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Two significant judgments recently handed down by the English courts provide welcome clarity on issues relating to the governing law of arbitration agreements while simultaneously reinforcing London’s foothold as a leading arbitration hub. The Supreme Court’s eagerly-anticipated decisions in both Enka v Chubb [2020] UKSC 38 and Kabab-Ji (Lebanon) v Kout Food Group (Kuwait) [2021] UKSC 48 identify and confirm the test to be applied to determine the governing law of an arbitration agreement where the arbitration agreement is otherwise silent on the point.

Enka principles

Determining the law applicable to arbitration agreements has long been a contentious topic. The Enka judgment itself opens with the observation that “On one side there are those who say that the law that governs a contract should generally also govern an arbitration agreement which, though separable, forms part of that contract. On the other side there are those who say that the law of the chosen seat of the arbitration should also generally govern the arbitration agreement. There have been Court of Appeal decisions falling on either side of this divide: Sulamérica Cia Nacional de Seguros SA v Enesa Engenharia SA [2013] 1 WLR 102 and C v D [2008] Bus LR 843.”

The central question in Enka was how the governing law of an arbitration agreement should be determined when the law applicable to the contract containing it differs from the law of the “seat” or place of the arbitration. The Supreme Court confirmed that, in such cases, the arbitration agreement is governed by: (i) as a starting point, the law expressly or impliedly chosen by the parties to govern it (applying the rules of contractual interpretation of the law of the forum); or (ii) in the absence of such a choice, the law “most closely connected” to the arbitration agreement. So, where a contract does not specify the law applicable to the arbitration agreement but does nominate a governing law, the latter will generally extend to any arbitration agreement which forms part of the contract. The Court considered that this approach promotes legal certainty and coherence, unlike presuming that, by nominating a seat, the parties have chosen the law of that seat to govern the arbitration agreement. Still, the Court also observed that where parties have made no choice of law under limb (i) above (such that the “close connection” test at limb (ii) applies) then, as a general rule, the arbitration agreement will nevertheless be “most closely connected” with the law of the arbitral seat.

Kabab-Ji

Just 12 months later, the Supreme Court confirmed and applied the Enka principles in Kabab-Ji SAL (Lebanon) v Kout Food Group (Kuwait) [2021] UKSC 48, unanimously holding that Kabab-Ji could not enforce a Paris-seated ICC award previously granted in its favour against Kout Food Group (“KFG”) in England. The Court reached its decision after finding that the law governing the arbitration agreement was (like the governing law of the underlying contract) English law and, under English law, there was no real prospect that KFG would be considered a party to the arbitration agreement.

Factual background

Kabab-Ji entered into a Franchise Development Agreement (“FDA”) with Al Homaizi Foodstuff Company (“AHFC”). AHFC later became a subsidiary of KFG. When a dispute arose under the FDA, Kabab-Ji commenced ICC arbitration proceedings against KFG (as AHFC’s parent) in Paris, notwithstanding that KFG was not party to the FDA. The arbitration clause in the FDA specified that Paris would be the seat of arbitration, and the governing law clause stipulated that the agreement would be governed by with English law. The arbitration agreement itself was silent as to its governing law.

In determining whether KFG had become an additional party to the FDA (and therefore the arbitration agreement), the Tribunal considered that it must apply French law (the law of the seat of the arbitration) to determine whether KFG was bound by the arbitration agreement, but English law to decide whether KFG had acquired rights and obligations under the FDA. In their award, the arbitrators found that KFG was bound by and in breach of the FDA.

Kabab-Ji issued proceedings in in London seeking enforcement of the Tribunal award in England pursuant to s.101 Arbitration Act 1996. On appeal in England, the Court of Appeal held that the governing law was English law and that KFG was not a party to the FDA and not in breach.

The Supreme Court agreed, dismissing Kabab-Ji’s appeal. In determining what law governed the validity of the arbitration agreement (the “choice of law” issue), the Supreme Court adopted a position consistent with its earlier judgment in Enka. It held that “the law governing the question of whether KFG became a party to the arbitration agreement is English law”, because the FDA’s governing law clause (which provided that “this Agreement” shall be governed by the laws of England) was ordinarily and reasonably understood to denote all clauses in the FDA, including the arbitration agreement. As such, it followed that there was no good reason to infer that the parties intended to exclude the arbitration clause from that agreement.

Comment

Most commercial agreements contain express governing law provisions, which serve to govern parties’ substantive legal rights and obligations. Where agreements also contain arbitration clauses a number will nominate the seat of that potential arbitration. However, only a handful will further specify the governing law of the arbitration agreement, perhaps in the mistaken belief that it will automatically be determined by the parties’ nominated seat. Both Enka and Kabab-Ji have confirmed that contracting parties’ choice of seat will not determine the law applicable to an arbitration agreement where the contract otherwise contains a governing law clause.

Considered together, Enka and Kabab-Ji highlight the often-overlooked fact that, when drafting contracts and nominating governing law, commercial parties often fail to draw a distinction between the underlying contract and any associated arbitration agreement. In order to avoid confusion, or wasting significant time and costs litigating the point down the line, practitioners should take care to expressly identify the law governing an arbitration agreement, particularly if they wish to diverge from the established position in Enka (indeed, had the parties in Kabab-Ji done this, the Court’s decision on whether KFG was a party to arbitration agreement may well have gone the other way). Parties’ decisions on this should be recorded clearly in the drafting, for example by including an express governing law provision within the arbitration agreement.

Interestingly, the French courts have historically adopted a different position to the English courts on this topic, typically holding that parties’ choice of seat will automatically designate the governing law of the arbitration agreement. We can see this conflict at play in Kabab-Ji, where the Cour d’appel found the opposite of the English courts and refused KFG’s application to have the award set aside. Although enforcement proceedings in England have now concluded, the Supreme Court’s decision is not the end of the dispute at an international level as KFG’s appeal in France remains pending before the Cour de cassation in Paris. This and the “risk of contradictory judgments” that the Supreme Court considers “cannot be avoided”, gives further weight to the drafting takeaway above.