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Kabab-Ji SAL (Lebanon) v Kout Food Group (Kuwait): A palatable outcome9 November 2021

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The UK Supreme Court recently delivered its second judgment in as many years on the law to be applied to determine the validity of an arbitration agreement. Last year, in Enka Insaat Ve Sanayi AS v OOO Insurance Company Chubb¹, the question of which law governed the validity and scope of an arbitration agreement arose before any arbitration had taken place. Now, in Kabab-Ji SAL (Lebanon) v Kout Food Group (Kuwait)², a similar question arose in circumstances where an arbitration had already taken place and proceedings were brought in England to enforce the award. With the Supreme Court’s latest judgment parties to arbitration agreements should now hopefully be in no doubt as to how the English courts will approach the issue, no matter when it arises. This decision is also an example of “exceptional circumstances” where the English court has refused enforcement of an arbitral award.

Background

Kabab-Ji SAL (“Kabab-Ji”), a Lebanese company, entered into a series of franchise agreements with Al Homaizi Foodstuff Company (Al Homaizi”) under which Kabab-Ji granted Al Homaizi licenses to operate franchises using Kabab-Ji’s Lebanese and Middle Eastern restaurant concept. Each of the franchise agreements were governed by English law.

Following a restructuring of the Al Homaizi group, Al Homaizi became a subsidiary of Kout Food Group (“KFG”) and, when a dispute arose under the franchise agreements, Kabab-Ji commenced ICC arbitration proceedings against KFG in Paris. Notably, the proceedings were not brought against Al Homaizi.

"Though KFG took part in the arbitration, it did so while maintaining that it was not a party to the franchise agreements or the arbitration agreement they contained."

Though KFG took part in the arbitration, it did so while maintaining that it was not a party to the franchise agreements or the arbitration agreement they contained. However, by a majority decision, the tribunal disagreed and made an award in Kabab-Ji’s favour. KFG sought to set the award aside in France (unsuccessfully, though an appeal is currently pending before the Court of Cessation), while Kabab-Ji commenced enforcement proceedings in England.

Both the Commercial Court and the Court of Appeal held that English law governed the validity of the arbitration agreement and that under English law KFG was not a party to it. The Court of Appeal went on to grant summary judgment refusing enforcement. Kabab-Ji appealed.

Decision of the Supreme Court

The Court was asked to consider three issues:

i. What law governed the validity of the arbitration agreement?

ii. If English law governed, was there any real prospect that a court might find at a further hearing that KFG became a party to the arbitration agreement in the franchise agreements?

iii. As a matter of procedure, was the Court of Appeal justified in giving summary judgment refusing recognition and enforcement of the award?

Issue 1: What law governed the validity of the arbitration agreement?

Under the 1958 Convention on the Recognition and Enforcement of Foreign Arbitral Awards (the “New York Convention”), a contracting state such as the UK, can only refuse to enforce an arbitration award from another contracting state in limited circumstances. This includes, under article V(1)(a)³, where the arbitration agreement is not valid under either the law to which the parties have subjected it or, failing any indication of the same, under the law where the award was made (i.e. the seat). KFG argued that the applicable law for these purposes was English law, as the governing law of the underlying agreement, while Kebab-Ji contended that it was French law, as the law of the seat.

Noting that there is no clear international consensus on the application of Article V(1)(a), and how to determine whether there is a choice of law applicable to the arbitration agreement, the Court held that it was for the English courts to form their own view, based on first principles.

In Enka, the Court held that:

i. Where the law of an arbitration agreement is not specified, the choice of governing law for the underlying contract will generally apply;

ii. A different choice of seat will not, without more, negate this inference, though additional factors might do so; and

iii. If there is also no specific provision concerning the governing law of the underlying contract, a clause providing for arbitration in a particular seat will not, in itself, be enough to infer that the contract is intended to be governed by the law of that place.

