THE CONTRACT DE PARTENARIAT: A NEW FORM OF FRENCH PUBLIC PRIVATE PARTNERSHIP ALLOWING THE USE OF ARBITRATION TO ADJUDICATE DISPUTES

Transcription

1 THE CONTRACT DE PARTENARIAT: A NEW FORM OF FRENCH PUBLIC PRIVATE PARTNERSHIP ALLOWING THE USE OF ARBITRATION TO ADJUDICATE DISPUTES PIERRE HEITZMANN Jones Day This article has been reproduced with the permission of the publisher and originally appeared in Volume 23, Part 1 of The International Construction Law Review. The International Construction Law Review is the only journal devoted to the legal aspects of international construction. For more information or to subscribe please contact Clare Bendon on +44 (0) clare.bendon@informa.com or visit

2 THE CONTRAT DE PARTENARIAT: A NEW FORM OF FRENCH PUBLIC PRIVATE PARTNERSHIP ALLOWING THE USE OF ARBITRATION TO ADJUDICATE DISPUTES PIERRE HEITZMANN* Jones Day Introduction Following the recent success of public-private partnerships (PPPs) in some countries of the European Union and in particular in the UK with the Private Finance Initiative projects, 1 PPPs have been recognised as an alternative and cost-effective method to mobilise, through project financing, additional financial resources and benefits from the private sector, especially in the context of financial shortages in the public sector. The recent Resource Book on PPP Case Studies released by the European Commission 2 shows that PPPs have been widely used in Europe and that the traditional concession model has been adapted to new needs coming from both the public and private sectors. A few months after the European Commission published the Guidelines for Successful Public-Private Partnerships in March 2003, 3 under European Commissioner for Regional Policy and Institutional Reform Michel Barnier, the French legislature passed Law No and authorised the government to prepare new regulations through a governmental Act 4 ( ordonnance ) to * The author is a member of the Paris Bar and of the Paris international arbitration team of Jones Day. He also teaches international contracts law at the Paris Institute for Political Sciences (Sciences-Po). Mr Heitzmann completed his legal studies in France and is a graduate of Sciences-Po; he also holds an LLM from Duke University. The views expressed in this article are the views of the author and should not be considered the views of Jones Day or of its clients. The English translations provided in this article from French judicial decisions and legal provisions are by the author. Copyright by the author. A short comment by Mr Heitzmann on the decision of the French Administrative Supreme Court dated 29 October 2004 appeared in the October 2005 issue of Mealey s International Arbitration Report. 1 See the report issued in July 2003 by HM Treasury, PFI: Meeting the Investment Challenge, available at 2 See Resource Book on PPP Case Studies, European Commission, DG Regional Policy, June 2004, available at 3 Guidelines for Successful Public-Private Partnerships, European Commission, March 2003, available on 4 Law No dated 2 July 2003 authorising the government to simplify the law (Loi n du 2 juillet 2003 habilitant le Gouvernement à simplifier le droit), published in the JORF of 3 July 2003, available on Once ratified by the legislature, a governmental act ( ordonnance ) acquires the status of a Law retroactively.

3 Pt 1] The Contrat de Partenariat 21 modernise the regime of contracts between public entities and the private sector. In the meantime, on 31 March 2004, the European Union adopted Directive 2004/18/EC on the Coordination of Procedures for the Award of Public Works Contracts, Public Supply Contracts and Public Service Contracts. 5 With this Directive, the European Parliament and Council adopted general and simplified rules for public procurement contracts to ensure more competition and better access to bids throughout the European Union. Through Governmental Act No (the Act ) dated 17 June 2004, 6 France introduced a new and general form of Public-Private Partnership, the Contrat de Partenariat (literally, partnership contract ). Consistent with Directive No 2004/18/EC, the French Government introduced a new form of PPP which allows the conclusion of public works contracts providing for the financing, design, construction, operation and maintenance of public infrastructure. In addition, the Act explicitly authorises parties to a partnership contract to submit their disputes to arbitration, subject to the application of French law. A broad derogation from the general principle prohibiting French Government entities from arbitrating disputes in domestic contracts is thereby introduced for the first time in French public procurement contract law. A group of French senators and some private associations (including the Association for Transparency and Morality in Public Works) challenged the legality of the Act on many grounds. The legality of the provision authorising parties to a partnership contract to submit their disputes to arbitration was questioned since the legislature had not explicitly authorised the government to depart from the general principle prohibiting French Government entities from arbitrating disputes. On 29 October 2004, the French Administrative Supreme Court (Conseil d Etat) confirmed the validity of this provision. It also acknowledged the suitability of arbitration to resolve disputes arising out of long-term contracts which often involve major investments. The introduction of the partnership contract as a new form of PPP departs from the general principle in French administrative law prohibiting the conclusion of a global contract for the design, construction, operation and maintenance of public works with deferred payments by public entities. Furthermore, the decision of the French Administrative Supreme Court is 5 See European Union Directive 2004/18/EC on the Coordination of Procedures for the Award of Public Works Contracts, Public Supply Contracts and Public Service Contracts, available at 6 Ordonnance No dated 17 June 2004, published in JO No 141 of 19 June 2004 at p , also available at

