Choice of law in arbitration agreements: ruling provides lessons

The impact of the judgment of the Court of Appeal in London is potentially wide-ranging, as similar provisions to those considered in this case are likely to be included in other contracts.

The ruling also cast doubt on the legal test that applies for determining the implied choice of law of arbitration agreements in cases where no express choice is said to have been made by the parties to those agreements.

The issues raised in the judgment merit further consideration by the courts in Singapore, where the legal test for considering the law of a contract is different.

The agreement

The case before the Court of Appeal was Kabab-Ji S.A.L v Kout Food Group.

Kabab-Ji, a Lebanese company, entered into a franchise development agreement (FDA) with Al Homaizi Foodstuff Company (AHFC), a Kuwaiti company, as licensee in 2001. In 2005, AHFC became a subsidiary of Kout.

According to the ruling, the FDA provided, among other things:

• that disputes under the agreement be resolved via arbitration;
• that the International Chamber of Commerce (ICC) rules on arbitration apply;
• that the arbitration be conducted in the English language, in Paris;
• that the arbitrators apply "principles of law generally recognised in international transactions" and "mandatory provisions of some countries … that … have an influence on the Agreement" in addition to the "provisions contained in the Agreement";
• that the agreement "be governed by and construed in accordance with the laws of England";
• that the agreement consisted of all the terms set out and that it was to be "construed as a whole"

The disputes and the resulting governing law issue

Disputes arose and Kabab-Ji commenced arbitration under the FDA against Kout, but not AHFC. The tribunal found in Kabab-Ji's favour. It determined that the governing law of the arbitration agreement was French law, and that English law governed the issue of whether AHFC's rights and obligations under the FDA had been transferred to Kout. Under English law, Kout was bound by the arbitration agreement, it said.

Decision of the Court of Appeal

The Court of Appeal upheld the High Court's decision that English law governed the arbitration agreement.

In his leading judgment, with which the other sitting judges were in agreement, Lord Justice Flaux considered how articles 1 and 15 of the agreement read together.

He said that Article 1 had made it clear that the agreement included all the terms of the agreement set out, while Article 15 stated that the agreement was governed by and construed in accordance with the laws of England. The "correct construction" of those terms "taken together" meant that the provisions in article 14 concerning the settlement of disputes, like all the provisions in the agreement, are governed by English law.

This, the judges considered, meant that the parties had made an express choice of English law to govern the arbitration agreement despite the choice of law not being spelled out expressly in the arbitration agreement itself.

The judges said that the concept of separability, which is provided for in UK statute and seeks to ensure the terms of an arbitration agreement are read distinct from those of the main agreement, did not alter its view. Nor did the fact Paris was specified as the arbitral seat in the agreement.

On the basis that English law governed the arbitration agreement, the court determined that Kout had not become a party to the FDA and arbitration agreement.

Two things stand out from the Court of Appeal's decision.

First, the capitalisation of 'agreement' in the governing law clause and the definition of 'agreement' in article 1 as including all the terms set out in the contract constituted an express choice of governing law in this case. It would arguably apply to other contracts with similar, and arguably rather standard boilerplate, clauses.

Second, the comments made by Lord Justice Flaux on the relationship between implied terms in contract and implied choices of the law governing an arbitration agreement are also noteworthy.

While they were not directly relevant to the outcome in this case, the comments made on the issue appear to cast doubt on the correctness of the test for determining implied choice of governing law, which was established in case law in England and Wales in the Sulamerica CIA Nacional de Seguros SA and others v Enesa Engenharia SA case.

Lord Justice Flaux had difficulties with the idea that the implied choice of an arbitration agreement's governing law did not depend on the need for business efficacy. In his opinion, this came into conflict with the UK Supreme Court's decision in Marks & Spencer plc v BNP Paribas Securities which authoritatively stated that a term could only be implied into a contract, in fact, if it was necessary for business efficacy.

Lord Justice Flaux also raised, without deciding, the question of whether there would in any given case, be a need to imply a governing law at all for business efficacy since there is the fallback position of applying either the law which has the closest and most real connection to the arbitration agreement or the law of the seat.

It is also unclear whether and how the doubts expressed in this case over the approach to implied choice in the Sulamerica case will affect the role and relevance of the law of the seat in determining the proper law of the arbitration agreement in England. Notably, this latest ruling did not reject the approach the Court of Appeal previously took in C v D, which prioritises the law of the seat as the system of law with the closest and most real connection to the arbitration, over the governing law of the main contract.

These are all very novel issues which merit further consideration by the Singapore courts. Resolving them would have significant consequences for contract choice of law analysis and the compatibility of the Sulamerica test.

While the test in Singapore for whether a term can be implied differs slightly from England, Lord Justice Flaux's concerns are nonetheless pertinent as the tests in Singapore for an implied choice of governing law and the implication of a term in fact are likewise different.

Ultimately, while the ruling in this case may embolden courts to more readily find an express choice of law, parties remain well-advised to seek legal advice in the drafting of arbitration agreements, particularly where the governing law of the main contract and the law of the seat differ.

Wee Jian Ang, Wynne Tay, and Glenn Sim are experts in arbitration at Pinsent Masons, the law firm behind Out-Law.