Arbitration clause and arbitration in B2B and property contracts

The arbitration clause (clause compromissoire) often slips in at the end of a contract, among the "miscellaneous provisions", drafted in haste or copied from a template. Yet it is the clause that will decide, on the day of a dispute, before whom the case will be heard, in what language, at what cost and under what rules. A manager who signs an international distribution contract, a developer negotiating a property development contract or a company concluding a shareholders' agreement discover too late that a poorly calibrated clause deprives them of a useful remedy or exposes them to ruinous arbitration proceedings. This guide deals with the upstream stage of litigation: how to weigh the choice between arbitration and the state courts, and then how to draft and negotiate a robust arbitration clause (seat, language, institution, governing law). It complements the analysis already devoted to challenging an arbitral award once it has been made.

Arbitration clause and submission agreement: two routes to arbitration

Arbitration rests on an arbitration agreement, defined by Article 1442 of the French Code of Civil Procedure. That text distinguishes two instruments. The arbitration clause is the agreement by which the parties undertake to submit to arbitration the disputes that may arise from their contract. It is inserted in the contract itself, before any dispute. The submission agreement (compromis) is the agreement by which the parties submit to arbitration a dispute that has already arisen.

The distinction is not academic. In practice, once the conflict has begun, obtaining the opponent's agreement to sign a submission agreement is the exception: a party that senses a favourable position before the state courts has no interest in consenting to arbitration. It is therefore at the stage of drafting the contract, when relations are good, that most is decided. The arbitration clause is the tool of anticipation. The other provisions to be settled at this stage between businesses are listed in our article on the essential clauses of the B2B commercial contract.

Article 1443 of the French Code of Civil Procedure imposes a formal requirement: on pain of nullity, the arbitration agreement must be in writing. In domestic arbitration, writing conditions the very validity of the clause. In international matters, the regime is more flexible, but writing remains indispensable for proof and for the later enforcement of the award.

The autonomy of the arbitration clause

A cardinal principle governs the subject: the arbitration clause is legally independent of the contract that contains it. Article 1447 of the French Code of Civil Procedure provides that the arbitration agreement is independent of the contract to which it relates and is not affected by the ineffectiveness of the latter. In other words, the alleged nullity of the main contract does not bring down the clause: the arbitrator remains competent to rule, including on that nullity. This principle of autonomy, long established by case law in international matters, protects the effectiveness of arbitration against delaying tactics consisting in challenging the contract in order to escape the arbitrator.

A procedural corollary follows: the competence-competence principle. Under Article 1448 of the French Code of Civil Procedure, where a dispute covered by an arbitration agreement is brought before a state court, that court declares that it has no jurisdiction unless the arbitral tribunal has not yet been seised and the arbitration agreement is manifestly null or manifestly inapplicable. It is therefore for the arbitrator, in the first instance, to rule on challenges to its own jurisdiction. The state judge intervenes only in cases of manifest nullity, that is, nullity that is obvious and indisputable.

Arbitration or state courts: deciding the choice in advance

The first reflex is not to draft an arbitration clause, but to ask whether arbitration genuinely serves the contracting party's interest. This choice is reasoned according to several parameters.

Confidentiality is arbitration's major asset. The proceedings and the award are not public, unlike a judgment delivered in the name of the French people. For a dispute involving know-how, a sensitive commercial strategy or a manager's reputation, this discretion carries great weight.

Neutrality justifies arbitration in international contracts. No party willingly agrees to plead before the courts of its counterparty's country, in a language and under a procedure foreign to it. Arbitration offers a neutral forum, chosen by common agreement. The legal specificities of these contracts and the points to secure when negotiating them are set out in our article on drafting international contracts.

The technical competence of the arbitrators is a strong argument in complex disputes: construction contracts, structured financial transactions, intellectual property disputes. The parties appoint arbitrators who are familiar with the subject matter, whereas the state judge is a generalist.

Conversely, several factors argue for the state courts. The cost of arbitration is high: arbitrators' fees, the institution's administrative costs, representation costs. For a dispute of low value, it is disproportionate. The absence of an appeal on the merits must also be weighed: the award cannot in principle be reviewed, and the only remedy available is the action to set aside, confined to limited grounds. Finally, urgent measures and enforcement measures fall to the state judge. On the procedure, time limits and grounds for this remedy, see our practical analysis of the action to set aside an arbitral award.