4 22 The International Construction Law Review [2006 distinguished from previous decisions by its pro-arbitration orientation. These recent developments deserve to be particularly noted and welcomed in the fields of public procurement contracts and arbitration law in France. The Contrat de Partenariat, a new form of PPP in France The partnership contract is often described as a kind of hybrid PPP contract by most practitioners. 7 Modernising French public-private partnerships was a necessity in France, where none of the existing forms of public private contracts 8 could encompass in one contract the services of engineering, construction, financing, operation and maintenance, such as the BOT (Build-Operate-Transfer), BOOT (Build-Own-Operate-Transfer), DBFO (Design-Build-Finance-Operate) or BOO (Build-Own-Operate) contracts which are usually described as the most common forms of PPPs. 9 The form of French PPPs which was the closest to BOT or DBFO contracts was the Public Works Companies Contract ( Marché d Entreprises de Travaux Publics or METP), where the construction and operation of heavy infrastructure was financed through the amortisation of private investments. However, the METPs were criticised because they introduced nontransparent mechanisms of financing with potentially exceptionally high internal rates of return. In two decisions rendered in 1999, the French 7 For a general study of the partnership contract, see Philippe Delelis, Partenariats public-privé, Jurisclasseur Administratif, Fasc 671 (2005); F Brenet & F Melleray, Les contrats de partenariats de l ordonnance du 17 juin 2004 (Litec, 2005); see also, B Martor and S Thouvenot, Le contrat de partenariat: la nouvelle alternative aux modes traditionnels d achats publics, JCP Administration et collectivités territoriales, 5 July 2004, No 28, p. 931; O Debouzy and P Guillot, Le contrat de partenariat public-privé et la réforme de l achat public (DS, 2005), p. 319; J M Peyrical & D Blondel, Contrats de PPPs et montages en boucle: de nouveaux outils pour la pratique, JCP Ed Notariale et Immobilière, 1 April 2005, Nos 13 14, p. 668; B Martor and S Thouvenot, Partnership Contracts or the revival of Public-Private Partnerships à la française, RDAI/IBLJ, No 2, 2004, p. 1111; P Lignières and A Ménéménis, Débat sur les contrats de partenariat, Droit Adm, Nov 2004; General study dedicated to the Partnership Contract, Revue de Droit Bancaire & Financier, March-April 2005, 58 85; Les contrats de partenariats Principes et méthodes, available at 8 The traditional forms of French PPPs include various forms of delegation of public service: (1) the concession de service public, where the concessionaire manages at its own risk public services and sometimes finances the related equipment, such as highways or public parking; he is usually paid by users and often receives a subsidy from the state, (2) the affermage, similar to the concession except that the private contractor or fermier (literally the farmer ) is always provided with built infrastructure, usually for water supply and transport services and (3) the régie intéressée, where the private party or régisseur manages services on behalf of the government without assuming the financial risks related to the management of services; he is compensated by the government and part of his compensation depends upon the revenues of the project. Furthermore, administrative long-term leases (bail emphytéotique administratif or BEA, a form of administrative contract created by the Law of 5 January 1988) have been used to design, build and transfer complex infrastructure or buildings on public land made available to the private entity. 9 See EC Guidelines of 2003, supra note 3, at p. 18

5 Pt 1] The Contrat de Partenariat 23 Administrative Supreme Court held that METPs were invalid, 10 holding that METPs needed to comply with the French Public Procurement Code, in particular with the rules imposing the conclusion of separate contracts for the construction, operation and maintenance of public works, and the rule prohibiting deferred payments by public entities (Article 350 of the old Public Procurement Code, now Article 94 of the Public Procurement Code). The French legislature tried to relaunch the use of PPPs in 2002 to encourage private investment in the public sectors of internal security, justice, defence and health, authorising recourse to leasing techniques and a single contract for the design, construction and maintenance of buildings such as prisons, police stations, military bases or hospitals. 11 The contracts concluded in these specific sectors are still subject to the general rules of the French Public Procurement Code, including the general rule prohibiting deferred payments. 12 The French regulatory environment was therefore not adapted to project financing techniques, which usually require the management of revenues and debts of all aspects of a project through a single project company. The main innovations of the Act consist in allowing public entities to contract with private entities for global services including engineering, construction, financing, operation and maintenance, and in authorising payments by the public entity during the duration of the contract (which may be linked to the performance objectives assigned to the project). For that reason, the partnership contract has been described as the new form of DBFO contract, 13 although the Act does not require the partnership contract always to include the financing, design, construction and operation of a project. Numerous possibilities combining only certain services may be contemplated depending on the needs of the project. 10 French Administrative Supreme Court (Conseil d Etat), 8 February 1999, Préfet des Bouches du Rhône v. Commune de la Ciotat, AJDA, 20 April 1999, p. 364; see also French Administrative Supreme Court, 30 June 1999, Département de l Orne v. Société Gespace France, Droit Administratif 1999, Commentaire No Law No of 29 August 2002 (Loi N du 29 août 2002 d orientation et de programmation sur la sécurité intérieure or LOPSI ); Loi d orientation et de programmation sur la justice (LOPJU) (Law No of 9 September 2002); Law No of 27 January 2003 relative à la programmation militaire pour les années 2003 à 2008; Ordonnance No of 4 September 2003 portant simplification de l organisation et du fonctionnement du système de santé. 12 In practice, however, the leasing component has been used to finance most of the project when possible. A recent example of a French PPP is the â30 million Paris Quinze-Vingts Hospital project, a long-term lease financing contract (bail emphytéotique). The project company is in charge of the design, building, financing and maintenance of a building leased to the hospital and other companies for a 27-year period after which the facilities will be transferred without costs to the hospital. Most of the project costs are financed through the lease. See Les Echos, 8 April 2005 and Le Monde, 12 April See also A Maréchal, infra note See P Lignières, Les PPPs, de nouvelles opportunités pour les enterprises, Cahiers de Droit de l Entreprise, No 3, May June 2005.

6 24 The International Construction Law Review [2006 Public Responsibility Private Responsibility 9 : Public Procurement Contracts/ Marchés de Travaux Publics : 8 administration of public service is not delegated construction risk shared by public and private entities no deferred payments financing by public entity performance and demand risks assumed by public entity adapted to short-term projects, not adapted to complex projects which need heavy investment Partnership Contracts/ Contrats de Partenariats : 8 administration of public service is not delegated construction risk assumed by private contractor deferred payments by public entity project financed by private party performance and/or demand risks shared with private entity depending (to be negotiated) adapted to complex and long-term projects which need heavy investment/ financing Concession Contracts/ Contrats de Concession : 8 management of public service is delegated/transferred construction risk assumed by private contractor unless the economy of the contract is drastically changed payments by endusers (demand risk assumed by concessionaire) financed by private party performance risks assumed by private entity adapted to long-term projects and often used in water, waste and transport sectors Partnership contracts are defined in the Act as: administrative contracts under which the State or a State-owned entity entrusts a third party, for a period defined depending on the duration of the amortisation of the investments or financing mechanisms selected, with a global task dealing with the financing of intangible investments, projects or equipment needed for the public service, the construction or modification of buildings or equipment as well as the corresponding upkeep, maintenance, operation or management, and when applicable, other services concurring to the performance, by the public entity, of the task of public service it is in charge of See supra note 6.

