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French Supreme Court rules that guarantors can challenge arbitration cases

FOCUS: The French Supreme Court has ruled that a third party guarantor can now challenge an arbitration decision. This has clarified a point that has been under debate for some time in France. 15 Sep 2015

Until now it has been thought that a guarantor can't challenge a decision as a third party if its own debtor is in the arbitration case. Under French law, a debtor is seen as representing the guarantor, so the guarantor is, in effect, involved in the case.

However, the Supreme Court has ruled that the guarantor can challenge an arbitration decision if it did not take part in the arbitration.

In a case between Société Pierre et Vacances and Immobilier Monceau Investisse Holding, (link in French) a subsidiary of Société Pierre agreed to sell shares in a second subsidiary to an outside company, Immobilier Monceau. 

As well as a shareholding purchase agreement (SPA), the first subsidiary gave Immobilier Monceau a guarantee covering the debts of the second subsidiary, including an arbitration clause. Its parent company, Société Pierre, gave the buyer its own guarantee, laying out the obligations of the second subsidiary but without an arbitration clause.

After the shares were transferred, debts emerged for the transferred company, and Immobilier Monceau began, and won, arbitration proceedings against the first subsidiary. It then made a further demand against Société Pierre under the guarantee.

Société Pierre responded by challenging the first arbitration decision, using a procedure under French law that is called tierce opposition. This allows a third party to challenge a decision to which it is not a party, but which affects it.

The Supreme Court supported Société Pierre in this, overturning a previous decision by the Paris Court of Appeal which had ruled that tierce opposition could not be used in this case. Under a French principle called representation des co-obligés, a guarantor is deemed to have been represented in court by the debtor. Société Pierre had therefore been represented in the case, and so tierce opposition could not be used, the Paris Court of Appeal said.

The Supreme Court, however, said that in this case Société Pierre had been deprived of the right to be heard by not being included in the arbitration case, and it therefore had the right to challenge the decision made.

The Supreme Court decision is important, although its impact will be limited because it only applies where the third party did not take part in the arbitration proceedings. In normal circumstances, under the principle of representation des co-obligés a guarantor would not be able to challenge a court decision against a debtor. This should therefore be seen as a specific exception to the principle, rather than a general ruling.

The decision is very welcome, however, as it clarifies the how the representation des co-obligés affects a challenge to an arbitration agreement by a guarantor under French law.

The Supreme Court has certainly discussed the tierce opposition in several arbitration cases. Until now, the understanding was that a third party challenge could only succeed if that party could show new grounds, which were not put forward in the original arbitration proceedings.

This case is a classic conundrum or arbitration, where you have multiple parties and interrelated agreements. It clarifies a question that has been debated for a while, and is expected to have wide repercussions across arbitration decision making.

The case will be published in the monthly bulletin of the Supreme Court and in its bi-monthly magazine, and also in the annual report: confirmation that it has made a significant change in the actual jurisprudence, and should be noted by the profession. 

Erwan Robert is a Paris-based litigation specialist at Pinsent Masons, the law firm behind Out-Law.com