The ongoing Kout Food saga provides a salutary reminder that difficult issues can sometimes arise when parties choose different systems for the substantive law of their contractual relationship and the curial law of the seat of the arbitration.
One such issue is the question of whether claims can properly be brought against a non-party to the arbitration agreement and what law applies to the analysis. That was the issue which generated conflicting decisions between the English and French courts a decade ago in Dallah,1 and it is that same issue that has arisen in Kout Food.
Subject to the possible intervention of the UK Supreme Court and/or the French Court of Cassation, the courts on either side of the Channel have again reached almost diametrically opposing results.
In July 2001, the Kuwaiti company Al Homaizi Foodstuff Co ("AHFC") entered into a franchise development agreement (the "FDA") with the Lebanese fast-food company Kabab-Ji S.A.L ("Kabab-Ji"). AHFC was to manage the operation of the restaurant brand "Kabab-Ji" in Kuwait for ten years. Under the FDA, AHFC and Kabab-Ji were to enter into a specific agreement for each creation of a franchise outlet (the "FOAs").
The FDA and the FOAs (the "Agreements") were governed by English law and contained an arbitration clause providing for ICC arbitration seated in Paris.
In October 2004, AHFC informed Kabab-Ji about the upcoming restructuring of its corporate group and the creation of a Kuwaiti holding company, which became Kout Food Group ("Kout"). Kabab-Ji agreed to the creation and incorporation of Kout, provided that it would not have any consequences on the "terms and conditions of agreements already signed" between AHFC and Kabab-Ji. Kout never formally became a party to the FDA but did pay certain invoices that were addressed to it by AHFC over a period of 30 months.
The Agreements expired in July 2011, and Kabab-Ji initiated Paris-seated ICC arbitration proceedings against Kout (but not AHFC) in March 2015, seeking damages for unpaid royalties between 2008 and 2011.
On 11 September 2017, the arbitral tribunal ruled, by majority, in favour of Kabab-Ji and found that (i) Kout was a party to the arbitration clauses contained in the Agreements, (ii) the substantial obligations under the Agreements applied to Kout, and (iii) Kout breached the Agreements and was thus contractually liable towards Kabab-Ji. The arbitral tribunal ultimately awarded Kabab-Ji approximately USD 7 million in damages and legal costs. The dissenting arbitrator (and the only English law-qualified member of the tribunal)2 found that Kout never became a party to the Agreements and thus owed no substantive obligations to AFC as a matter of English law.
On 13 December 2017, Kout moved for annulment of the award before the Paris Court of Appeal.
In the meantime and pending the French court's decision on annulment, on 21 December 2017 Kabab-Ji brought proceedings before the English courts seeking recognition and enforcement of the award. Kout applied for an order that recognition and enforcement of the award be refused. On 20 January 2020, the English Court of Appeal granted Kout's application, declining to enforce the award.3
On 23 June 2020, the Paris Court of Appeal dismissed Kout's annulment request.
The English Court of Appeal decision of 20 January 2020
Before the English courts, Kout challenged enforcement on one of the New York Convention grounds, namely, that the arbitration agreement was invalid because Kout was not a party to it.4 Following the decision of the UK Supreme Court in Dallah, the English court was required to revisit this question without deference to the tribunal's determination of its own jurisdiction.5
It was common ground between the parties that the question of whether Kout was a party to the arbitration agreement had to be resolved by applying the law governing the arbitration agreement.6 But there was a dispute as to whether the arbitration agreement was governed by English law (the substantive law of the agreement) or French law (the law of the arbitral seat).
Under English law, there is a three-stage enquiry for determining the governing law of an arbitration agreement. The court will first consider whether the parties have made an express choice of governing law. If no express choice is found, the court will consider whether an implied choice has been made. And, if no implied choice can be found, the court will look to the system of law which has the closest and most real connection with the arbitration agreement.7 Applying this test, the Court of Appeal found that the parties had made an express choice of English law (even though there was no wording to that effect within the arbitration clause itself).
The parties' express choice was found by the court through the construction of Articles 1 and 15 of the FDA, taken together. Article 1 defined the "Agreement" as including all terms of the agreement set out in the FDA, including the arbitration agreement at Article 14. Article 15 then provided that the "Agreement" (using the same defined term) would be governed by English law. Such an interpretation was, in the court's view, supported by the arbitration agreement itself, whose Article 14.3 provided that "the arbitrator(s) shall apply the provisions contained in the Agreement". The court reasoned that this required the arbitrators to apply the governing law clause in determining matters of its own jurisdiction, as well as matters relating to the substance of the dispute.8
Following this conclusion, the Court of Appeal applied English law to the question of whether Kout had become a party to the FDA and arbitration agreement.