7 Pt 1] The Contrat de Partenariat 25 When private land is provided for the purpose of erecting buildings or installing equipment, the project company will enjoy in rem ownership rights attached to such buildings or equipment during the duration of the project. There are no particular restrictions regarding the status of the private party contracting with the public entity, and, therefore, contractual or corporate joint ventures, or use of subcontracting, may be contemplated depending on the circumstances. Unlike the concession and other forms of delegations of public service, the Contrat de Partenariat does not involve the management of public services: although the infrastructure, buildings or equipment and the associated services of operation and maintenance subject to partnership contracts are supposed to contribute to the implementation of a general public service, the public entity will keep control of the public service. The Act requires that a thorough and detailed assessment of the economic, financial, legal, administrative and technical aspects of the project be made before considering the conclusion of a partnership contract, including an evaluation of the global costs, performance, risk sharing and other options available to set up the project. The public entity must provide the reasons for selecting the partnership contract instead of other forms of contracts potentially available, and show that either the complexity of the project or the urgency of the public need justify the selection of the form of partnership contract (Article 2(a) of the Act). Article 5 of the Act states that a project is deemed complex where the public entity is objectively incapable of defining the technical means to address its needs or to establish the financial or legal framework of the project. Urgency is deemed to exist in cases where the supply of a public good or service is grossly inadequate and/or seriously behind, according to both the Administrative Supreme Court 15 and the Constitutional Council. 16 The French Public Procurement Code does not apply to partnership contracts 17 but the conclusion of partnership contracts is subject to the general rules of public procurement, including transparency, publicity, free access, equality in the treatment of bids received and objectivity of the procedures, and to the competitive dialogue procedure pursuant to Directive 2004/18/EC on the Coordination of Procedures for the Award of 15 French Administrative Supreme Court, 29 October 2004, Mr Sueur et al., published on N See Decision of the Constitutional Council, No DC of 2 December 2004, available at 17 See Opinion No of the Administrative Supreme Court dated 3 June 2004, and Response by the Ministry of the Economy, published in JO of 6 September 2005, p. 8357, stating that partnership contracts are considered as a category of public works for the purpose of applying EU Directive 2004/18/EC (supra note 5), but that they are not governed by the French Public Procurement Code ( Les contrats de partenariat ne sont pas des marchés publics au sens du code des marchés publics, mais ils entrent dans la définition des marchés publics au sens communautaire ).

8 26 The International Construction Law Review [2006 Public Works Contracts, Public Supply Contracts and Public Service Contracts. 18 Also, the validity of the decision made by the public entity to launch a bid procedure involving partnership contract bids may be challenged before the administrative judge through summary proceedings, as already confirmed by the Administrative Supreme Court. 19 The administrative judge will verify that the complexity or the urgency of the project justifies the use of a partnership contract. Such challenges may delay the development of partnership contracts. The contract is to be awarded to the most competitive bid in economic terms, including the global cost of the project, the performance objectives and the recourse to small companies; additional criteria may be considered, such as the technical aspects of the bids, the innovative aspect of the project, the proposed schedule, and the functional suitability or aesthetics of the project. The possibility of agreeing to arbitrate disputes arising out of partnership contracts: a new derogation from the principle of prohibition in French administrative contracts The Act requires the inclusion of some 12 clauses dealing with specific contractual issues, 20 including dispute resolution mechanisms. Notably, it allows the use of arbitration, subject to the application of French law. Although the EC 2003 Guidelines for Successful Public-Private Partnerships clearly mentioned arbitration as a dispute resolution mechanism commonly adopted in PPPs, 21 this new provision allowing arbitration in a contract defined as an administrative contract is remarkable in French law, since it contradicts the general principle of French law prohibiting governmental entities from arbitrating their disputes. Indeed, this general rule was introduced as early as 1806 in the old French Code of Civil Procedure: Article 1006 prohibited arbitration of 18 See supra note See French Administrative Supreme Court, 29 October 2004, supra note The Act also provides that other provisions need to be inserted dealing with: (1) the duration of the project; (2) the division of risks between the public entity and the project company; (3) the agreed-upon objectives of performance; (4) the compensation of the project company, including a breakdown of the various costs for financing, investment and operation of the project and the projected additional revenues contemplated under the project; (5) the guaranteed dedication of the buildings and equipment to the public service managed by the public entity; (6) the tools allowing the public entity to control the good performance of the contract, including the compliance with the agreed-upon objectives of performance; (7) liquidated damages and penalties available to the public entity in case of violations of the contract, including non-compliance with the agreed-upon objectives of performance; (8) mechanisms available to amend the contract, including by unilateral decision of the public entity to take into account the evolution of the needs; (9) agreement procedures for the partial or total transfer of the contract; (10) conditions ensuring the continuity of public service including where the contract is terminated; (11) consequences of the termination of the contract (whether unexpected or not) regarding the ownership of the buildings and equipment. 21 See EC Guidelines of 2003, supra note 3, at p. 94.

