French Court Rules On Safe Harbor Of Netting Agreements In Insolvency

• Published date: 27 March 2024
• Law Firm: Jones Day
• Author: Mr Alban Caillemer Du Ferrage, Christopher Arnold, Dickson Chin, Qian Hu and Peter Petraro

In Short

The Situation: For the first time ever, a court in France has examined the compatibility of the statutory netting safe harbor with the French Constitution. The French High Court of Justice (Cour de cassation) addressed the preliminary question of constitutionality in the context of an insolvency proceeding and handed down its decision on March 6, 2024.

The Result: The court declined to refer the question to the French Supreme Court (Conseil constitutionnel) on the grounds that there was no serious legal question worthy of any further analysis. By doing so, the court affirmed that the protection against systemic risk, as well as the imperatives of legal certainty and stability of the financial system, are in the public general interest.

Looking Ahead: This decision sets a major precedent, confirming the soundness of the legal basis and fundamentals of close-out netting under French law.

In December 2023, an insolvency court in France received a "preliminary question of constitutionality" (a "PQC") regarding the constitutionality of the rules protecting master agreements for derivatives and transactions involving financial instruments. The issue raised the question of what happens when one of the counterparties is the subject of insolvency or similar proceedings, which'given the numerous rules in...