In Kabab-Ji SAL v Kout Food Group, the UK Supreme Court recently considered the question of which system of law the English courts must apply to decide whether there is an enforceable arbitration agreement.
This case illustrates the different approaches taken in determining questions of applicable law and the consequences this can have for both annulment and enforcement proceedings in different countries.
Kabab-Ji SAL, the appellant, a Lebanese restaurant franchisor, entered into a Franchise Development Agreement (FDA) dated 16 July 2001 with Al Homaizi Foodstuff Company for the operation of the franchise in Kuwait for 10 years. Under the FDA, the appellant and Al Homaizi entered into ten Franchise Outlet Agreements (FOAs). In accordance with the governing law clauses in these contracts, English law applied to the FDA and the FOAs (the Franchise Agreements). Subsequently, in 2005, Al Homaizi Group underwent a corporate restructuring. A new holding company, Kout Food Group (KFG), was established and Al Homaizi became a subsidiary of KFG.
A dispute that arose under the Franchise Agreements was referred to arbitration under the rules of International Chamber of Commerce (ICC) in Paris, France. Kabab-Ji SAL was the claimant in the arbitration. KFG was the sole respondent. It took part in the arbitration under protest, maintaining it was not a party to the Franchise Agreements, or the arbitration agreement contained within them.
The ICC Tribunal Award
The ICC arbitral tribunal unanimously considered that it must apply French law, as the law of the seat of the arbitration, to determine whether KFG was bound by the arbitration agreements, but English law to decide whether KFG had acquired substantive rights and obligations under the Franchise Agreements.
A majority of the tribunal held that, applying French law, KFG was party to the arbitration agreements and, applying English law, regarding the FDA, there was novation by addition, rather than substitution, whereby KFG had become an additional party to the Franchise Agreements alongside Al Homaizi by reason of the parties’ conduct. They went on to conclude that KFG was in breach of the Franchise Agreements and awarded a principal amount of US$6,734,628.19 to the Kabab-Ji SAL.
The third arbitrator dissented on the basis that, applying English law, KFG never became a party to the FDA (or the FOAs), as any novation involving the replacement of Al Homaizi by KFG, or the addition of KFG as a party, was precluded by the strict wording of the agreement. Accordingly, KFG owed no substantive obligations to the claimant under the Franchise Agreements.
Annulment Proceedings in France
KFG launched legal proceedings in France to annul the award on grounds which included the contention that the arbitrators had no jurisdiction over KFG as it was not a party to, and therefore not bound by, the arbitration agreements. The annulment action was dismissed by the Court of Appeal in Paris. KFG has lodged an appeal against the decision of the Paris Court of Appeal with the Court of Cassation.
Enforcement Proceedings before the English Courts
In parallel with the action brought by KFG in France to annul the award, Kabab-Ji SAL brought proceedings in England, under section 101 of the Arbitration Act of 1996 (the 1996 Act), to enforce the award. KFG responded by making an application under 103(2) of the 1996 Act to refuse recognition and enforcement of the award in England.
When the case reached the Court of Appeal of England & Wales, it refused recognition and enforcement of the arbitral award. This was then appealed to the UK Supreme Court.
The Supreme Court considered three issues.
Issue 1 – What law governs the arbitration agreement?
The Supreme Court endorsed the conclusion of the judge and the Court of Appeal that the law governing the question of whether KFG became a party to the arbitration agreement is English law.
In its seminal judgement of October last year, in Enka Insaat Ve Sanayi AS v OOO Insurance Company Chubb, the Supreme Court had concluded:
“(iv) Where the law applicable to the arbitration agreement is not specified, a choice of governing law for the contract will generally apply to an arbitration agreement which forms part of the contract.
(v) The choice of a different country as the seat of the arbitration is not, without more, sufficient to negate an inference that a choice of law to govern the contract was intended to apply to the arbitration agreement.
(vi) Additional factors which may, however, negate such an inference and may in some cases imply that the arbitration agreement was intended to be governed by the law of the seat are:
(a) any provision of the law of the seat which indicates that, where an arbitration is subject to that law, the arbitration agreement will also be treated as governed by that country’s law; or (b) the existence of a serious risk that, if governed by the same law as the main contract, the arbitration agreement would be ineffective. Either factor may be reinforced by circumstances indicating that the seat was deliberately chosen as a neutral forum for the arbitration.
(vii) Where there is no express choice of law to govern the contract, a clause providing for arbitration in a particular place will not by itself justify an inference that the contract (or the arbitration agreement) is intended to be governed by the law of that place.”
In the case before it, the Supreme Court held that the considerations of principle which led it in Enka to reach these conclusions apply with equal force where the question of validity arises after an award has been made in the context of enforcement proceedings.
The Supreme Court held that the effect of the governing law clause of the FDA, which provided that “this Agreement” shall be governed by the laws of England was clear – the phrase is ordinarily and reasonably understood to denote all the clauses incorporated in the contractual document including, therefore, the arbitration agreement. It further held that there was no good reason to infer that the parties intended to except the arbitration clause from their choice of English law to govern all the terms of their contract.
Issue 2 – If English law governs, is there any real prospect an English court would find KFG became a party to the arbitration agreement in the FDA?
The Supreme Court was satisfied that the Court of Appeal was both entitled and correct to conclude that as a matter of English law, there was no real prospect that a court might find at a further hearing that KFG became a party to the arbitration agreement in the FDA.
The FDA contained clauses mandating that any change to its terms had to be in writing (the No Oral Modification clauses). Given the terms of the No Oral Modification clauses, the evidential burden was on the claimant to show a sufficiently arguable case that KFG had become a party to the FDA and hence to the arbitration agreement in compliance with the requirements set out in those clauses, or that KFG was estopped or otherwise precluded from relying on the failure to comply with those requirements.
The Supreme Court concluded that, on the findings made by the judge and the evidence before the court, such a case was not, and had not been, made out.
Issue 3 - As a matter of procedure, was the Court of Appeal justified in giving summary judgment refusing recognition and enforcement of the award?
The Supreme Court found that, as a matter of procedure, the Court of Appeal was justified in overturning the judge’s decision to grant an adjournment and in giving summary judgment refusing recognition and enforcement of the award.