Arbitration clauses in brokerage agreements : the art of writing to do nothing

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Publié le 18/09/2024 par Jérôme Goy et Jérôme Goy

INSURANCE LAW

Facts:

Arbitration clauses are becoming increasingly common in brokerage agreements between policyholders and brokers, and between brokers and insurers, yet they are not always applicable in practice. This type of clause, which makes it possible to set aside state justice in favor of arbitration in the event of a dispute relating to the application of the contract, must comply with certain drafting constraints if it is to be effective. In a ruling that brought a long legal battle to a close, the Paris Court of Appeal provided a clear illustration of this difficulty. In this case, a brokerage agreement was signed between an insurance company and a brokerage firm. The agreement could be terminated at any time in the event of one of the parties failing to meet its obligations, but also included an “Arbitration” clause stipulating that the parties would first seek to settle their dispute through arbitration. When a dispute arises and arbitration fails to satisfy both parties, they turn to the ordinary courts. Among the many grounds it puts forward on appeal, the brokerage company argues that the appellant company’s claims should be dismissed on the grounds of non-compliance with the “Arbitration” clause.

Court Decision:

The Court of Appeal, ruling after a referral from the French Supreme Court (Cour de Cassation), issued a confirmatory judgment, dismissing the claim on the grounds that the clause was “a simple optional undertaking, non-binding and non-mandatory (1)”. This type of clause is most often found in brokerage contracts: “the parties shall endeavor to settle any dispute amicably”, followed by “the most diligent party may refer the matter to arbitration (2)”. In this case, the wording of the clause is so imprecise that it cannot be qualified as either an arbitration clause or a conciliation clause. It is simply an option left to the parties: the clause is therefore perfectly ineffective.

Commentary:

This appeal decision is only a topical example. Brokers are familiar with a large number of “arbitration” clauses included in their service agreements with clients or insurers. The main attraction of arbitration clauses is that they enable two professionals to have their dispute settled by a justice system that is reputed to be faster, more pragmatic and less public, in line with the often sought-after principle of business confidentiality. However, a poorly drafted arbitration clause produces exactly the opposite effect: it prolongs the dispute, makes it public, and creates a purely legal and procedural debate on its validity, far removed from the usual will of the parties.
We can therefore only recommend that brokers decide how to draft the clauses inserted in their standard service agreements: either opt for a clear, and above all imperative, arbitration clause, or do not insert any clause at all. Let your word be “yes”, if it’s “yes”, “no”, if it’s “no”. What is more comes from the Evil One.”