9 Pt 1] The Contrat de Partenariat 27 disputes where a notification to the Attorney-General s office was required. Article 83 listed among such disputes those concerning public policy, the State, State property, the cities and the public bodies. The principle was restated by the French legislature in 1972, 22 in the French Civil Code at Article 2060: One may not enter into arbitration agreements in matters of... controversies concerning public bodies and entities and more generally in all matters in which public policy is concerned. Although at that time, the French Commercial Code authorised arbitration of domestic disputes and already recognised the validity of international arbitration agreements as a matter of principle, the legislature (wrongly) believed that it was useful to add a general provision stating that an arbitration agreement is void unless provided otherwise by law. (This new provision inserted at Article 2061 of the French Civil Code was abrogated in 2001 and replaced by the opposite principle.) However, this principle of prohibition was also adopted independently by the Administrative Supreme Court as a general principle of administrative law. After the French Revolution, the French legal and court systems were divided between the civil law system and the administrative law system, supposedly to ensure a true separation of powers 23 ; this dual court system has inspired many others in countries in North Africa, the Middle East and South America. 24 The tribunal resolving jurisdictional conflicts between civil and administrative courts held in the famous Blanco case that public administration could not be ruled by the principles established in the Civil Code for relationships between individuals and that it has special rules which vary depending on the needs of the [public] service and the necessity to reconcile the State s rights with rights of private parties. 25 Consistent with this general principle, the French Administrative Supreme Court held in a decision of 1893 that public law entities could not submit their contract disputes with private entities to arbitration. 26 The rationale of the government counsel ( Commissaire du Gouvernement ) was to avoid that public entities express a deplorable dislike vis-à-vis national 22 Law No dated 5 July 1972, inserted in the French Civil Code at Art 2061 until the 2001 reform. 23 Some authors have criticised the need to maintain this dual system of civil and administrative courts; for a recent comment, see D Truchet, Mauvaises et bonnes raisons de mettre fin au dualisme juidictionnel (Bad and Good reasons to put an end to the dual court system), Justices 1996, No 3, p See Conseil d Etat, L influence international du droit français, June 19, 2001, La Documentation Française at p. 54. See also Horacio A Grigera Naón, Les contrats d état: quelques réflexions, Rev Arb 2003, p. 667; and Hadi Slim, Les contrats d état et les spécificités des systèmes juridiques dualistes, Rev Arb 2003, p Tribunal of Conflicts, 8 February 1873, Blanco, D , S French Administrative Supreme Court, 17 March 1893, Compagnies du Nord v. Ministre de la Guerre, S

10 28 The International Construction Law Review [2006 courts, and at the same time, neglect, while defending public interests which they are entrusted with, the safeguards which only this justice entails. 27 The landmark SNVS case of confirmed this trend. SNVS, a commercial and industrial public entity ( Etablissement Public Industriel et Commercial or EPIC) had agreed to arbitrate an existing dispute with CGTT, a private company located in Tangier, following the performance of a contract for the transportation of pipelines. An award was rendered ordering SNVS to pay a substantial amount to CGTT. SNVS challenged the award arguing that the arbitration agreement was void. In his recommendations to the Administrative Supreme Court, the government counsel stated that the provisions of the old French Code of Civil Procedure (Articles 83 and 1006) prohibiting arbitration of disputes concerning public policy, the state, state property, the cities and the public bodies constituted only some legal window dressing for a more general principle of administrative law prohibiting arbitration agreements involving public entities. The government counsel acknowledged in his submission that validating such an arbitration agreement would be consistent with the provision of the Commercial Code allowing arbitration between merchants, a recent decision from the Paris Court of Appeals, the majority of authors and even a recent opinion of the Administrative Supreme Court. He also recognised that declaring the arbitration void would be shocking since SNVS had agreed to arbitrate an existing dispute and challenged the arbitration agreement only after an award adverse to SNVS was rendered. Nevertheless, he recommended that the arbitration agreement be declared void on the basis that only a law could authorise a commercial and industrial public entity such as SNVS to arbitrate, and warned the Supreme Court that approving the arbitration agreement would create a precedent for commercial and industrial public entities whose activities were more administrative than commercial. The court declared the arbitration agreement void. This chauvinistic view distrusting arbitration unfortunately remained embedded in the minds of most administrative judges, at least until the decision of the Administrative Supreme Court of 29 October However, since 1893, the French legislature has recognised the potential benefits of arbitration and authorised its use on a case by case basis in contracts or disputes involving public entities, even before it acknowledged in 1925 the validity of arbitration agreements between merchants. 27 Ibid. 28 French Administrative Supreme Court Ass., 13 December 1957, Société Nationale de Vente des Surplus ( SNVS ), D 1958, pp. 517 and 519.

11 Pt 1] The Contrat de Partenariat 29 In 1906, the French legislature authorised the French state, French counties (départements) and cities to liquidate their expenses related to public works and supplies through arbitration; this provision was inserted in the old Public Procurement Code (Articles 247 and 361). Notably, the legislator explicitly referred to the arbitration rules of the Code of Civil Procedure. 29 This provision is now inserted at Article 132 of the New Public Procurement Code. In 1966 France ratified the 1961 European Convention on International Commercial Arbitration (Geneva), which provides in Article II.1 that legal persons of public law have the right to conclude valid arbitration agreements. In 1967 France ratified the 1965 Washington Convention creating ICSID, with the purpose of facilitating arbitration disputes between private investors and states. A Law of 9 July 1975 introduced a general provision to complement and lessen the general principle of Article 2060 of the French Civil Code, providing that categories of public entities of an industrial or commercial character may be authorised by decree to enter into arbitration agreements. Several laws and decrees later authorised public entities with industrial and commercial activities to conclude arbitration agreements, 30 including the national railroad company SNCF in 1982, 31 La Poste and France Telecom in 1990, 32 Electricité de France and Gaz de France in In 2001, the NRE Law reversed the principle of nullity of arbitration agreements unless provided otherwise by law, which had been inserted in 1972 at Article 2061 of the French Civil Code, and adopted a pro-arbitration provision stating that unless specifically provided otherwise by law, the arbitration agreement is valid in contracts concluded for the purpose of a professional activity. This reform put an end to the highly controversial AREA case of the Administrative Supreme Court, which had explicitly relied on the former version of Article 2061 to declare void an arbitration agreement inserted in a subcontract governed by administrative law, but 29 Law of 17 April 1906, Art 69. The original text provides: Pour la liquidation de leurs dépenses de travaux publics et fournitures, l État, les départements et les communes pourront recourir à l arbitrage tel qu il est réglé par le livre III du code de procédure civile. En ce qui concerne l État, il ne pourra être procédé à l arbitrage qu en vertu d un décret rendu en conseil des ministres et contresigné par le ministre compétent et le ministre de l économie et des finances. 30 For an exhaustive list, see Yves Gaudemet, Arbitrage et Droit Public, Droit et Patrimoine, June 2002, No. 105, p Law of 30 December 1982, Rev Arb 1983, p Law of 2 July 1990, Rev Arb 1990, p Decree of 8 January 2002; some practitioners have noted with amusement that arbitration agreements were indeed inserted in a contract dated 1951 between EDF and GDF: see P Sablière, La loi du 8 avril 1946 sur la nationalisation de l électricité et du gaz, CJEG, quoted by Yves Gaudemet, supra note 30, p. 83.

