In a judgment of 23 November 2021, the Paris Court of Appeal ruled that the French provisions implementing the 1986 Agency Directive are not overriding mandatory provisions, and thus do not define French public policy.
It is hard to reconcile this judgment with the Ingmar case of the European Court of Justice.
Background
Swiss company Guess Europe entered into an agency contract with a French company to market its products in France. The agency contract provided for the application of Swiss law and, it seems, arbitration in Switzerland.
After the French agent did not meet its target, Guess terminated the contract without paying any indemnity for termination. It then initiated arbitration proceedings seeking, inter alia, that it did not owe anything under the agency contract. Guess partly prevailed: the arbitrator ordered Guess to pay certain commissions, but ruled that it did not owe anything else.
In parallel, the French agent initiated proceedings before French courts against the French subsidiary of Guess seeking payment of commissions and production of certain documents for the purpose of determining the amount of its indemnity after termination. The action was dismissed on an unknown ground. The parties debated whether Guess France could be characterised as principal before both fora, so it is possible that the agent lost on the ground that Guess France was not concerned with these claims.
Guess Europe obtained a declaration of enforceability of the arbitral award in France. The French agent appealed and argued that the award was contrary to French public policy.
Ingmar
The main argument of the French agent was obviously that the European Court of Justice held in Ingmar v. Eaton (C-381/98) that
Articles 17 and 18 of Council Directive 86/653/EEC of 18 December 1986 on the coordination of the laws of the Member States relating to self-employed commercial agents, which guarantee certain rights to commercial agents after termination of agency contracts, must be applied where the commercial agent carried on his activity in a Member State although the principal is established in a non-member country and a clause of the contract stipulates that the contract is to be governed by the law of that country.
This strongly suggested that these provisions of the Agency Directive should be considered as overriding mandatory provisions by the Member States.
If so, it would also seem that these provisions should define the public policy of the Member States.
The Judgment of the Paris Court of Appeal
The Paris Court of Appeal, however, ruled that the French provisions implementing the Agency Directive (articles L. 134-1 et seq. of the French Commercial Code) do not define French international public policy. It held:
an internal mandatory rule, even if it is the result of the transposition of a European directive, the imperative nature of which has been recalled by the Court of Justice of the European Union, is only likely to come under the French concept of international public policy if, after having verified its applicability to the dispute, its disregard violates this concept, that is to say the set of rules and values whose disregard cannot be tolerated by the French legal order, even in international matters (§29).
The Court found, however, that the dispute fell within the scope of the Directive. But it then ruled that the purpose of the Directive is not to define the most essential values and principles which should trigger the public policy exception.
The Court ruled that the provisions of European Union law
even if they are described as mandatory, do not all pursue objectives aimed at guaranteeing essential principles or values whose disregard by the Member States cannot be tolerated in an international context (§ 39)
and that this was not the purpose of the aforementioned directive and its transposition, the objective of which
is essentially to harmonize and approximate the laws of the Member States with regard to the defence of the private interests of commercial agents without the protection of vital interests of those same Member States being at stake, or even if it is clear from such provisions that they are necessary for the implementation of a compelling policy of defending freedom of establishment or undistorted competition (§40).
Precedent
The Court of Appeal relied on two judgments of the Cour de cassation in support of its position. One is pretty unclear, but the other one had indeed ruled that the French implementing provision was a domestic mandatory rule and thus not an overriding mandatory provision.
The debate in this case, however, was not whether French law should be applied to displace the application of the law of a third State, but whether it should be applied to displace the application of German law.
Assessment
The Paris Court of Appeal certainly has a point. The reasons given by the ECJ to justify its decision show that its goal was not to assess whether the Directive serves the crucial interests of the Member States. Rather, the Court wanted to advance its own agenda of creating a single market, and used strategically private international law to that end.
This being said, there is a precedent, and it is binding on the Member States.
Dear Gilles, Many thanks for this interesting post. Perhaps the Paris judgment can be explained by the different roles public policy plays in the conflict of laws and in the recognition of arbitral awards. Ingmar was about the conflict of laws and the role of the Directive there. It does not necessarily mean that an award that ignores the Directive (or the national law implementing it) would have to be annulled. At least the ECJ has not ruled this yet.
Dear Matthias,
You’re quite right that the Ingmar case was not strictly speaking about the definition of the public policy of the Member States, but about overriding mandatory provisions.
This being said, the Paris court asserts that the Agency directive is an internal mandatory rule.