The Court of Appeal considered Kabab-Ji's argument that Kout's conduct in performing under the FDA (e.g. paying invoices for royalty payments) was sufficient to override the effect of the "no oral modification" clause contained within the FDA and thereby make Kout an additional party to the FDA. However, applying the recent judgment of the Supreme Court in Rock Advertising,9 the Court of Appeal found that Kout's conduct fell well short of the standard required under English law to override the effect of the no oral modification clause.10 As a result, the court held that Kout had not become a party to the FDA or the arbitration agreement, and therefore the arbitral tribunal had no jurisdiction over Kout. Accordingly, the court refused recognition and enforcement of the award.
The Paris Court of Appeal decision of 23 June 2020
Following its success in the English courts, Kout relied on much the same arguments before the Paris Court of Appeal to argue that the tribunal wrongly found itself to have jurisdiction. According to Kout, the arbitral tribunal should have applied English law (as the lex contractus) to the arbitration clauses contained in the Agreements and, as a result, should have declined jurisdiction over Kout as a non-signatory.
The Paris Court of Appeal, in performing its de novo review of arbitral jurisdiction, rejected this argument and followed the Dalico11 doctrine, pursuant to which: (i) an international arbitration agreement is normally not governed by any national law but by a French "material rule" (règle matérielle); and (ii) the issue of whether a party is bound by an arbitration clause has to be solved by a factual enquiry; that is, the court must assess whether the parties intended (la commune volonté des parties) to arbitrate the dispute.
The Paris Court of Appeal specified that the parties' choice of English law as the lex contractus "would not suffice" to demonstrate the parties' intention to submit the arbitration clauses to English law and bypass the application of the French "material rule". The judges further stressed that there were no provisions in the Agreements designating English law as the law governing the (separable) arbitration clauses and, "on the contrary", that separate provisions in the Agreements expressly empowered the arbitrators to apply "all the legal principles generally recognized in the context of international transactions"12.
Additionally, Kout contended that, even if the French "material rule" were to apply, it would not be bound by the arbitration clauses contained in the Agreements. In that respect, Kout notably relied upon the English Court of Appeal decision, which, in Kout's own terms, held that AHFC's substantive rights had not been transferred to Kout ("pas venue aux droits de"), nor had Kout become a party to the arbitration clauses contained in the Agreements.
The court also rejected this argument, but this time based on the Jaguar13 doctrine, according to which the arbitration clause must be "extended to the parties directly involved in the performance of the contract and in any disputes arising out of the contract, provided that it is established that their contractual situation and their activities give rise to a presumption that they accepted the arbitration clause, the existence and scope of which they were aware of",14 regardless of whether they were signatories to the contract containing the clause.
It is worth noting that the Paris Court of Appeal referred to the non-signatory's knowledge of the existence of the arbitration clause to trigger its extension. Several recent decisions had not included this criterion,15 although it was part of the initial Jaguar ruling. That said, the Paris Court of Appeal here also, in its decision, approved of the arbitral tribunal's application of the following less subjective formulation of the doctrine, not including any mention of a presumption of intention in connection with or of knowledge of the arbitration clause: "[T]he jurisprudence of the Cour of Cassation and the Paris Court of Appeal is thus that this party should be deemed to have agreed to the [arbitration] clause if the arbitral tribunal finds that this party intended to participate in the performance of the contract".16 The court then stated that the inclusion in the arbitration clause of a prohibition on the arbitrators' relying on any rule that "contradicts the strict wording of the [Agreements]" was not sufficient to nullify the possibility of extending the arbitration to non-signatories, considering that the Agreements also foresaw the application by the arbitrators of general principles of law. The court went on and reviewed Kout's involvement in the performance of the Agreements thoroughly and held that, given Kout's long involvement in their performance, termination and renegotiation, the arbitral tribunal rightly found that the arbitration clauses contained in the Agreements extended to Kout.
The Paris Court of Appeal then briefly dismissed Kout's other jurisdictional arguments and alternative annulment grounds regarding (i) the scope of the arbitrators' mandate17 and (ii) the respect of the adversarial principle18 (principe du contradictoire).
Kout has four months to appeal the decision to the French Court of Cassation.19 Meanwhile, in the English proceedings, Kabab-Ji has applied for permission to appeal to the UK Supreme Court. As at the date of this article, the outcome of that application is pending.
The outcome of these cases is not especially surprising. Both the Paris and London Courts of Appeal applied well-established principles of their respective legal systems in order to reach their decisions.
The key difference is in the approach taken to determine the applicable law of the arbitration agreement. For the English court, the arbitration agreement must ultimately be governed by a domestic system of law, and the starting point in the enquiry is to construe the entire agreement (using the interpretation principles of the substantive governing law) to determine whether the parties have made an express choice of law to govern their arbitration agreement.
In contrast, the French courts assess the "existence and validity" of an arbitration agreement by reference to the "will of the parties without the need to refer to any national law".20 This approach can be displaced only if there is a clear intention by the parties to subject the arbitration agreement to a particular national system of law.
Once those different approaches are understood, it is easy to see how the French and English courts managed to come to opposing conclusions on the governing law of the arbitration agreement. From there, the courts applied their own different approaches to the issue of finding non-signatories bound by arbitration clauses, with English law being stricter on this issue than French law.