Last November we reported on the conflicting decisions handed down by the French and the English courts in Kabab-Ji SAL (Lebanon) v Kout Food Group (Kuwait) (“Kabab-Ji“) on the topic of the law governing the arbitration agreement.
On 28 September 2022, that cross-channel ‘conflict’ intensified when the French Cour de Cassation confirmed the Paris Court of Appeal’s finding in Kabab-Ji that the law of the seat (in this case, French law) governed the arbitration agreement, contrary to the UK Supreme Court’s finding that the law of the underlying contract (in this case, English law) governed the arbitration agreement.
Parties rarely make a specific choice of the law governing the arbitration agreement so what does this decision mean for parties with contracts that are silent on this issue? Why is the law governing the arbitration agreement of real practical importance? And what is best drafting practice in light of these latest contradictory findings by the French and English courts? This Legal Update will address these important questions, after initially summarising the case facts and history.
Brief facts and arbitral decision
- Kabab-Ji SAL (Lebanon) (“KJS“) entered into a Franchise Development Agreement and a number of related agreements with Al-Homaizi Foodstuff Company WWL (“AHFC“) for the operation of a restaurant franchise in Kuwait (the “Agreements“). The Agreements, which were expressly to be governed by and construed in accordance with English law, included an agreement to submit any dispute to an ICC arbitration seated in Paris, France (the “Arbitration Agreement“), though the Arbitration Agreement itself did not separately specify the system of law applicable to it.
- Following a corporate reorganisation, AHFC later became a subsidiary of Kout Food Group (“KFG“), though KFG never became a party to the Agreements. Subsequently, a dispute arose under the Agreements, in relation to which KJS commenced an arbitration against KFG (and not AHFC), which the arbitral tribunal determined in favour of KJS.
- In the context of the arbitral proceedings, KFG argued that it was not a party to the Arbitration Agreement and was therefore not bound by the arbitral award. When examining the law governing the Arbitration Agreement, the arbitral tribunal held that the law of the seat (French law) applied to the question of whether KFG was bound by the Arbitration Agreement. It found that KFG had been a party to the Arbitration Agreement and had breached the Agreements.
The contradictory findings by the English and French courts
- KFG applied to the Paris Court of Appeal (Paris being the seat of arbitration) to set aside the award, but it was unsuccessful. The Paris Court of Appeal held that French law applied to the Arbitration Agreement and applying the principles of French law on this issue meant that KFG was bound by the award. KFG appealed (see further below).
- In parallel, KJS applied to the English courts to enforce the award against KFG’s assets in England (under section 101 of the Arbitration Act 1996). KFG argued that the English courts should refuse to recognise and enforce the award on the basis “that the arbitration agreement was not valid under the law to which the parties subjected it or, failing any indication thereon, under the law of the country where the award was made” (section 103(2)(b) of the Arbitration Act 1996).
- The matter was litigated through the English courts from the London High Court up to the UK Supreme Court. All three English courts found, inter alia, that the law governing the validity of the Arbitration Agreement was English law. The Court of Appeal gave summary judgment in favour of KFG and refused recognition and enforcement of the award, a finding which the UK Supreme Court held was justified. It found that since there was no real prospect that an English court might find that, as a matter of English law, KFG became a party to the Arbitration Agreement, KFG could not therefore be bound by the award. The UK Supreme Court relied on Enka1. The key principle coming out of Enka is: where an arbitration agreement is silent as to its governing law, the law expressly chosen by the parties to govern the contract as a whole is generally interpreted to govern the arbitration agreement.
- Eleven months after the UK Supreme Court’s decision, the French Cour de Cassation decided the appeal of the Paris Court of Appeal’s decision which had dismissed KFG’s set aside application. It confirmed the Paris Court of Appeal’s finding that French law applied to the Arbitration Agreement and dismissed the appeal. It held that in French-seated international arbitrations, in the absence of an express choice of law applicable to the arbitration agreement, the arbitration agreement shall be governed by the substantive rules of French law.
- The French Cour de Cassation explained that, owing “to a substantive rule of international arbitration law, the arbitration clause is legally independent of the main contract which contains it directly or by reference, and its existence and validity are to be assessed, subject to the mandatory rules of French law and international public policy, on the basis of the common intent of the parties, without it being necessary to refer to a state law, unless the parties have expressly made the validity and the effects of the arbitration agreement itself subject to such law.”
- As such, the choice of English law to govern the main contract was not enough to establish the “common will” of the parties to submit their Arbitration Agreement to English law and KFG did not “provide evidence of any circumstance likely to establish unequivocally the common will of the parties to designate English law” as the law applicable to the Arbitration Agreement.
- Accordingly, French law takes a very different approach to English law when determining the law governing the arbitration agreement since, rather than taking a conflict of laws approach of selecting a national law to determine the question, it will apply a substantive rule of international arbitration law to govern the issue (hence applying mandatory rules of French law and international public policy). This means that “under English law, any decision by the French court about whether KFG became a party to an arbitration agreement …will not give rise to an issue estoppel…The English court cannot be bound by the decision of the French court because the English court must apply a different system of law to determine the issue. In such circumstances, the risk of contradictory judgments cannot be avoided.2“
- KJS is in the position where it has a valid award according to French courts but it has not been able to enforce it in England due to the operation of English law. It is not unusual for the English courts and the French courts to take different decisions. We previously reported on the well-known 2010 case of Dallah v. Pakistan (“Dallah“)3 in which the UK Supreme Court found that the government of Pakistan was not a party to the arbitration agreement (as a matter of French law) and hence it refused to enforce the award because the agreement was not valid for the purposes of section 103(2)(b) of the Arbitration Act 1996. Conversely, in proceedings to set aside the same award, the French Court of Appeal also applied French law but held that the tribunal had validly extended the scope of the arbitration agreement to the government of Pakistan. The conflicting decisions in cases like Kabab-Ji and Dallah highlight that the choice of enforcing court may be crucial.
