UK Supreme Court gives guidance on arbitration agreement applicable law

The court unanimously dismissed an appeal in the case of Kabab-Ji v Kout Food Group Kuwait (KFG), refusing recognition and enforcement in England and Wales of a Paris-seated award by an International Chamber of Commerce (ICC) arbitral tribunal.

The decision shows the English courts’ continued commitment to applying the principles set out in another Supreme Court case handed down last year, which also concerned the English law rules for confirming the governing law of an arbitration agreement.

The case

The appeal to the Supreme Court was brought by Lebanese company Kabab-Ji. It had entered into a franchise development agreement (FDA), governed by English law, with Kuwaiti company Al Homaizi Foodstuff Company. Later, because of a corporate restructuring, a new holding company (KFG) was established, of which Al Homaizi became a subsidiary.

A dispute arose under the FDA which Kabab-Ji referred to arbitration seated in Paris under the ICC rules against KFG alone. KFG participated in the proceedings under protest, maintaining it was neither a party to the FDA nor the arbitration agreements contained in them.

The arbitral tribunal applied French law as the law of the seat to determine whether KFG was bound by the arbitration agreement, but English law to decide whether KFG had acquired substantive rights and obligations under the FDA.

KFG applied to the French courts to annul the award on grounds that the tribunal lacked jurisdiction over it, claiming it was not a party to the arbitration agreement and was therefore not bound by it. In parallel, Kabab-Ji applied to the English courts for an order to enforce the tribunal’s award.

In June 2020, the Paris Court of Appeal dismissed the annulment decision. KFG’s appeal to the Court of Cassation is pending. The only remaining ground available to KFG for resisting enforcement of the award was under article V(1)(a) of the New York Convention 1958, and section 103(2)(b) of the English Arbitration Act, 1996.

The appeal to the Supreme Court

The UK Supreme Court was asked to determine which system of law the English courts must apply to decide whether there was in fact an enforceable arbitration agreement. If English law applied, the Supreme Court had to decide if the Court of Appeal was right to hold that as a matter of English law, KFG never became a party to the arbitration agreement; and, procedurally, was the Court of Appeal right to decide that question and give summary judgment refusing enforcement of the award.

The UK Supreme Court unanimously dismissed the appeal on all issues.

The choice of law issue

The Supreme Court held that the arbitration agreement was governed by English law.

As set out in the 2020 case of Enka v Chubb, Article V(1)(a) of the New York Convention establishes two uniform international conflict of laws rules.

Firstly, it establishes that the validity of the arbitration agreement is governed by ‘the law to which the parties subjected it’, or in other words, the law chosen by the parties.

Secondly, where no law is chosen, the applicable law is that of ‘the country where the award was made’, generally the legal place of the arbitration seat. A general choice of law to govern a contract containing an arbitration clause will normally be a sufficient ‘indication’ of the law to which the parties subjected the arbitration agreement for the purposes of Article V(1)(a) of the New York Convention.

Applying these principles to the Kabab-Ji case, the effect of the FDA's governing law clause provides that ‘this agreement’ should be governed by English law and there was no good reason to infer that the parties intended to except the arbitration agreement from their choice of English law to govern all the terms of their contract.

The party issue

The Supreme Court found the English Court of Appeal was right 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.

This was because the arbitration agreement on which Kabab-Ji relied was the arbitration clause in the FDA – a contract between Kabab-Ji and Al Homaizi. The FDA contained a number of ‘no oral modification’ clauses, which prevented it from being amended except in writing, signed on behalf of the parties. The effect of these clauses is that KFG did not become a party to the FDA or the arbitration agreement, and there was no real prospect of Kabab-Ji avoiding the effect of these clauses by relying on the doctrine of estoppel.

The Supreme Court added that reliance on the no oral modification clauses was not contrary to the obligation of good faith and fair dealing in clause 2 of the FDA. UNIDROIT principles – developed by the International Institute for the Unification of Private Law – cannot be relied upon to contradict the requirements of English law.

The procedural issue

On the procedural question, the Supreme Court decided that the Court of Appeal was justified in giving summary judgment refusing recognition and enforcement of the award.

Insights

The first step in determining whether an international arbitration agreement is valid, or whether it covers a particular dispute, is to identify which system of law the court must apply to answer this question.

The UK Supreme Court’s approach focuses primarily on the law chosen by parties to govern the underlying contract between them, which in this case was English law. This judgment confirms that a general choice of law clause in a written contract containing an arbitration clause will normally be a sufficient ‘indication’ of the law to which the parties have subjected the arbitration agreement contained within that contract.

The decision also demonstrates the different approaches of French and English courts as to the law governing arbitration agreements. The French courts have developed what they call the substantial rules of international arbitration which allows parties to ignore the conflict of laws methods such as the ‘closest connection’ test applied by the English court.

What this means is that a French court will assess the arbitration clause without any reference to the governing law of the underlying contract – the arbitration clause effectively lives and operates separately from the rest of the contract. This begs the question whether it is necessary for parties to explicitly specify the applicable law of the arbitration agreement in addition to the seat or legal place of arbitration.

According to the Kabab-Ji decision, parties will run the risk that the question of determining the applicable law may be considered differently by national courts if the governing law of the underlying contract is not the same as the law of the seat.

The UK Supreme Court’s decision again highlights the importance of deliberately thinking about and dealing with the choice of law applicable to the arbitration at the contract drafting stage. The presumption by the English court that there is one system of law governing both the contract and the arbitration agreement provides welcome certainty and an approach that is commercially minded and pragmatic.

The concise and clear judgment by the Supreme Court also emphasises the importance of commencing arbitration against the correct party. Arbitration is a creature of contract but KFG was never party to the underlying contract, which contained the arbitration agreement. The Supreme Court had no hesitation in dismissing arguments for an implied novation or other mechanisms by which KFG was said to have become a party to the contract. The ‘no oral modification’ clauses in the contract put paid to any such arguments. As a result, the award cannot be enforced against KFG in England.