Shearman And Sterling

Royal Courts of Justice in London

November 01, 2021

Kabab-Ji SAL v Kout Food Group : Latest UK Supreme Court Judgment on Governing Law of Arbitration Agreements

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KABAB-JI SAL V KOUT FOOD GROUP : LATEST UK SUPREME COURT JUDGMENT ON GOVERNING LAW OF ARBITRATION AGREEMENTS

Introduction and Key Takeaways

The U.K. Supreme Court recently handed down its long-awaited judgment in Kabab-Ji SAL (Lebanon) v Kout Food Group (Kuwait).[1] The judgment confirmed and applied the principles concerning the governing law of arbitration agreements that were established by the Supreme Court in October last year in Enka Insaat ve Sanayi AS v OOO Insurance Company Chubb.[2]

In the Enka case, the Supreme Court had established that where the parties have expressly or impliedly made a choice of law to govern a contract containing an arbitration clause, that will generally be a sufficient indication of the parties’ choice of law to govern the arbitration agreement as well. On the facts of the case, particularly the fact that the parties had not chosen a governing law for the main contract in question, Shearman & Sterling successfully argued on behalf of Enka that the arbitration agreement was governed by the law of the seat and not the law applicable to the main contract.

Following the decisions in Enka and Kabab-Ji, there are three key takeaways for parties considering arbitration clauses in their transaction documents:

  • The English law approach to determining the law applicable to an arbitration agreement is now clear, the decision in Enka having put to rest what Lord Burrows described as “an intriguing question of law which courts and commentators have been grappling with for many years.”[3] The decision in Kabab-Ji has confirmed and applied the principles in Enka in the context of the enforcement of an arbitration award rendered under the Convention on the Recognition and Enforcement of Foreign Arbitral Awards (the “New York Convention”) in the English Courts.
  • However, there remains uncertainty at the international level. In June 2020, the Paris Court of Appeal considered the same award as the English Courts in Kabab-Ji but reached the opposite conclusion on which governing law applied to the parties’ arbitration agreement. That divergence reflected the Tribunal’s original award, in which the one English-qualified arbitrator and two civil law arbitrators also reached different conclusions. An appeal is currently pending before the highest French court, the Cour de Cassation, but it is expected that the Paris Court of Appeal’s decision will be upheld.
  • In order to achieve complete certainty, contracting parties should ensure that they identify the law governing their arbitration agreement specifically, whether or not that be the same law that governs the main contract in which the arbitration agreement is found.

Background

In 2001, Kabab-Ji SAL entered into a Franchise Development Agreement and several Franchise Outlet Agreements with Al Homaizi Foodstuff Company (“AHFC”) to operate a franchise using Kabab-Ji’s restaurant concept in Kuwait. Following a corporate restructuring in 2005, Kout Food Group (“KFG”) became the parent company of AHFC.

The Franchise Development Agreement contained an arbitration agreement providing for ICC arbitration in Paris. Whilst the Franchise Development contained a general governing law clause providing for English law, that clause did not make reference to the arbitration agreement.

The Franchise Development Agreement expired in 2011, but a dispute arose over KFG’s continued use of Kabab-Ji’s trademark after this date. In 2015, Kabab-Ji commenced arbitration proceedings against KFG, but not AHFC, purportedly under the arbitration agreement in the Franchise Development Agreement.

KFG objected to the jurisdiction of the Tribunal and participated in the arbitration under protest, arguing that it was not a party to the arbitration agreement. However, in 2017, a majority of the Tribunal found that French law, as the law of the seat, was the governing law of the arbitration agreement and that, as a matter of French law, KFG was a party to the arbitration agreement.

The Tribunal further determined that KFG was bound by the substantive rights and obligations in the Franchise Development Agreement (this being a question of English law), and ultimately ordered KFG to pay US$6.7 million in damages plus interest for its continued use of Kabab-Ji’s trademark.

The French and English Proceedings

KFG applied for the award to be set aside before the Paris Court of Appeal on grounds which included that the arbitrators had no jurisdiction over KFG as it was not a party to (and therefore not bound by) the arbitration agreement in the Franchise Development Agreement. The premise of that argument was that the law governing the arbitration agreement was English law, not French law; and had the arbitration agreement been construed in accordance with English law, rather than French law, KFG would not be a party.

