions on jurisdiction clauses are identical to those of Article 23 of the Brussels Regulation; and
• given that the clause here was invalidated in light of a French legal concept, it is also arguable that this ruling impacts the validity of clauses that are outside the scope of the Brussels Regulation or the Lugano Convention (eg a clause that would designate the New York courts but reserve the right for one party to sue elsewhere).

French decisions are not binding on other Member State courts so this ruling does not prevent a non-French court from validating a one-way clause that would confer jurisdiction on the French courts (or any other courts) but which would leave more options for one of the parties. The decision nonetheless raises the spectre of parties to litigation in other Member States (in particular those recognising the concept of potestativité) raising similar arguments as to the validity of such clauses (which could ultimately lead to a reference to the ECJ). For example, where parties have agreed to a one-way English jurisdiction clause, the risk is that a counterparty may try to use the decision to bring proceedings (eg for a declaration of non-liability) in a different court on the basis that the clause is void or argue in proceedings brought in England that the clause is invalid so the English courts should decline to hear the proceedings or, at the very least, refer the question to the ECJ.

Banks and other institutions can, however, take comfort from the fact that this decision does not appear to impact the validity of:

• exclusive jurisdiction clauses that apply equally to all contractual parties, whether within or outside the EU;
• non-exclusive jurisdiction clauses that apply equally to all contractual parties. Although such clauses could arguably be said to be binding on neither of the parties, which would raise the question of their potestativité following this Supreme Court ruling, they are expressly validated by Article 23 of the Brussels Regulation ("jurisdiction shall be exclusive unless the parties have agreed otherwise"); and
• one-way arbitration clauses (ie clauses which effectively give one party the option to choose whether to arbitrate or litigate). The risk that parties may in future wish to run arguments with respect to one-way arbitration clauses similar to those raised here cannot be entirely excluded. However, these clauses have long been recognised as valid by the French courts and given that the French courts are usually pro-arbitration, it seems unlikely that one-way arbitration clauses will be at risk of being struck down by a French court.

In light of this decision banks and other institutions may wish to consider whether to continue using one-way or hybrid jurisdiction clauses in their deal documentation. In deals with a French nexus, it may be prudent to include a clause which gives equal rather than one-way rights to the parties (for example, an exclusive jurisdiction clause).

Where there is no French nexus, parties will need to take a view on the likelihood of a counterparty running the kind of arguments raised in the French Supreme Court in the courts of other Member States (and on the likelihood of such arguments being referred to and/or upheld by the ECJ) and to balance that against the perceived advantages of one-way jurisdiction clauses and the relative merits of other jurisdiction clause formulations.

No clear market practice has yet developed in this regard but clients and industry bodies are continuing to discuss the issue.