An arbitration clause is therefore justified only if the financial stakes, the international dimension or the sensitivity of the matter call for it. Inserting arbitration in a low-value contract is an economic misjudgement.

The decisive terms of an effective arbitration clause

A well-drafted clause anticipates the complete organisation of the proceedings. Each omitted parameter will have to be decided after the dispute has arisen, when any agreement becomes difficult.

Institution or ad hoc arbitration

The first choice is between institutional arbitration and ad hoc arbitration. In institutional arbitration, an organisation administers the proceedings under its own rules: the International Chamber of Commerce (ICC), whose secretariat is in Paris, the Paris Mediation and Arbitration Centre (CMAP), or the London Court of International Arbitration (LCIA) for contracts with an Anglo-Saxon connection. The institution regulates time limits, appoints the arbitrators in default of agreement, scrutinises the award as to form and secures the conduct of the proceedings. It is the recommended solution for most B2B contracts, in particular international ones.

Ad hoc arbitration leaves the parties to organise the proceedings themselves, without an institution. It is less costly but requires a very detailed clause and good cooperation between the parties, failing which deadlock looms. It suits well-informed contracting parties, assisted by advisers experienced in arbitration.

The reassuring reflex is to adopt the model clause published by the chosen institution. The ICC, like the other centres, makes available a reference wording whose effectiveness is proven. Departing from it by in-house drafting is the first source of defective clauses.

The seat of arbitration

The seat of arbitration is a legal notion, not a geographical one. It is not the place where the hearings physically take place, but the legal connection of the proceedings. The seat determines the procedural law applicable to the arbitration, the state courts competent to hear the action to set aside the award and, to a large extent, the supporting judge (juge d'appui) who may intervene in the event of difficulty in constituting the arbitral tribunal.

Fixing the seat in France is of marked interest: French arbitration law, reformed by Decree No. 2011-48 of 13 January 2011, is regarded as favourable to the effectiveness of awards and the supervision exercised by the Paris Court of Appeal is predictable. Conversely, a seat in a State with an unstable arbitration regime exposes the parties to unpredictable challenges. This parameter must never be left to chance or confused with the hearing room.

The language of the proceedings

Absent a stipulation, the language of the arbitration will have to be fixed by the arbitral tribunal, which generates a costly preliminary debate between parties of different nationalities. The clause must expressly designate the language of the proceedings, of the written submissions, the exhibits and the award. This choice has immediate practical consequences: cost of translations, choice of arbitrators and counsel who command that language. In a Franco-German contract, choosing English may be a neutral compromise; imposing one's own language is a strategic advantage to be negotiated.

The number and appointment of arbitrators

The clause specifies whether the dispute will be decided by a sole arbitrator or by a tribunal of three arbitrators. A sole arbitrator reduces costs and shortens time limits; it suits disputes of moderate value. A three-member tribunal, each party appointing one arbitrator and the two arbitrators appointing the chair, offers more safeguards in substantial cases, at a higher cost.

The clause must provide a mechanism for appointment in default of agreement, failing which the proceedings are blocked from the outset. This is precisely one of the contributions of institutional arbitration: the institution's rules fill these gaps automatically.

The law applicable to the merits

A distinction must be drawn between the law applicable to the contract (the law that will govern the merits of the dispute) and the procedural law of the arbitration (determined by the seat). The governing law clause is often stipulated separately, but its interaction with the arbitration clause must be checked. A contract governed by Swiss law but with a seat of arbitration in Paris is perfectly valid: the two parameters are independent and must be decided separately.

International arbitration: specific points of caution

Article 1504 of the French Code of Civil Procedure classifies as international arbitration that involves the interests of international trade. The criterion is economic, not formal: it turns on the nature of the transaction, not on the nationality of the parties. A contract between two French companies may fall within international arbitration if it concerns a cross-border economic flow.

This classification entails the application of a distinct regime, set out in Articles 1504 to 1527 of the French Code of Civil Procedure, more liberal than that of domestic arbitration. The arbitration clause there escapes even the strict formal requirement of writing on pain of nullity that applies to domestic arbitration.

