One-way Jurisdiction clause invalid

French Supreme Court, First Civil Chamber, 25 March 2015, ICH v Crédit Suisse, No. 13-27264

The French Supreme Court has invalidated a one-way (or asymmetric or “hybrid”) jurisdiction clause in a loan agreement between a French borrower and a Swiss Bank under Article 23 of the Lugano Convention. This decision confirms an earlier ruling by the French Supreme Court in 2012 (the Rothschild case)¹, in which it held that a one-way jurisdiction clause that was only binding upon a borrower (an individual) was potestative and thus contrary to the object and purpose of jurisdiction clauses in Article 23 of EU Regulation 44/2001 (the original Brussels Regulation).²

The claimant, a French company, entered into two facility agreements with a Swiss bank (the Swiss Bank) via an English company, acting as a financial intermediary, for financing repair works on a farming business. These facility agreements were secured by a first demand guarantee issued by a French bank (the French Bank). The claimant considered that its financial arrangement with the banks was not yielding expected returns to ensure repayment of the loan and started proceedings in France before the Angers Court of First Instance against all the parties to the transaction for breach of their duty to inform and advise the borrower. The Swiss Bank and the French Bank challenged the jurisdiction of the French court. In particular, the Swiss Bank relied on the jurisdiction clause in the facility agreements: “the borrower acknowledges that the exclusive forum for any judicial proceedings is Zurich or at the place where the relationship with the bank’s branch is established. The bank is however entitled to bring a claim against the borrower before any other competent court”.

The Court of Appeal found that even though the jurisdiction clause was favourable to one party (the bank) this imbalance was inevitable in any jurisdiction clause agreed between two contracting parties from different states, and therefore was not contrary to the Lugano Convention.

The French Supreme Court reversed the Court of Appeal’s ruling on the grounds that the Court of Appeal, which had expressly recognised that the clause was imbalanced, should have considered whether the clause was contrary to the objectives of predictability and legal certainty in Article 23 of the Lugano Convention.

Reminder of the Rothschild case

The appeal before the French Supreme Court was based on a previous ruling of the Court: the Rothschild case (which was covered in the February 2012 edition of the European Finance Litigation Review). In Rothschild the Supreme Court held that a jurisdiction clause providing that the borrower was bound to apply to the Luxembourg courts whereas the lender could choose to sue the borrower either at its domicile or “before any other competent court” was potestative for the bank. Being potestative meant that it was inconsistent with the object and purpose of a choice of jurisdiction under Article 23 of the original Brussels Regulation. The Supreme Court decided that the jurisdiction clause in Rothschild, in its entirety, was invalid.

The Rothschild case was strongly criticised by commentators and practitioners, who considered that it left many questions unanswered:

• whether all one-way jurisdiction clauses, irrespective of their wording, would be invalidated or only jurisdiction   clauses that are drafted very broadly, ie those permitting the bank to sue the borrower before “any other competent court” (as opposed to only EU courts having jurisdiction on the basis of the original Brussels Regulation or the Lugano Convention);
• whether the effect of this decision is limited only to clauses within the scope of the Brussels/Lugano jurisdiction regimes or whether it extends to all one-way jurisdiction clauses with a French nexus;
• whether one-way arbitration clauses are affected (ie clauses giving one party the option to choose whether to arbitrate or litigate) even if the Rothschild case was clearly limited to jurisdiction clauses. This would, however, seem unlikely as these clauses have long been recognised as valid by the French courts, which are usually arbitration-friendly;³ and
• whether the outcome of the case would have been the same if the borrower had been a corporate entity rather than an individual (as it was in this case).

The Rothschild case has also been criticised for its use of the French concept of “potestativité”,⁴ ie the Supreme Court should not have interpreted provisions of European law in light of a French-law concept because the Court of Justice of the European Union (CJEU) promotes an autonomous and uniform interpretation of EU regulations.

Some clarification on one-way jurisdiction clauses

The Supreme Court decision of 25 March 2015 addresses some of these concerns:

(i) It did not rely expressly on the concept of “potestativité”, although the Swiss Bank expressly relied on Rothschild in its appeal. Instead, the decision exclusively refers to Article 23 of the Lugano Convention (which is similar to Article 23 of the original Brussels Regulation).⁵

However, even if the concept of “potestativité” is not referred to, the Supreme Court’s reasoning remains in substance identical to that of the Rothschild case: it declares the clause void because it was binding on only one of the parties and reserved the right to the bank to apply to “any other competent court”. According to the Supreme Court, the clause was thus imbalanced and contrary to the objectives of predictability and legal certainty contemplated under Article 23 of the Lugano Convention.

