Case Commentary - Arbitration and Impecuniosity: French Supreme Court Rules

Introduction

On 27 September 2023, the French Supreme Court confirmed recent caselaw and ruled that an argument of impecuniosity raised by the claimant is not, in itself, sufficient to preclude the application of an arbitration clause, unless the claimant can demonstrate that a previous attempt to resort to arbitration proceedings was undertaken and failed due to financial constraints.

Background

On 21 August 2012, OB Lavau, a French company, and its manager, also acting in his own name, entered into licensing agreements with another French entity, Atlas Form, which later became OB Réseaux, for the opening and operation of a fitness center. These contracts contained arbitration clauses referring to the arbitration rules of the International Chamber of Commerce (“ICC”). The company benefiting from these licensing agreements encountered certain financial difficulties, OB Lavau, was put in compulsory liquidation and sued its co-contractor before the Rennes Commercial Court for damages, despite the existence of arbitration clauses. The Rennes Commercial Court declared itself incompetent in a judgment dated 14 September 2021. In its ruling dated 3 May 2022, the Rennes Court of Appeal upheld the lower court’s judgment, ruling in particular that the the arbitration clauses were not manifestly null and void due to the claimant’s impecuniosity. The latter appealed to the French Supreme Court arguing that the Court of Appeal ruling failed to examine whether their impecuniosity deprived them of access to the courts, in violation of article 6 § 1 of the European Convention on Human Rights. Indeed, the claimant argued before the Supreme Court that the Court of Appeal had to determine whether the probable costs of the arbitral proceedings were not manifestly disproportionate in comparison to the claimant’s resources. If that was the case, this would deprive the claimant of effective access to a judge.

The Supreme Court’s Decision

The Supreme Court dismissed the appeal on the basis of the negative effect of the competence-competence principle of Article 1448 of the French Code of Civil Procedure by explaining that, in the present case, the claimant did not prove that an arbitration proceeding had been initiated and had failed because of its financial difficulties. According to the Supreme Court, the Court of Appel did not have to search whether the probable costs of arbitral proceedings were disproportionate to the claimant’s resources because the claimant’s impecuniosity is not in itself sufficient to preclude the application of the arbitration clause. Therefore, the Court of Appeal rightfully decided that the right of access to court was not violated and that the commercial court was incompetent.

Implications for Future Proceedings

Based on this case law, which reinforces prior decisions on the matter, the mere existence of financial difficulties of the claimant will not be sufficient to set aside an arbitration agreement if no previous arbitral attempt was pursued by the claimant. Impecunious claimants must effectively demonstrate that arbitral proceedings failed due to their financial circumstances. The decision of the Supreme Court thus encourages future impecunious claimants wishing to litigate before state courts to initially engage in arbitration and witness the proceedings falter due to their financial constraints, and then go to court and argue that the arbitral proceedings could not prosper because of these difficulties which warrant the setting aside of the arbitration agreement. The Supreme Court decision confirms that any discussion regarding impecuniosity of the claimant must first be dealt with by an arbitral tribunal, and only if the arbitration fails can state litigation be pursued.

It must be emphasized that the present case was rendered in the context of a domestic arbitration case. The decision can reasonably be extended to international arbitration.