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The Supreme Court recently handed down its highly anticipated decision in Kabab-Ji SAL (Lebanon) v Kout Food Group (Kuwait) [2021] UKSC 48, concerning the enforcement of a Paris arbitral award in England and Wales. In its judgment, the Court unanimously dismissed the appeal brought by Kabab-Ji SAL (“Kabab-Ji”), meaning that Kabab-Ji cannot enforce a Paris-seated ICC award previously granted in its favour against Kout Food Group (“KFG”) in England and Wales. The Supreme Court reached its decision after finding that the law governing the applicable arbitration agreement is English law and, as a matter of English law, there is no real prospect that KFG would be found to be a party to that arbitration agreement.

Background and French proceedings

In 2001, Kabab-Ji (a Lebanese and Middle Eastern dining chain) entered into a Franchise Development Agreement (“FDA”) with Al Homaizi Foodstuff Company (“AHFC”) to operate Kabab-Ji’s franchise in Kuwait. In 2005, AHFC became a subsidiary of KFG following a corporate reorganisation. When a dispute arose under the FDA, Kabab-Ji referred this to ICC arbitration in Paris, commencing proceedings against KFG (as AHFC’s parent). KFG were not party to the FDA and took part in the arbitration under protest. 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 and construed in accordance with English law. The arbitration agreement itself was silent as to its governing law. The culmination of these features raised an important jurisdictional question: had KFG had become an additional party to the FDA (and therefore to the arbitration agreement), and if so how?

In order to answer that question, it was necessary for the tribunal to decide: (i) which law governed the question of whether KFG was a party to the arbitration agreement; and (ii) whether, under that law, KFG had become a party to 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 in the first instance Paris hearing found that KFG was bound by and in breach of the agreement.

KFG applied to the Paris Cour d’Appel to have the award set aside. The Cour d’Appel refused to set aside the award, but KFG’s appeal is currently pending before the Cour de cassation and, therefore, remains ongoing in France.

Journey to the Supreme Court

Shortly after, Kabab-Ji issued proceedings in the High Court in London seeking enforcement of the award in England pursuant to s.101 Arbitration Act 1996. The High Court held that the law governing the arbitration agreement was English law and that, under English law, KFG was not a party to the agreement and, therefore, not in breach. However, the Court refused to make a final determination against enforcement pending the Cour d’Appel’s decision in Paris which, at the time, was pending.

On appeal in England, the Court of Appeal agreed that the governing law was English law, that KFG was not a party to the FDA and not in breach, and further held that the High Court ought to have made a final determination refusing enforcement; the Court of Appeal then made such a determination. Kabab-Ji appealed that judgment to the Supreme Court in proceedings the subject of this article.

The Supreme Court agreed with the Court of Appeal, and Kabab-Ji’s appeal was dismissed on the basis of three issues:

1. Choice of law issue. In asking what law governed the validity of the arbitration agreement, the Supreme Court held that it must form a view based on first principles, consistent with its earlier judgment in Enka v Chubb [2020] UKSC 38. 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. It followed that there was no good reason to infer that the parties intended to exclude the arbitration clause from the terms of that agreement.
2. Party issue. The Supreme Court considered whether the Court of Appeal was right that there was no real prospect that a Court might find at a further hearing that KFG had become a party to the arbitration agreement. The Supreme Court agreed and held that “there was no real prospect that a Court might find at a further hearing that KFG became a party to the arbitration agreement”, having regard to the fact that the FDA contained a no oral modification clause, and that the FDA was, on its face, a contract between Kabab-Ji and AHFC only.
3. Procedural issue. Finally, the Supreme Court asked if the Court of Appeal erred in ruling that summary judgment should be given that refused recognition and enforcement of the award in England and Wales, without a full evidential hearing and trial of the issue. The Supreme Court held that “the Court of Appeal was justified in overturning the judge’s decision to grant an adjournment and in giving summary judgment refusing recognition and enforcement of the award”.

Comment

The decision provides further, and helpful, clarification on the English courts’ approach to determining the governing law of an arbitration agreement where that choice of law is not detailed expressly in the relevant arbitration agreement itself. Further, it follows the broad principles established by the Supreme Court in Enka v Chubb [2020] UKSC 38, including that where there is no specific choice of law governing a written arbitration agreement, the governing law applicable to the contract will generally also extend to the arbitration agreement.

Considered together, the recent judgments in both Enka and Kabab-Ji highlight the often-overlooked fact that, when drafting contracts and determining governing law, commercial parties all too 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 state expressly the governing law attributable to an arbitration agreement, particularly if they wish to diverge from the established position in Enka. If so, this should be actioned clearly in the drafting, for example by including an express governing law provision within the arbitration agreement.

In the present case, 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 in itself, and the “risk of contradictory judgments” that the Supreme Court observed “cannot be avoided”, gives further weight to the drafting lessons above.