The decisive issue in international arbitration is the cross-border enforcement of the award. The New York Convention of 10 June 1958 on the Recognition and Enforcement of Foreign Arbitral Awards, ratified by more than 170 States, guarantees that an award made in a contracting State will be recognised and enforced in the others, subject to limited grounds for refusal. It is this instrument that gives international arbitration its practical superiority over a state court judgment: a French judgment is difficult to enforce abroad, whereas an arbitral award travels far better. Checking that the State where the counterparty's assets are located has ratified the New York Convention is part of the preliminary analysis.

Pathological clauses: the drafting traps to avoid

Practice refers to as "pathological clauses" those arbitration clauses whose defective drafting undermines their effectiveness. They feed preliminary litigation over the very validity of the clause, before any examination of the merits.

• The hybrid clause that provides both for the jurisdiction of arbitration and that of a state court, without a clear hierarchy. It creates an ambiguity that the opponent will exploit to delay the proceedings.
• The designation of a non-existent or wrongly named institution, for example a reference to a "Paris arbitration chamber" with no further detail, which corresponds to no identifiable institution.
• The clause silent on the seat and the language, which defers to the opening of the dispute debates that should have been settled in advance.
• The blank clause that merely states "any dispute shall be submitted to arbitration" without further indication: it is valid in principle but generates costly uncertainty.
• Incompatibility between the chosen rules and the stipulated arrangements, where the in-house clause contradicts the rules of the designated institution.

The remedy is simple: adopt the model clause of the chosen institution and add to it only verified terms (seat, language, number of arbitrators, governing law). Any tailor-made drafting must be reviewed by an arbitration practitioner.

Arbitration and property contracts: arbitrability and limits

Arbitration has its place in many property contracts, but its scope is framed by the rules on arbitrability. Article 2059 of the French Civil Code opens arbitration to rights that the parties are free to dispose of; Article 2060 excludes from it matters affecting public policy in the strict sense, the status of persons or public bodies.

In property matters, arbitration is frequent in property development contracts, complex construction contracts, shareholders' agreements of property holding companies (sociétés civiles immobilières) and transfers of shares in companies whose assets are predominantly property. These disputes, often technical and confidential, lend themselves well to arbitration.

Two reservations deserve attention. First, commercial leases: the commercial lease statute contains provisions of public policy, and the fixing of the revised or renewed rent falls within the jurisdiction of the commercial rent judge (juge des loyers commerciaux). An arbitration clause in a commercial lease must therefore be handled with caution, by identifying precisely the disputes that are arbitrable and those that fall outside the arbitrator's remit.

Second, protection of the non-professional. Article 2061 of the French Civil Code, in the wording resulting from Act No. 2016-1547 of 18 November 2016 on the modernisation of justice in the 21st century, provides that the arbitration clause must have been accepted by the party against whom it is invoked and that where one of the parties has not contracted in the course of a professional activity, the clause cannot be invoked against that party. In practical terms, an individual who buys a dwelling off plan (vente en l'état futur d'achèvement) cannot have an arbitration clause imposed on him or her: he or she remains free to bring the matter before the state court. This rule limits arbitration to relations between professionals and excludes property contracts concluded by a consumer.

A confusion should be avoided in passing: the "superior court of arbitration" (cour supérieure d'arbitrage) mentioned in Articles L525-9 and R2524-14 of the French Labour Code concerns exclusively the arbitration of collective labour disputes. This specific mechanism has no connection with the commercial or property arbitration governed by the Code of Civil Procedure.

Anticipating what follows: from the award to the action to set aside

Drafting an arbitration clause also means anticipating the outcome of the proceedings and the residual remedies. The arbitral award has, from the moment it is made, the authority of res judicata in respect of the dispute it decides, by virtue of Article 1484 of the French Code of Civil Procedure. It is not enforceable as of right: its enforcement requires an exequatur order issued by the tribunal judiciaire.

Arbitration does not open an appeal on the merits in international matters. The only ordinary remedy is the action to set aside. For an award made in France in international arbitration, Article 1520 of the French Code of Civil Procedure exhaustively lists five grounds: lack of jurisdiction of the arbitral tribunal, irregular constitution of the tribunal, the tribunal exceeding its mandate, breach of due process, and recognition or enforcement being contrary to international public policy. In domestic arbitration, Article 1492 of the same code provides six comparable grounds. In all cases, the judge hearing the action to set aside does not retry the case on the merits: the judge exercises a limited review of the regularity of the award.

