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On 27 October 2021, the UK Supreme Court handed down itsdecision inKabab-Ji SAL(Lebanon)vKout Food Group(Kuwait)[2021] UKSC 48("Kabab-Ji"), confirming that– as a matter of English conflict of laws rules - thegoverning law chosen by contracting parties should generally beconstrued as applying also to the arbitration agreement in thatcontract.
The decision serves, amongst other things, as a caution that,where arbitration is the parties' chosen dispute resolutionmethod, it is in general best practice wherever possible to specifya separate governing law provision for their arbitrationagreements. Otherwise, there may be a risk that the differing rulesapplied by different national courts to determine the governing lawof the arbitration agreement may lead to litigation with uncertainand possibly inconsistent outcomes.
This update provides an analysis of the Supreme Court'sjudgment inKabab-Jiand considers itsimplications.
Background
In 2001, Kabab-Ji SAL ("KJS") enteredinto a Franchise Development Agreement and a number of relatedagreements with Al Homaizi Foodstuff Company("AHFC") for the operation of arestaurant franchise in Kuwait (collectively, the"Agreements"). The Agreements, whichwere expressly to be governed by and construed in accordance withEnglish law, included an agreement to submit any dispute to an ICCarbitration seated in Paris (the "ArbitrationAgreement"), though the Arbitration Agreement itselfdid not separately specify the system of law applicable to it.
Following a corporate reorganisation in 2005, AHFC became asubsidiary of Kout Food Group ("KFG"),though KFG never became a party to the Agreements. Subsequently, adispute arose under the Agreements, in relation to which KJScommenced an arbitration against KFG (and not AHFC), which thearbitral tribunal determined in favour of KJS.
Throughout, KFG had maintained that it was not a party to theArbitration Agreement and was therefore not bound by the arbitralaward. The key anterior issue was this - what law governed theArbitration Agreement? English law, as the law governing theAgreements as a whole? Or French law, as the law of the seat of thearbitration?
The Tribunal, by a 2-1 majority, determined that:
- whether or not KFG was a party to the Arbitration Agreement wasa matter of French law (as the law of the seat of the arbitration)rather than English law;
- applying French law to this issue,KFGhad been a party to the ArbitrationAgreement; and
- ·on the merits, KFG was in breach of theAgreements.
KFG made an application to the Paris Court of Appeal for anannulment of the award, which was unsuccessful. At the time ofwriting, a further appeal to the French Court of Cassation ispending.
In parallel, KJS applied to the English courts to enforce theaward against KFG's assets in England, pursuant to the UNConvention on the Recognition and Enforcement of Foreign ArbitralAwards 1958, commonly known as the "New YorkConvention". Under the New York Convention, foreignarbitral awards should generally be recognised and enforced, unlessone or more of the limited grounds for refusal is established. KFGargued that the English courts should refuse to recognise andenforce the award on the basis of the ground set out at section103(2)(b) of the (English) Arbitration Act 1996 –"that the arbitration agreement was not valid under thelaw to which the parties subjected it or, failing any indicationthereon, under the law of the country where the award wasmade…".
Decisions of the English courts
At first instance, the Commercial Court held that:
- the law governing the validity of the Arbitration Agreementalso governs the question of whether KFG became a party to thesame;
- that law was English law;
- applying English law to this issue, KFG was not, and had notbecome, a party to the Agreements or the ArbitrationAgreement.
The Court of Appeal affirmed the decision at first instance andunanimously dismissed KJS' appeal, going further and givingsummary judgment in favour of KFG and refusing recognition andenforcement of the award.
On further appeal by KJS, the Supreme Court considered thatthere were three issues to consider:
- what law governs the validity of the ArbitrationAgreement?
- if English law, was there any real prospect that an Englishcourt might find that KFG became a party to the ArbitrationAgreement?
- as a matter of civil procedure, was the Court of Appealjustified in refusing recognition and enforcement of the award inparticular by way of summary judgment?
Lords Hamblen and Leggatt, with whom the other judges agreed,held that where there was no separate specification as to the lawgoverning an arbitration agreement, the law expressly chosen by theparties to govern the contract as a whole would generally also beinterpreted to govern the arbitration agreement (here, Englishlaw). A choice of a different jurisdiction as the seat of thearbitration would not be sufficient in itself to negate such aninference. The Court concluded that, accordingly:
"…The effect of these clauses is absolutelyclear. Clause 15 of the [Franchise Development Agreement] is atypical governing law clause, which provides that 'thisAgreement' shall be governed by the laws of England. Evenwithout any express definition, that phrase is ordinarily andreasonably understood… to denote all the clausesincorporated in the contractual document, including thereforeclause 14…. There is no good reason to infer that theparties intended to except clause 14 from their choice of Englishlaw to govern all the terms of their contract".
In so concluding, the Supreme Court confirmed that theprinciples it set out in its decision last yearinEnka1applied with equalforceafter an award has been made, inthe context of enforcement proceedings. InEnka, theCourt had considered the same principles, though in that case anarbitration had not yet taken place. As the Court noted, it wouldbe illogical for the law governing the validity of an ArbitrationAgreement to differ depending purely on whether the question wasraised before or after an award was made. As inEnka,where there is no express choice of law in the contract at all, thegoverning law of the arbitration agreement will be the system oflaw with which it is "most closely connected"which, as a general rule, will be the law of the seat of thearbitration.
On the second and third issues, the Supreme Court also found infavour of KFG. There was no real prospect that an English courtmight find that as a matter of English law KFG became a party tothe Arbitration Agreement. This was primarily due to so-called"No Oral Modification" provisions in the Agreements tothe effect that any amendments must be in writing and signed onbehalf of the parties in order to be effective. Accordingly,KJS' position – that KFG had become a party to theArbitration Agreement - was not sufficiently arguable. Given that,on this basis, there was no real prospect of KJS succeeding attrial, it followed that the Court of Appeal had been justified ingiving summary judgment in favour of KFG.
Comment
To lawyers from common law jurisdictions, the SupremeCourt's decision that KFG is not bound by the award because ithad not been a party to the Arbitration Agreement will not seemsurprising, especially following the SupremeCourt'sEnka decision. The decision does,however, provide further clarification of the principles which theEnglish courts will apply in considering what law to apply toquestions relating to the validity of an arbitration agreement. Ingeneral, this will be the governing law of the contract in whichthe arbitration agreement is contained, even though arbitrationagreements may be treated separately from the contract whenconsidering its validity. Where there is no choice of governing lawin the contract at all, it will generally be the law of the seatthat applies to the arbitration agreement.
InKabab-Ji, the parties did not specifyseparately what law should govern the Arbitration Agreement. Theresults of this were ultimately costly, but not unforeseeable– whilst the French and English courts handed downdiametrically opposed decisions in relation to this point, each didso in accordance with well-established legal principles of theirrespective jurisdictions.
In this sense, these inconsistent decisions could have beenavoided. Had the parties separately specified that English lawshould also govern the Arbitration Agreement, then the Frenchcourts would likely have applied English law to the issue ofwhether KFG was a party to the Arbitration Agreement, on the basisthat this was the common intention of the parties. The Englishcourts would have reached the same conclusion, in accordancewithEnka.
Accordingly, where parties include an arbitration agreement in acontract, they should as a matter of best practice specify thegoverning law that should govern the arbitration agreement inaddition to choosing the governing law of the contract as a whole,in order to mitigate potential uncertainty and the risk of parallelproceedings and inconsistent judgments.
Footnote
1 [2020] 1 WLR 4117
Originally Published 23 November 2021
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