12 30 The International Construction Law Review [2006 concluded between two private parties, one of them acting on behalf of the state for the performance of a long-term concession agreement. 34 The Act introduces an additional and broader exception to the general principle of prohibition of arbitration agreements in domestic administrative contracts. It is not restricted to existing disputes or to certain categories of public entities. The mandatory application of French law to partnership contracts The Act provides that parties to a partnership contract may submit disputes to arbitration, with the application of French law. As the French Administrative Supreme Court pointed out, this possibility to arbitrate disputes with the application of French law is an explicit derogation from the general principle applicable to French domestic contracts. For the same reason, and given the general principle of freedom of choice of the law governing international contracts confirmed by Article 3 of the Rome Convention, one may wonder whether the legislature ever intended to impose French administrative law on international partnership contracts, especially given the position of French courts which consistently rejected challenges of foreign awards where foreign public entities challenged awards arguing that the arbitral tribunal should have applied administrative law instead of civil law. 35 In any event, the fact that the legislature imposed the application of French law is not surprising, since in public-private contracts involving project-financed transactions, the applicable law is almost always the law of the state hosting the project. Imposing the application of French law on the merits may have been inserted to prevent parties from agreeing to let arbitrators decide ex aequo et bono in contracts where public interest is often heavily involved. However, the application of French law is more likely to be understood as a wish of the government to promote the application of French administrative law, since the Act defines partnership contracts as administrative contracts. 36 An official governmental instruction (Circulaire) dated 8 May 34 See French Administrative Supreme Court, 3 March 1989, Rec Leb p. 69, Rev Arb 1989, p Regarding the impact of the 2001 reform of Art 2061, see Ph Fouchard, La laborieuse réforme de la clause compromissoire par la loi du 15 mai 2001, Rev Arb 2001, p. 397; Ch Jarrosson, Le nouvel essor de la clause compromissoire après la loi du 15 mai 2001, JCP Ed E 2001, p. 1371; see also Yves Gaudemet, supra note 30, p. 83; Ph Marini and F Fages, La réforme de la clause compromissoire, D. 2001, Chroniques, No 32, p In one landmark case, the Paris Court of Appeals recognised and enforced a foreign award against the Republic of Egypt which had been annulled by the Egyptian courts on the basis that the tribunal had (supposedly) wrongly applied principles of Egyptian civil law instead of Egyptian administrative law. See Chromalloy Aero Services v. Republic of Egypt, Paris Court of Appeals, 14 January 1997, Rev Arb, , commented on by Ph Fouchard. See also Ministère tunisien de l Equipement v. société Bec Frères, Paris Court of Appeals, 24 Feb 1994, Rev Arb, , commented by Y Gaudemet, rejecting the challenge of an award based on the alleged administrative nature of the contract prohibiting arbitration clauses for such contracts. 36 Art 1 of the Act.

13 Pt 1] The Contrat de Partenariat , explicitly requested public agencies to submit their contracts to French (administrative) law, even for works to be performed abroad, which could otherwise expose the French state to the risks of litigation submitted to a foreign law and therefore out of reach of the French administrative judge. 37 Yet, French administrative law is not especially adapted to project-financed contracts where private parties invest considerable amounts in complex transactions, and therefore need as much legal certainty as possible. Because French administrative law is a body of French law historically built on case law, it is sometimes perceived as obscure. It is also criticised for ignoring the principle of sanctity of contracts. Notably, French administrative law empowers a public entity to impose sanctions on a private contractor and to modify unilaterally or terminate the contract during its term, on grounds of public policy, public security or public health. This creates considerable uncertainty for private investors in project-financed contracts, even if French administrative law has developed a principle of indemnification of the private contractor in such situations. Indeed, a recent report released by the Racines Group, a governmental task force in charge of following government strategy and mid/long-term plans, pointed out that the specificity of French administrative law may discourage private investments. As the report stated, [French] administrative contract law would gain by presenting more guarantees for private investors. 38 As some authors have suggested, one solution to avoid the application of administrative law could be for private investors to conclude PPPs with private parties who are entrusted by the French administration with certain public service tasks (the recent Italian experience on promotion contracts as a new form of PPP may be of interest). 39 Another solution would be for the French Government to create a legal environment more adapted to PPPs. Given the reputation of French administrative courts of tending to consider primarily the public interest, the submission of disputes to arbitral tribunals with the application of French administrative law may certainly 37 See Instruction (Circulaire) dated 3 May 1988, published in the JO of 8 May 1988, p. 6547, relating to the conclusion of public works abroad; this instruction acknowledged that the French Public Procurement Code would not necessarily govern contracts concluded and performed abroad and referred to the decision from the French Administrative Supreme Court of 3 July 1968, Sieur Lavigne, Rec T, No , p (also published at AJDA 1969, p. 253). On the issue of the possibility of applying foreign law to an administrative contract, see French Administrative Supreme Court, 8 May 1968, Epoux Fourny, Rec p. 289; French Administrative Supreme Court, 28 January 1983, Mme Johnston, Revue Crit DIP 1985, p. 316; French Administrative Supreme Court, 7 January 1987, Mme Félicien, Revue Crit DIP 1988, p July 2005 Report on PPPs and Local Projects published by the French administration, available at Les Cahiers du Plan, No 9 at p See Boris Martor and Sébastien Thouvenot, Partnership Contracts or the revival of Public-Private Partnerships à la française, RDAI,IBLJ, No 2, 2004 at p. 130.