This restrictive framework reinforces the importance of the initial drafting. The jurisdiction of the arbitral tribunal, the extent of its mandate and respect for due process derive in part from the arbitration clause: a clause that is imprecise on the scope of arbitrable disputes opens the door to a ground for setting aside based on the tribunal exceeding its mandate. The terms of the action to set aside the award are the subject of a detailed analysis in our article dedicated to challenging an arbitral award.

Conclusion

The arbitration clause is not a boilerplate formula: it is a micro-agreement that organises, in advance, the resolution of a future dispute. Well drafted, it offers confidentiality, neutrality and cross-border effectiveness; botched, it generates costly preliminary litigation or deprives a party of a useful remedy. The position taken in this guide is clear: arbitration is won upstream, at the negotiating table, not in the hearing room. Three requirements sum up the approach. First, check that the stakes and the scale of the contract justify arbitration rather than the state courts. Second, fix, without leaving them blank, the seat, the language, the institution, the number of arbitrators and the governing law. Third, start from the model clause of the chosen institution rather than from risky in-house drafting.

Before any signature, have your arbitration clause reviewed by an arbitration practitioner: half an hour of analysis at the negotiation stage avoids months of debate over jurisdiction on the day of the dispute.

Frequently asked questions

What is the difference between an arbitration clause and a submission agreement? The arbitration clause, defined in Article 1442 of the French Code of Civil Procedure, is stipulated in the contract before any dispute: it provides for future disputes to be submitted to arbitration. The submission agreement (compromis) concerns a dispute that has already arisen. In practice, the arbitration clause is the reference tool, because obtaining an opponent's agreement to sign a submission agreement after the conflict has begun is rarely possible.

Is an arbitration clause valid in a property contract signed by an individual? No, it cannot be imposed on him or her. Article 2061 of the French Civil Code, resulting from Act No. 2016-1547 of 18 November 2016, provides that the arbitration clause cannot be invoked against a party that has not contracted in the course of a professional activity. An individual purchaser of a dwelling therefore retains the right to bring the matter before the state court, even if the contract contains an arbitration clause.

What does the seat of arbitration mean and why is it important? The seat is the legal connection of the proceedings, distinct from the physical place of the hearings. It determines the applicable procedural law and above all the courts competent to hear an action to set aside the award. Fixing a seat in France, whose arbitration law derives from Decree No. 2011-48 of 13 January 2011, offers a predictable framework favourable to the effectiveness of awards.

Can an arbitral award be appealed? In international arbitration, there is no appeal on the merits: the only ordinary remedy is the action to set aside, the grounds for which are exhaustively listed in Article 1520 of the French Code of Civil Procedure. In domestic arbitration, Article 1492 provides comparable grounds. The judge hearing the action to set aside reviews the regularity of the award; the judge does not retry the case.

How can a badly drafted arbitration clause be recognised? A so-called pathological clause is recognised by its ambiguity: designation of a non-existent institution, simultaneous jurisdiction of arbitration and a state court without a hierarchy, silence on the seat and the language, or incompatibility between the stipulated arrangements and the chosen arbitration rules. These defects feed litigation over the very validity of the clause. The remedy is to adopt the model clause published by the chosen institution.

What distinguishes international arbitration from domestic arbitration? Article 1504 of the French Code of Civil Procedure classifies as international arbitration that involves the interests of international trade, according to an economic criterion and not one of nationality. The regime, set out in Articles 1504 to 1527, is more flexible than that of domestic arbitration. Its major advantage is the cross-border enforcement of awards, guaranteed by the New York Convention of 10 June 1958, ratified by more than 170 States.

Should one prefer a sole arbitrator or three arbitrators? A sole arbitrator reduces costs and time limits: it suits disputes of moderate value. A tribunal of three arbitrators, more expensive, offers more safeguards in complex or high-value cases, each party appointing one arbitrator. This choice must be fixed in the clause, with a mechanism for appointment in default of agreement, failing which the constitution of the tribunal risks being blocked.