(ii) As the claimant was a corporate entity, not a natural person, this confirms that the rationale underlying the French Supreme Court jurisprudence is not the protection of the consumer but a more general prohibition of imbalanced clauses, irrespective of the status of the contracting parties.

(iii) The French Supreme Court also stresses that the clause: (i) “reserved the right to the bank to apply before any other competent court”; and (ii) “did not specify the objective elements on which this alternative jurisdiction was based”. This could be construed as a signal that the Supreme Court did not decide to invalidate all one-way jurisdiction clauses, irrespective of their wording, but only those that are particularly imbalanced, ie clauses that grant a broad discretionary right to one of the parties. This would be the case for a jurisdiction clause that allows one party (the lender) to sue another party (the borrower) in any other court in the world without any geographical limitation. Were this to be confirmed, this would mean that a one-way jurisdiction clause that gives one of the parties the option to sue another party before a limited number of courts could be valid.

What remains unclear

The Supreme Court decision does not call into question the validity of: (i) exclusive jurisdiction clauses that apply equally to all contracting parties; and (ii) non-exclusive jurisdiction clauses that apply equally to all of the parties, as they are expressly valid under the Lugano Convention, the original Brussels Regulation and the Recast Brussels Regulation.

It remains, however, unclear whether this jurisprudence applies only to one-way jurisdiction clauses governed by European law (ie the Brussels Regulation, the Lugano Convention or the Recast Brussels Regulation), as the decision of 25 March 2015 is exclusively based on Article 23 of the Lugano Convention, or could also affect the validity of clauses that fall outside its scope (even if in that case, the French courts should rely on different grounds to invalidate such a clause).

Brussels Recast

Article 25 of the Recast Brussels Regulation⁶ applies to any jurisdiction agreement which selects the courts of a Member State, even if none of the parties are domiciled in a Member State (contrary to the provisions of Articles 23 of the Lugano Convention and of the original Brussels Regulation). Thus the French Supreme Court ruling is likely to apply to these agreements too.

Impact on drafting

In light of this new ruling, commercial parties should carefully consider whether to use one-way jurisdiction clauses, in particular when dealing with French parties or in transactions with a French nexus. There is still too much uncertainty to be able to predict whether certain types of one-way jurisdiction clauses may be upheld by the French courts. Although the French Supreme Court does not appear to prohibit all kinds of “hybrid” clauses (only those that are particularly imbalanced as a result of not being based on objective elements), it may be prudent to provide for a jurisdiction clause that gives equal rights to all parties where there is a French nexus.

Footnotes

_{1. French Supreme Court, First Civil Chamber, 26 September 2012, No. 11-26022.
2. Council Regulation (EC) No. 44/2001 of 22 December 2000 on jurisdiction and the recognition and enforcement of judgments in civil and commercial matters.
3. French Supreme Court, First Civil Chamber, 15 May 1974, No. 72-14706. However, in a recent judgment, the Rennes Court of Appeal held that such clause is potestative because only one of the parties is bound to arbitrate (Rennes Court of Appeal, 11 February 2014, No. 13/03759).
4. This notion is generally found in the French Civil Code in relation to conditions precedent. Under the French Civil Code, a potestative condition precedent is one “which makes the fulfilment of the agreement depend upon an event which one of the contracting parties has the power to make happen or to prevent from happening”. Such conditions precedent are considered void under French law (provided that certain requirements are fulfilled).
5. Article 23 of the Lugano Convention provides that “if the parties, one or more of whom is domiciled in a State bound by this Convention, have agreed that a court or the courts of a State bound by this Convention are to have jurisdiction to settle any disputes which have arisen or which may arise in connection with a particular legal relationship, that court or those courts shall have jurisdiction. Such jurisdiction shall be exclusive unless the parties have agreed otherwise”. However, it should be noted that pursuant to Recital 20 of the Recast Brussels Regulation, “where a question arises as to whether a choice-of-court agreement in favour of a court or the courts of a Member State is null and void as to its substantive validity, that question should be decided in accordance with the law of the Member State of the court or courts designated in the agreement, including the conflict-of-laws rules of that Member State”. Therefore, under the Recast Brussels Regulation, the court would have to apply French law to determine whether the jurisdiction clause is valid or not.
6. Regulation (EU) No. 1215/2012 of 12 December 2012 on jurisdiction and the recognition and enforcement of judgments in civil and commercial matters (recast).}