## Facts

- A Libyan municipality contracted with a Danish company, Société Dalico Contractors, on June 15, 1981 to build a water-drainage system.
- The contract incorporated tender documents and standard conditions, with contemplated amendments through an annex.
- The standard conditions stated that Libyan law governed and that Libyan courts had jurisdiction.
- Dalico commenced arbitration based on an arbitration clause contained in tender documents and referenced in an annex modifying the jurisdiction provision.
- The municipality contested arbitration, arguing the annex and referenced documents were unsigned and therefore invalid under Libyan law.
- A Paris-seated arbitral tribunal found a valid arbitration agreement and issued an award for Dalico.
- The municipality sought annulment of the award in the Paris Court of Appeal; the court rejected annulment and upheld the arbitration clause.
- The municipality appealed on points of law to the Cour de cassation.

## Issues

1. Whether the validity and effectiveness of an international arbitration agreement must be determined under a state law identified by conflict-of-laws rules (including the law governing the main contract), or instead under a substantive rule of international arbitration law.
2. Whether the lower court could find an arbitration clause valid and incorporated by reference despite unsigned documents and despite a separate clause selecting Libyan courts.

## Decision

- The Cour de cassation dismissed the appeal and affirmed the judgment refusing to annul the arbitral award.
- The court held that, in international arbitration, the arbitration clause is legally independent from the main contract, including when included by reference.
- The clause’s existence and effectiveness are assessed by the parties’ common intention, subject only to French mandatory rules and international public policy.
- Because this substantive rule applies, the court found it unnecessary to apply or ascertain Libyan law to determine the arbitration clause’s validity.
- The court upheld the finding that the arbitration clause was accepted through incorporation by reference and could prevail over the competing state-court jurisdiction clause.

## Legal Principles

- In international arbitration, the arbitration agreement is separable from the main contract, whether contained directly in the contract or incorporated by reference.
- The existence and effectiveness of the arbitration agreement are determined by the parties’ common intention, not by application of a particular national law via conflict-of-laws analysis.
- This substantive assessment is limited by French mandatory rules and international public policy at the seat.
- An arbitration clause incorporated through contract documents may displace an inconsistent clause conferring jurisdiction on state courts when the parties’ common intention supports arbitration.

## Conclusion

The court confirmed a substantive approach to international arbitration agreements: their validity depends on the parties’ shared intent, constrained only by French mandatory law and international public policy, without resort to any designated state law, and incorporation by reference can establish a binding arbitration clause even alongside a conflicting forum-selection clause.


Municipalite de Khoms el Mergeb v. Societe Dalico, 1994 Rev. Arb. 116 (Cass. 1e civ. 1993)