Why is the law governing the arbitration agreement of real practical importance?
- The law governing the arbitration agreement will be relevant to matters relating to the formation, existence, validity, scope, legality, interpretation, termination, effects and enforceability of the arbitration agreement as well as the identities of the parties to the arbitration agreement.
- Kabab-Ji shows that law of the arbitration agreement is important because it can have a considerable influence over the outcome of an arbitration. The case highlights that French and English arbitration law do not handle the issue of non-signatories to the arbitration agreement in the same way.
- In Kabab-Ji, the English and French courts had to grapple with the nature of this law at the enforcement and annulment stage. However, this law may also be relevant at other points in an arbitration, for example, if a party:
- contests that it is bound by an arbitration agreement;
- argues that the arbitration agreement is not valid;
- argues that the governing law of the arbitration agreement includes an implied term of confidentiality;
- argues that a claim or a subject matter is outside the scope of the arbitration agreement;
- disputes the tribunal’s jurisdiction; and/or
- seeks an anti-suit injunction (since the arbitration agreement is invoked as a bar to court proceedings).
What are the implications of this “Anglo-French Clash” for parties with signed contracts that are silent on law governing the arbitration agreement ?
- Where the law of the seat varies from the law of the underlying contract, the question as to the law applicable to the arbitration agreement can be complex and may itself become the subject of legal proceedings.
- However, certain institutional rules provide a default law applicable to the arbitration agreement. In this regard:
- Article 16.4 of the LCIA Rules 2014 and LCIA Rules 2020 provides that it shall be the law applicable at the seat of the arbitration, unless the parties agree in writing otherwise. By contrast, the LCIA Rules 1998 do not provide a default law (a novelty since 2014).
- The LMAA Terms 2002, 2006, 2012, 2017 and 2021 set English law as the default applicable law (unless the parties agree otherwise).
- The ICC Rules (relevant in Kabab-Ji) do not provide a default law, like most other institutional rules.
- A default law in institutional rules should avoid the need to debate the matter before the courts. Therefore, where the contract is silent as to the law of the arbitration agreement, the parties should look carefully at the applicable institutional rules to see if they provide for a default law.
- Kabab-Ji shows that there is a risk of inconsistent judgments arising from parallel annulment and enforcement proceedings where (i) the arbitration agreement is silent on the law which governs it and the institutional rules (like the ICC Rules) fail to “fill the gap” by providing a default law and (ii) the seat is different from the place(s) where the parties will be enforcing the award.
- If the arbitration agreement, and the institutional rules incorporated by reference into it, are silent on the law governing the arbitration agreement, then once an arbitration is foreseen or imminent, it is best practice to examine the potential jurisdictions for enforcement purposes and ascertain which approach the jurisdiction(s) will follow to determine the law governing the arbitration agreement. If the approach at the place(s) of enforcement will, or may, differ from the approach at the seat, then the parties will be on notice of a high risk of inconsistent judgments.
- To protect against that risk, and reduce the likelihood of any potential disputes over the law applicable to the arbitration agreement, parties could amend their arbitration agreements post-signature to include an express provision specifying the governing law of the arbitration agreement. Legal advice should be sought as there will be many issues to consider, including whether the modified arbitration clause should apply to current and future disputes or just future disputes after the amendment date.
What do parties drafting future arbitration agreements need to bear in mind following these contradictory decisions?
- The English and French court decisions in Kabab-Ji underline the importance of expressly setting out the parties’ intentions in their contract. The French Cour de Cassation decision further reinforces our prior recommendation that “where parties include an arbitration agreement in a contract, they should as a matter of best practice specify the governing law that should govern the arbitration agreement in addition to choosing the governing law of the contract as a whole, in order to mitigate potential uncertainty and the risk of parallel proceedings and inconsistent judgments.“
- This step will also be important where the parties opt for institutional rules which provide for a default law of the arbitration agreement and they are unhappy with that default law (as the parties’ express choice of law will trump the default law).
- Careful thought should be given as to whether the law of the seat and the law of the arbitration agreement should be the same. Often they will be, which means there is only one system of law to deal with.
- Parties may query whether it will be sufficient to expand the governing law clause of the underlying contract to refer to the arbitration agreement, along these lines: “This Contract (including the arbitration agreement at Clause [X]) and any non-contractual obligations arising out if it shall be governed by [xxx] law“.
- The potential problem with this is that if the underlying contract is struck down as null, void, inoperable or invalid, then there is a high likelihood that the court would refuse to look at that provision (even though it clarifies the parties’ intentions as regards the arbitration agreement).
- However, if the arbitration clause includes an express, self-standing, provision along the lines that “the arbitration agreement at Clause(s) [X] shall be governed and constructed in accordance with [xxx] law”, then the position will be crystal clear even if the underlying contract is unenforceable since the arbitration agreement is severable from that underlying contract. We recommend this as best practice.
The lessons from Kabab-Ji are important ones for:
- parties with signed contracts containing arbitration provisions – because they will need to review the arbitration agreement and governing law clause of the underlying contract and assess the risks arising from them; and
- parties who are, or will be, drafting contracts containing arbitration provisions – because it is now best practice to include an express provision outlining the law applicable to the arbitration agreement.
Should you require any assistance with your current or future contracts, the authors would be delighted to assist you.