However, on 23 June 2020, the Paris Court of Appeal upheld the majority decision of the Tribunal, concluding that the choice of English law as the governing law of the overall Franchise Development Agreement was “not […] sufficient to establish the common will of the parties to submit the arbitration clauses to English law and thus to derogate from the substantive rules of international arbitration applicable at the seat of arbitration expressly designated by the parties.”[4] The Paris Court of Appeal concluded that French law was the governing law of the arbitration agreement, and KFG could be considered a party to it. KFG has appealed to the Cour de cassation, whose decision is still pending.

In parallel, Kabab-Ji applied to the Commercial Court in London and appealed to the English Court of Appeal for recognition and enforcement of the award. In April 2019, the Commercial Court declined to enforce the award pending a final decision from the Paris Court of Appeal. However, on 20 January 2020, the Court of Appeal handed down a summary judgment concluding that the arbitration agreement, construed under English law, was not valid as against KFG, under Section 103(2)(b) of the Arbitration Act 1996 (which enacts the provisions of Article V(1)(a) of the New York Convention). In the Court of Appeal’s view, the wording of the Franchise Development Agreement indicated a clear intention for the entire agreement, including the arbitration clause, to be governed by English law.

The UK Supreme Court Decision

On Kabab-Ji’s further appeal to the U.K. Supreme Court the following issues were considered:

  • Which law governed the question of the validity of the arbitration agreement?
  • Was there any real prospect that KFG could be a party to the arbitration agreement?
  • Was the Court of Appeal justified in giving summary judgment refusing recognition and enforcement of the award?

The Supreme Court unanimously dismissed the appeal by Kabab-Ji, finding in favour of KFG’s arguments on all three questions.

The first issue arose because KFG argued that if the arbitration agreement was governed by English law, it would not be valid as against KFG. As such, it would be unenforceable as against KFG under Section 103(2)(b) of the Arbitration Act 1996, which provides that recognition or enforcement of an award may be refused if “the arbitration agreement was not valid under the law to which the parties subjected it or, failing any indication thereon, under the law of the country where the award was made.”

Applying Enka, the Supreme Court reiterated that a choice of law to govern a contract containing an arbitration clause will generally be a sufficient “indication of the law to which the parties subjected the arbitration agreement for the purposes of Article 5(1)(a) of the Convention.” As the parties had clearly expressly chosen the Franchise Development Agreement to be governed by English law, so too was the arbitration agreement in it. Although the decision in Enka was concerned with the application of common law rules for identifying the governing law of a contract and an arbitration agreement contained within it prior to the commencement of any arbitration, rather than the requirements of Section 103(2)(b) or Article V(1)(a) of the New York Convention, the Supreme Court confirmed that, in order to achieve consistency and coherence in the law, the same principles applied in both cases.

The Supreme Court also found that a requirement in the arbitration agreement that the arbitrators should apply international legal principles, including in particular the UNIDOIT Principles of International Commercial Contracts, was irrelevant to determining the governing law the arbitration agreement, since this concerned the substantive law governing the parties’ rights and obligations under the contract. In any event, the Court indicated that even if they were applicable to the question of the governing law of the arbitration agreement, the basis on which a tribunal reaches a decision as to their own jurisdiction is of no legal or evidential value to the Court.

The Supreme Court therefore upheld the Court of Appeal’s conclusion that the law applicable to the question of whether KFG became a party to the arbitration agreement was English law.

As to the second issue, the Court considered that the ‘no oral modifications’ clause in the Franchise Development Agreement was valid and enforceable as a matter of English law, which meant there was no realistic prospect of further evidence showing that there had been a novation by conduct of the Franchise Development Agreement from AHFC to KFG. Consequently, there was no real prospect that KFG might be found to be a party to the arbitration agreement under English law.

On the third issue, the Court concluded that neither Article V(1) of the New York Convention nor the applicable provisions of English law required full evidential hearings where enforcement is resisted in the English courts on the grounds that there was no valid arbitration agreement. English Courts hearing a challenge to an arbitral award are thus entitled to dispense with, as the Court of Appeal did, proceedings by way of summary judgment if it is in the interests of justice to do so.

Comment

The Supreme Court’s decision in Kabab-Ji is consistent with the decision in Enka, which itself brought clarity to the determination of the governing law of arbitration agreements under English law, an issue that has long been uncertain. The Supreme Court has confirmed beyond any doubt the general principle that, unless there are strong indications to the contrary, a chosen governing law for a contract will also govern any arbitration agreement contained within it.

Helpfully, the Court also emphasised the importance of applying a common approach to such conflict of law questions under common law, statute or international treaty; and whether or not issues arise before or after an award is made.