And while you could argue, and some do argue, that the scope of public policy is different from the scope of overriding mandatory provisions, in this case, the Court does link both concepts. It explains that the directive does not define public policy because it is not an overriding mandatory provision.
And even if you distinguish both concepts, the result would be what Luca Radicati has called semi mandatory provisions: overriding mandatory in the forum, but not if the parties chose another forum . Do we want that? Does the EU want that?
For some, this is the type of decision that illustrates vividly the difficult coexistence between EU mandatory law and international commercial arbitration (let alone investment arbitration re Achmea etc). A request for the enforcement of a foreign award falls within the scope of the NYC. Under art V NYC, or more lenient regimes ex art. VII NYC, national courts do not have a framework to fit every mandatory rule of EU law. Even OMR would need to be characterised as public policy, which are not coinciding concepts as this case demonstrates. [This, of course, leaving aside the apparent irreconcilability between Ingmar and the finding by the Paris Cour d’appel that French rules implementing the EU Agency Directive do not amount to OMR. This finding would be permissible if the level of agency protection went beyond that afforded by the Directive (see Unamar), but not when the compensation rights of agents align with EU law.]
There are various ways to address the concerns that decisions like this might trigger at EU level.
One is to widen the notion of international public policy to include all EU OMR, but this might not be satisfactory given the restrictive nature that the public policy exception should have.
Another option is to argue that the principle of effectiveness of EU law is part of public policy, with the result that awards containing flagrant departures for EU law (at least EU overriding mandatory law) cannot be approved and/or recognised and enforced by courts of EU MS. EU MS would need to uphold that principle despite the existence of a pro-arbitration policy, which is alien to the core of EU law.
A third alternative would be to consider that arbitration agreements which do not guarantee the application of EU overriding mandatory law are invalid or at least unenforceable. This (hostile) approach is not a novel idea. English courts ruled in Accentuate Ltd v Asigra Inc [2009] EWHC 2655 (QB) that they would not give effect to an arbitration agreement which (combined with a choice of law clause) had the effect of escaping the application of EU agency protection (confirmed also by Fern Computer Consultancy Ltd v Intergraph Cadworx & Analysis Solutions Inc, 2014 EWHC 2908 (Ch)). Also, see the discussion of German and Belgian cases in Kleinheisterkamp, J., ‘The impact of internationally mandatory laws on the enforceability of arbitration agreements’ (2009) 3(2) World Arbitration& & Mediation Review, 91-120. Outside of the EU, there is abundant US law and caselaw that prevents the operation of arbitration in areas with a heavy content of mandatory provisions.
Even if the invalidity and/or unenforceability of arbitration agreements was not applied at the pre-arbitration stage, when parties simply seek to enforce their agreement, the test could be relevant at the post-arbitration stage (e.g., under art. V.1.a. NYC) once a party can prove the incompatibility between EU law and the award.
Finally, it could be explored whether an award with such content could be annulled or refused enforcement based on excess of mandate. It could be argued that from the point of view of an EU court, parties could not dispose of the mandatory rules governing agency contracts in the EU. When parties delegate their dispute resolution faculties to a third party (ie, an arbitrator), the delegation cannot encompass wider powers than those available to the parties themselves. An award that violated those non-derogable rules exceeds the scope of the delegation and the arbitral mandate. Perhaps this is an indirect way to introduce a system of mandatory rules for arbitrations, which remains a big gap (and source of uncertainty) in the current practice of international arbitration (except when parties and arbitrators agree to apply the Rome I regime, including arts. 3.3, 3.4 and 9, or similar regimes).
One last note to point out that there is an additional layer of complexity. It could be argued that the above arguments are contrary to the pro-arbitration spirit embodied in the NYC, which has been adopted by all EU MS. Should that be the case, one could wonder whether an international treaty which prevents EU MS from upholding the principle of effectiveness of EU law even when EU mandatory rules are involved is compatible with EU law… That would be a clash between public international law vs arbitration which we have seen in investment arbitration and which we can leave for another day… It is unclear whether the vague statements by the CJEU in Eco Swiss and Achmea on level of court review at the post-award stage is sufficient to confirm such compatibility…
More on this in Penades Fons, M., ‘The Effectiveness of EU Law and Private Arbitration’, (2020) 57(4) Common Market Law Review, 1069 – 1106 and in a forthcoming article on the effectiveness of EU law, arbitration agreements and the arbitrators’ mandate.