27.07.2022

Kabab-Ji v Kout Food Group confirms principles on determining governing law of an arbitration agreement

In February 2021 we discussed the English Supreme Court case of Enka v Chubb, which provided much-needed clarity on how the governing law of an arbitration agreement should be determined where the agreement lacks an express choice of law provision.  In Kabab-Ji SAL v Kout Food Group [2021] UKSC 48, the English Supreme Court has confirmed the principles set out in Enka v Chubb. 

The facts

The appellant, Kabab-Ji SAL (Kabab-Ji), a Lebanese company, entered into a franchise agreement with Al Homaizi Foodstuff Company (Al Homaizi), a Kuwaiti company, as licensee.  In 2005 Al Homaizi became a subsidiary of the respondent, Kout Food Group (KFG), after a corporate reorganization.  A dispute arose under the franchise agreement and Kabab-Ji commenced arbitration against KFG.  In accordance with the arbitration clause in the franchise agreement, ICC arbitration was commenced, with Paris as the seat of arbitration, and English law as the governing law.  The arbitral tribunal unanimously held that it must apply French law (the law of the arbitral seat) to decide whether KFG was bound by the arbitration agreements, but English law (as per the terms of the contract) to decide whether KFG had obtained substantive rights and obligations under the franchise agreement.  A majority of the tribunal held that KFG was in breach of the franchise agreements, and awarded around US$6.7 million in unpaid licence fees, damages and legal costs against KFG.  The third arbitrator dissented, finding that KFG never became a party to the franchise agreement and thus owed no substantive obligations to Kabab-Ji or Al Homaizi.

Kabab-Ji applied to the English courts to enforce the award. 

Meanwhile, KFG applied to the Paris Court of Appeal for the award to be set aside.  The Paris Court of Appeal concluded that, despite the agreement specifying English law as the governing substantive law, French law was the governing procedural law of the arbitration agreement and that KFG was therefore a party to the agreement.  KFG is currently appealing that decision to the Court of Cassation, France’s highest court.

The English courts’ decisions

A trial of preliminary issues was held in the Commercial Court.  Three issues were considered and judgment was handed down as follows:

  1. Does the law governing the validity of the arbitration agreement govern the question of whether KFG became a party to the arbitration agreement? Yes, it does.
  2. What is that law? It is English law. 
  3. At English law, has KFG become a party to (i) the franchise agreement and (ii) if different, the arbitration agreement? No, it did not become a party to either agreement, the two questions raising the same issue. 

That decision was appealed by both Kabab-Ji and KFG.  The Court of Appeal dismissed Kabab-Ji’s appeal and allowed KFG’s cross-appeal, refusing recognition and enforcement of the award.  It held that:

  1. The terms of the franchise agreement provided for the express choice of English law to govern the arbitration agreement; and
  2. As a matter of English law, in the absence of written consent as required by the terms of the franchise agreement, KFG could not have become a party to the franchise agreement and hence the arbitration agreement.

Kabab-Ji appealed to the Supreme Court. 

The Supreme Court’s decision

In Enka v Chubb, the Supreme Court held that where parties have made a choice of law to govern a contract which includes an arbitration clause, that is generally also a sufficient indication of the parties’ choice of law to govern the arbitration agreement.  If no choice was indicated, the applicable law is that of the country where the award was made.  An express agreement is not required.  A general choice of law clause in a written contract also containing an arbitration clause will generally be a sufficient indication of the law governing the arbitration agreement. 

In this case, the franchise agreements provided that the arbitration should be conducted in English, in Paris, France, and that the agreement would be governed by and construed in accordance with English law.  The Supreme Court held that the effect of these clauses is “absolutely clear”.  There is no good reason to suggest that the parties intended to except the arbitration clause from their choice of English law to govern the terms of the contract.  The law to which the parties subjected the arbitration agreement is therefore English law.  Applying this conclusion, therefore, the law which the English court must apply to determine whether KFG became a party to the arbitration agreement, is English law.

The Supreme Court then considered whether there was any real prospect that a court might, in the future, find that KFG became a party to the arbitration agreement.  Kabab-Ji argued that KFG became a party to the arbitration agreement by becoming a party to the franchise agreement (and thus to the arbitration clause contained within it).  Kabab-Ji was unable to point to any agreement in writing to this effect between itself and Al Homaizi.  Unfortunately for the appellant, the franchise agreement contained a number of clauses prohibiting any oral modification of the contract (No Oral Modification clauses).  Previous Supreme Court decisions have held that such clauses are legally effective, and there is no public policy reason why the courts should not give effect to the parties’ mutual bargain made in No Oral Modification clauses.  In the absence of written documents signed by both parties, the franchise agreement could not be modified.  The presence of the No Oral Modification clauses in the franchise agreement was described as an “insuperable obstacle” to Kabab-Ji’s claim that KFG had become a party to the arbitration agreement.  As a matter of English law, the Court held, there was no real prospect that a court might make a finding to this effect. 

Our comment

This case confirms the rule set out in Enka v Chubb.  In particular, it confirms that the determination as to whether an entity is a party to an arbitration agreement is a procedural matter, not a substantive one, and that the governing law specified by a contract also governs any arbitration agreement contained within the contract.  In the absence of any contrary indication in the agreement, the law which governs procedure is the same as the law governing the substantive dispute. 

KFG’s appeal in the French Cour de Cassation may lead to a divergence of approaches on this principle.  If the appeal is successful, this may lead to an increase in jurisdiction-shopping among cases proceeding to international arbitration.  In this context, it remains important for parties to expressly identify the law which they want to govern the arbitration clauses in their contracts, as well as the law governing the main contract. 

If you have any questions about trade or maritime arbitration, please get in touch with our Trade and Transport team or your usual contact at Hesketh Henry.

Disclaimer:  The information contained in this article is current at the date of publishing and is of a general nature.  It should be used as a guide only and not as a substitute for obtaining legal advice.  Specific legal advice should be sought where required.

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Kerry
Media contact - Kerry Browne
Please contact Kerry with any media enquiries and with any questions related to marketing or sponsorships on +64 9 375 8747 or via email.

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