14 32 The International Construction Law Review [2006 help to re-establish a more rational balance between the interests of private investors and the public. The French Administrative Supreme Court has reaffirmed the principle of validity of arbitration agreements in international administrative contracts The French Administrative Supreme Court made it plain in its 29 October 2004 decision that the general principle of prohibition of arbitration was applicable to domestic public works contracts. The court thereby implicitly reaffirmed the well-established principle of validity of arbitration agreements concluded by state-owned entities in international contracts: Whereas according to Article 11 of the challenged Act: A partnership contract necessarily includes provisions dealing:... (l) With the steps to prevent and resolve disputes, and with the conditions it may, if applicable, submit disputes to arbitration, with the application of French law ; that similar provisions can be found at paragraph (l) of Article L of the General Code of Regional Administrative Bodies, in its drafting resulting from the challenged act; that while authorising the Government to create new forms of contracts concluded by public entities or private parties mandated to perform a task of public service within the limits it defines, Article 6 of the law dated July 2, 2003, must be understood as allowing the authors of the challenged act to define a comprehensive legal regime for these new contracts, including the conditions to prevent and resolve disputes which may arise out of their performance; that, given the complexity of the said contracts, associated with inter alia the global character of the task entrusted to the party contracting with the administration, the duration of the commitments contracted and the mechanisms for the financing to arrange, making it necessary to put in place conditions fitted for dispute resolution, the authors of the challenged act had the authority, without misjudging the scope of this authorisation and without violating any rule or constitutional principle, to depart, through the provisions referenced above, from the general principle of law according to which public law entities cannot escape from the rules which determine the jurisdiction of national courts by empowering an arbitrator to decide the resolution of disputes to which they are a party and which deals with domestic contractual relationships; Allowing arbitration agreements in domestic contracts was a necessity for French project-financed transactions. Such projects usually involve the creation of a company dedicated to the project in the country hosting the project and often implicate foreign investment through contracts with public entities, financial institutions as well as construction companies or other companies involved in the completion of the project. Contracts involving cross-border investments would be considered as international contracts by the French Civil Supreme Court, but not necessarily by French administrative courts. The question of whether the prohibition of arbitration agreements in administrative contracts was applicable to international contracts remained 40 See French Administrative Supreme Court, 29 October 2004, supra note 15.

15 Pt 1] The Contrat de Partenariat 33 unsettled in French law for some time. 41 The controversy could have ended in 1986, when the Administrative Supreme Court was consulted by the government on the possibility of inserting an arbitration agreement in a contract between French administrative bodies and the Walt Disney company in connection with the EuroDisney project. The Administrative Supreme Court referred to Articles 2060 and 2061 of the Civil Code and held that the general principle of law which bars state-owned legal entities from submitting their disputes to arbitration was applicable to domestic contractual relationships. 42 However, the same court surprisingly concluded that the contract between the French state, other state-owned entities and Walt Disney Productions, a US company, should be governed by French domestic public policy rules, and not governed by principles applicable to international commerce. This decision was in contradiction with the definition of international arbitration integrated into the French new Code of Civil Procedure in 1981, according to which where international commercial interests are involved, the arbitration shall be an international one. A member of the Administrative Supreme Court, who later tried to justify the decision, referred to the classical principle of international law pursuant to which contracts concluded between a state and a foreign individual are not governed by international law and depend exclusively on domestic law, in general the one of the contracting State ; this archaic view simply ignores the reality of the numerous bilateral investment treaties signed by the French state, which directly refer to the application of principles of international 41 In 1957, the Paris Court of Appeals held that the prohibition of public entities concluding arbitration agreements should not be applicable to international commercial contracts, since the French state could waive such a prohibition for contracts concluded between French public entities and foreign private entities. Paris Court of Appeals, 10 April 1957, JCP 1957, II The Paris Court of Appeals nonetheless referred the case to the Tribunal resolving jurisdictional conflicts between civil and administrative courts, to clarify whether the signatory of the charterparty had the authority to sign an arbitration agreement on behalf of the French state. In a 1958 decision, the Tribunal held that the private courts had jurisdiction to decide this issue since the charterparty did not involve public service performance or some provisions out of the orbit of ordinary law. See Tribunal of Conflicts, 18 May 1958, D 1958, p A few months later, the Administrative Supreme Court, citing articles 1006 and 83 of the Code of Civil Procedure, took the opposite position in the SNVS case. French Administrative Supreme Court Ass, 13 December 1957, Société nationale de vente des surplus, Rec 677; D 1958, p. 517 and 519; AJDA 1958.II.91; see in particular the comments by Motulsky in JCP, 1958 II and Rev Arb 1958, p. 39. Less than 10 years after this decision, in two landmark decisions involving international maritime contracts (San Carlo and Galakis), the Civil Supreme Court confirmed the validity of arbitration agreements inserted in international contracts involving French state-owned entities, denying any application of the general principle contained in Arts 1006 and 83 of the Code of Civil Procedure to international contracts, Cass Civ 1st Chamber, 14 April 1964, ONIC v. Capitaine du San Carlo, D 1964, p. 637 and Cass Civ 1st Chamber, 2 May 1966, Bull Civ I, No 256, p In 1991 and 1994, the Paris Court of Appeals confirmed the validity of arbitration agreements concluded by state-owned entities, including foreign states and state-owned entities: Paris Court of Appeals, 17 Dec 1991, Gatoil v. NIOC, Rev Arb 1993, p. 281; Paris Court of Appeals, 24 Feb 1994, Ministère tunisien de l Equipement v. société Bec Frères, RTD Com, 1994, p Opinion dated 6 March 1986, French Administrative Supreme Court, Ass, Rev Arb 1992, p Jacques Ribs, Ombres et incertitudes de l arbitrage pour les personnes morales de droit public français, JCP 1990 Ed G, No 41, 3465.