The Court noted that these conclusions were not directly applicable in this case since, in Enka, the issue arose prior to enforcement and so it had applied English common law rules for resolving conflicts of laws, rather than Article V1(a). Nevertheless, in Enka, it had expressed the view that a general choice of law to govern a contract containing an arbitration clause should normally be sufficient to qualify as the “law to which the parties have subjected” the arbitration agreement for the purposes of Article V(1)(a) and in this case the Court commented that it would be illogical if the law governing the validity of the arbitration agreement were to differ depending on whether the question is raised before or after an award has been made. In order for there to be consistency, the Court said, the same law should be applied in either case and therefore the principles for identifying the applicable law should be the same.

The Court noted that, under Article V(1)(a), it is only if there is no “indication” of a chosen law that recourse should be had to the seat and “indication” signified something less than an express and specific agreement. Once it was accepted that express agreement as to the law governing the arbitration agreement was not required, and that any form of agreement would suffice, it was difficult to resist the conclusion that a general choice of law clause in a written contract (such as the choice of English law in the franchise agreements in this case) would normally be sufficient “indication” of the law to which the parties had subjected the arbitration agreement.

As such, the Court upheld the Court of Appeal’s decision that English law applied to the arbitration agreement in this case. A reference to the UNIDROIT principles within the arbitration agreement did not change this conclusion. First, because it applied to the law the arbitrators were to apply in making their decision rather than the law governing the validity of the arbitration agreement and second, because in any event the reference to the UNIDROIT principles would not have led to the conclusion that the arbitration agreement was governed by French law.

Issue 2: Was there any real prospect that a court might find that at a further hearing that KFG became a party to the arbitration agreement in the franchise agreements?

Reinforcing its decision in MWB Business Exchange Centres Ltd v Rock Advertising Ltd⁴ that “No Oral Modification” clauses are effective, the Court went on to hold that a number of such clauses within the franchise agreements were insurmountable and so KFG had not become a party to the franchise agreements under English law, whether by a novation or otherwise, nor could it be bound by them. The Court went on to conclude that there was no real prospect that an English court might find at a further hearing that KFG became a party to the arbitration agreement, or that further evidence might be put forward that might lead to a different conclusion, particularly bearing in mind the fact there had already been an ICC arbitration in which the issue had been contested, involving witness evidence and disclosure of documents.

Issue 3: Was the Court of Appeal justified in giving summary judgment refusing recognition and enforcement of the award?

Nevertheless, Kabab-Ji contended that following Dallah Real Estate and Tourism Holding Co v Ministry of Religious Affairs of the Government of Pakistan⁵, where a party resisting enforcement seeks to prove there was no valid arbitration agreement, a full evidential hearing and trial of the issue is necessary, and all documents available to the arbitrators should be available to the judge making the determination. It was therefore said that the Court of Appeal had been wrong to give summary judgment refusing recognition and enforcement.

The Court disagreed, however, noting that there is nothing in the New York Convention or Arbitration Act 1996 which sets out how the requisite proof concerning the validity of an arbitration agreement is to be established. While in some cases a full evidential hearing may be required, there was no good reason why it was necessary in cases appropriate for summary determination.

The Court went on to hold that the Court of Appeal had been justified in giving summary judgment in this case, noting that given the very different approach to the issues taken by the French courts, an adjournment pending an appeal in France would only assist if the French courts annulled the award, and that would only give another separate ground for refusing enforcement.

Conclusion

This long-running cross-jurisdictional saga may not be conclusively over given the pending appeal before the Court of Cassation in Paris on the question of whether the award should be annulled. Enforcement proceedings In England are, however, now at an end.

The latest decision of the Supreme Court reinforces the principles in Enka that under English law a choice of law clause in a written contract containing an arbitration clause will generally also extend to the arbitration agreement, and makes clear that whether the question is addressed before the arbitration has commenced, or only after an award has been made and enforcement is sought, the English courts will adopt a consistent approach. Nevertheless, parties should put the issue beyond doubt by explicitly providing for the law to govern their arbitration agreement.

[1] [2020] UKSC 38, see our article at https://www.wfw.com/articles/an-end-to-uncertainty-court-of-appeal-guidance-on-determining-the-proper-law-of-arbitration-agreements/
[2] [2021] UKSC 48
[3] Transposed into English law by section 103(2)(b) Arbitration Act 1996
[4] [2018] UKSC 24
[5] [2010] UKSC 46

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