In reaching this conclusion, the Court has tried to give the best effect to what it views as the intentions of the parties at the time. However, one notable aspect of the Court’s decision was its refusal to expand the ‘validation principle’, which provides (where possible) that parties to a contract should not be taken to have chosen a governing law for their arbitration agreement which would invalidate that agreement. In Kabab-Ji, the Court offered its view that the principle was simply one of ‘contractual interpretation’, which presupposes the existence of a contract as a matter of law and logic. The Court found that to apply the validation principle in Kabab-Ji would be to assume that the parties had agreed to arbitration when precisely the question at issue was whether the relevant parties had in fact made that agreement. In prior cases, the validation principle had only been invoked where an existing agreement would have been rendered invalid by applying a particular governing law.

Whilst this further clarification of the law is welcome in England & Wales, it comes with the caveat that it represents only the English courts’ answer to what is an international legal issue. It is noteworthy that the courts in the other major arbitral jurisdictions in Europe—in particular, France, Sweden and Switzerland—all take different approaches (both to England & Wales and each other) to determining the law applicable to an arbitration agreement. The U.K. Supreme Court recognised that there is little uniformity or consensus between jurisdictions in the interpretation and application of the rules for determining the validity of an arbitration agreement in Article V(1)(a) of the New York Convention, so it is perhaps not surprising that it relied on English conflicts of law principles, as elucidated in Enka.

Concerns at the international level are only likely to increase in the near future, when the French Cour de cassation renders its decision on annulment of the tribunal’s award. The expectation is that the French Cour de cassation—whilst also looking broadly to the parties’ common intentions at the time—will reach the opposite conclusion to the U.K. Supreme Court on which law applies to the arbitration agreement and whether KFG is a party thereto. It is plainly unsatisfactory for the application of Article V(1)(a) by the courts of different jurisdictions to lead to divergent decisions on questions relating to the same award between the same parties.

A continued divergence in different courts’ approaches to determining the law applicable to an arbitration agreement may lead to protracted litigation, as parties may seek to obtain decisions from the friendliest forum as quickly as possible. It could also lead to ‘arbitrator-shopping’: the potential fault-lines are visible from the tribunal’s decision in the original Kabab-Ji award, where the sole English-qualified arbitrator on the tribunal dissented from the majority decision of his civil law colleagues on the issues of the applicable law and whether or not KFG was a party to the arbitration agreement.

In this context, the most important takeaway to be drawn from Enka and Kabab-Ji is that, in order to achieve certainty, parties should ideally expressly identify the law governing the arbitration clauses in their contracts (in addition to identifying the law governing the main contract). Had the parties in Kabab-Ji done so, there would very likely have been a different answer in the arbitration to the question of whether KFG was a party to the arbitration agreement in the first place. The parties would also have avoided costly litigation in front of the English and French courts.

The approach of specifically stipulating the governing law of the arbitration agreement is one already followed by the Hong Kong International Arbitration Centre, which has revised its model clauses to contain an express choice of governing law for arbitration agreements. It is perhaps time for the European institutions to follow suit.

Footnotes

[1]  [2021] UKSC 48.
[2]  [2020] UKSC 38
[3]  Enka, para 187.
[4]  Kabab-Ji S.A.L Company v. Kout Food Group Company, Cour d’Appel de Paris (Pôle 1–Chambre 1), 23 June 2020, Revue de l’Arbitrage, Comité Français de l’Arbitrage, Volume 2020 Issue 3, p.844: “La désignation du droit anglais comme régissant de manière générale les Accords et l’interdiction faite aux arbitres de ne pas appliquer une règle qui contredirait les Accords ne sauraient suffire, à elles seules, à établir la volonté commune des parties de soumettre les clauses compromissoires au droit anglais et de déroger ainsi aux règles matérielles en matière d’arbitrage international, qui étaient applicables au siège de l’arbitrage expressément désigné par les parties.”

Authors and Contributors

Alex Bevan

Partner

International Arbitration

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+971 2 410 8121

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Abu Dhabi

Garreth Wong

Partner

International Arbitration

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Jonathan Swil

Partner

Litigation

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Jennifer Younan

Partner

International Arbitration

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+33 1 53 89 48 04

Paris

Alastair Livesey

Senior Associate

International Arbitration

+44 20 7655 5530

+44 20 7655 5530

London

Chris Collins

Associate

Litigation

+44 20 7655 5688

+44 20 7655 5688

London