16 34 The International Construction Law Review [2006 law to guarantee a reciprocal, fair and equitable treatment to private investors. 44 The decision was (rightly) perceived by many as nonsensical, since the Administrative Supreme Court could have used at least two legal grounds (which it explicitly rejected) to hold the arbitration agreement valid: the fact that the contract was international and that it could be qualified as an investment contract under the 1965 ICSID Convention. 45 This decision certainly exacerbated the differences in France between private law practitioners and professors on the one hand and the public and administrative law specialists on the other hand. It forced the legislature to vote the EuroDisney Law of 19 April 1986, which authorised the state, administrative bodies and entities to conclude arbitration agreements with foreign companies for projects of national importance, a law which was certainly not necessary given the ratification of the 1961 Geneva Convention and 1965 Washington Convention. 46 The nationalistic approach of the Administrative Supreme Court in effect establishes a double standard for defining international contracts. This is certainly embarrassing for a country like France, which has ratified many international treaties on international arbitration and some 84 bilateral investment treaties. In an area such as project finance and in the context of partnership contracts, a dual regime allowing arbitration only for international contracts would certainly have brought more legal uncertainty, where most projects are designed to concentrate the flows of revenue and debt in one project company established by the foreign investor in the country hosting the overall investment. The recognition by the French Administrative Supreme Court of the adequacy of arbitration for complex project-financed contracts The recent decision of the French Administrative Supreme Court held that the government had been authorised to depart, without violating any rule 44 Some authors like Professor Pierre Mayer, have argued that transnational principles of law should apply to international contracts involving states on the basis that private parties are not natural actors or subjects of international public law and cannot be vested with rights and obligations under international public law (see P Mayer, La neutralisation du pouvoir normatif des Etats, JDI 1986, p. 5); for a recent summary of the debate on the law applicable to state contracts, see Charles Leben, L évolution de la notion de contrat d état les états dans le contentieux économique international, Rev Arb 2003, p. 629, strongly dissenting with P Mayer and providing examples of state contracts and bilateral investment treaties referring to international law principles applicable to disputes between states and private investors. 45 See Matthieu de Boisséson, Interrogations et doutes sur une évolution législative: l article 9 de la loi du 19 août 1986, Rev Arb 1987, p According to Art 55 of the French Constitution, international treaties prevail over national laws once they have been ratified and published, provided there is reciprocity in their application; however both the Civil and Administrative Supreme Courts have confirmed that the superiority of international treaties does not apply to constitutional provisions or principles: see French Administrative Supreme Court, 30 October 1998, Sarran et Levacher, Rec p. 368 and RFDA 1998, p. 1091, and Cour de Cassation, June 2, 2000, Dalloz Sirey, No 42, 30 Nov 2000, pp

17 Pt 1] The Contrat de Partenariat 35 or constitutional principle... from the general principle of law according to which public law entities cannot escape from the rules which determine the jurisdiction of national courts by empowering an arbitrator to decide the resolution of disputes to which they are a party and which deals with domestic contractual relationships. Indeed, it was not clear at all that the legislature, which had authorised the government to create new forms of contracts, had also authorised the government to depart from the general principle of prohibition of arbitration clauses in administrative contracts. In other words, the Administrative Supreme Court could have decided that this provision was illegal and void. The conclusions submitted by the counsel for the government are worth quoting: We are left with the last ground [to challenge the Act] which triggered for us, we will not hide it, a real hesitation. 47 The French Administrative Supreme Court, by validating the provision, made a deliberate decision to promote the development of arbitration in administrative contracts. The French Administrative Supreme Court was faced with a problem, i.e., that the legislature had not explicitly authorised the government to depart from the general principle of administrative law prohibiting arbitration in domestic disputes involving public entities. Yet, it decided to validate the provision of the governmental Act, saying that the legislature s mandate to create new forms of contracts concluded by public entities or private parties mandated to perform a task of public service had to be understood as allowing the government to define a comprehensive legal regime for these new contracts, including the conditions to prevent and resolve disputes which may arise out of their performance. This is a significant change from the conservative SNVS case law, which explicitly required the legislature to authorise arbitration agreements for public entities with a commercial activity. But the Administrative Supreme Court went further than that; it held that the government could depart from the general principle of prohibition: given the complexity of the said contracts, associated with inter alia the global character of the task entrusted to the party contracting with the administration, the duration of the commitments contracted and the mechanisms for the financing to arrange, making it necessary to put in place conditions fitted for dispute resolution (emphasis added). This statement suggests that arbitration is more adapted to resolve disputes in complex contracts than administrative courts, and constitutes a serious change in the case law developed by the Administrative Supreme Court. 48 It 47 French Administrative Supreme Court, 29 October 2004, conclusions of the government counsel, RFDA, Nov Dec 2004, p See the comment of D Foussard in Rev Arb 2005, p. 134, emphasising the creativity of the decision to validate the provision authorising arbitration agreements in partnership contracts. See also Gaz Pal of 6 Nov 2004, pp and DA of January 2005 at p. 23.

18 36 The International Construction Law Review [2006 would naturally follow that an award could and should be able to resolve finally such disputes. This opinion also contrasts with the opinion rendered in 1986 in connection with the EuroDisney project, where the Administrative Supreme Court stated that an appeal on the merits was available against any arbitral award as a matter of right (in disputes dealing with domestic administrative contracts), and could only be waived through an express provision voted by the legislator. 49 Finally, the Administrative Supreme Court held that the new provision authorising arbitration did not violate any rule or constitutional principle. Because the EuroDisney opinion had relied on the former version of Article 2061 of the Civil Code prohibiting arbitration without an express authorisation by the legislator, the reference to the lack of any contradictory rule may be interpreted as an implicit reference to the new Article 2061 of the French Civil Code, which authorises arbitration agreements inserted in contracts concluded for the purpose of a professional activity. With respect to the conformity of the new provision with the French Constitution, the Administrative Supreme Court rightly held that there was no constitutional principle prohibiting arbitration agreements in administrative contracts. This position was confirmed two months later by the French Constitutional Council. 50 The reference to the adequacy of arbitration to resolve complex disputes signals a surprising and most welcome change in the long-lasting suspicion of administrative courts towards arbitration. It further hints that parties agreeing to arbitration in domestic public works contracts could waive an appeal on the merits. As a result, the final decision of the arbitrator(s) would not be reviewed by the administrative judge, provided that the parties clearly waived such an appeal prior to the arbitration agreement. The regime of the procedural rules governing the arbitration procedure remains unclear however: will a civil judge or administrative judge appoint arbitrators when needed? Should it be the President of the Civil Court ( Président du Tribunal de Grande Instance ), who is accustomed to doing this, or the administrative judge, as some public law authors suggest? 51 Which court should have jurisdiction if a party challenges the arbitration award? Should the rules of the new Code of Civil Procedure apply? Again, and if the idea is to promote PPPs and encourage private investment, the legislature should confirm that any challenge of awards should be based on the rules of the new Code of Civil Procedure, just like the legislature explicitly referred to the rules of the old Code of Civil Procedure in French Administrative Supreme Court, 6 March 1986, Rev Arb 1992, p See Constitutional Council Decision of 2 December 2004, supra note See Matthias Audit, Le Contrat de partenariat ou l essor de l arbitrage en matière administrative, Rev Arb 2004, p. 541.

19 Pt 1] The Contrat de Partenariat 37 when it authorised certain public entities to arbitrate a category of disputes. 52 One last word, in memory of the late Professor Fouchard. When the French legislature felt compelled to vote a new law authorising certain French state-owned entities (La Poste and France Telecom) to arbitrate in 1990, Professor Fouchard pointed out that the principle of prohibition of arbitration in commercial administrative contracts was archaic and defended only by a techno-structure trained by the very French School of National Administration deeply installed within the French State. 53 More than 10 years have passed since then, and following the reform of Article 2061 of the French Civil Code, it is clear that the old principle of prohibition of arbitration in commercial administrative contracts, although still in place, is losing supporters. Conclusion Both the decision by the legislature to create a new form of PPP for which disputes can be arbitrated and the decision of the French Administrative Supreme Court confirming the validity and adequacy of arbitration in partnership contracts should be understood as a natural development of the 2001 reform of Article 2061 of the French Civil Code. The reasons given by the Administrative Supreme Court for validating the 2004 reform indicate a significant change in the attitude of this deeply conservative institution towards arbitration. Yet, one could have hoped to have additional clarifications from the legislature (or from the judge) with respect to the rules governing arbitration proceedings and the enforcement of awards, regardless of whether such arbitration proceedings would be considered as domestic or international. One important objective of the government is to have the private sector carry the burden of the debt created by the financing of PPPs, and as a result to reduce the public debt. 54 The French Government s need to develop PPPs is significant, and has been evaluated at over â20 billion. 55 One year after being introduced in France, however, the partnership contract has not been used by French governmental entities. As a result of 52 Several eminent practitioners have supported the view that awards dealing with administrative contracts should be reviewed by civil courts under the rules of the new Code of Civil Procedure, like any award dealing with a contract concluded for the purpose of a professional activity: see Jean-Louis Delvolvé, L arbitre et le contrat administrative, in De Lege Feranda : Etudes pour le Professeur Alain Hirsch (Geneva: Ed Slatkine, 2004), p. 115; see also L Degos, La percée de l arbitrage dans la justice administrative: le contentieux du contrat de partenariat, Décideurs SF&D, April 2005, No 63, p Rev Arb 1990, p According to the Eurostat decision of 11 February 2004 (STAT/04/18), the public entity does not have to record the debt of the project in its books if the private partner bears the construction risk and either the risk of end-users demand (where the public entity can reduce payments depending on the actual demand) or the risk of the availability (where the public entity may reduce payments or penalise the private partner if the service/output is not available/satisfactory). 55 See O Debouzy & P Guillot, supra note 7.

20 38 The International Construction Law Review [2006 this slow uptake, the French Minister of Economy has recently asked 10 ministers to identify at least three projects which could be financed and arranged through partnership contracts. 56 This lack of interest has been attributed to the complex and lengthy procedure which obliges all partners to prove the superiority of a partnership contract over any other form of PPP, and to demonstrate the complexity or urgency of the project. Private investors may prefer to use other forms of PPPs, such as the administrative long-term lease financing contract (BEA or Bail Emphytéotique Administratif) which do not involve such mandatory procedures. 57 In addition, the partnership contract still raises certain tax questions. 58 Yet, a confirmation that the rules of the new Code of Civil Procedure would be applicable to arbitration proceedings would certainly reassure potential investors. 56 See Les Echos, 22 August 2005, p. 4 and the 19 July 2005 Report on PPPs and Local Projects published by the French administration, available at Les Cahiers du Plan, No A Maréchal, Quand le bail emphytéotique hospitalier prive d intérêt le contrat de partenariat, JCP Ed Adm & Coll Terr, 23 May 2005, p. 843; see also supra note One challenge for future partnership contracts will be to neutralise the impact of value-added tax on project costs, since the current regime applicable creates potential negative impacts for project companies which are not eligible for the Compensation Fund for VAT.