Governing law of arbitration agreement
02 December 2021
The UK Supreme Court refused to enforce an ICC arbitration award against a Kuwaiti company. Where the governing law of an arbitration agreement was not specified, the governing law of the contract (English law) applied, despite Paris being the arbitral seat. The risk of an inconsistent decision in France (as the courts would likely apply French law) in pending litigation involving the same arbitration award could not, in the Supreme Court’s view, be avoided. The case highlights the importance of specifying the governing law clause both of the contract as a whole and also of the arbitration agreement where the seat of the arbitration and the governing law of the contract are different. Otherwise, there is a risk of a prolonged dispute about the governing law of the arbitration agreement, such as happened here: Kabab-Ji SAL (Lebanon) v Kout Food Group (Kuwait)  UKSC 48
English and French applicable laws and parallel proceedings
Kabab-Ji (a Lebanese company) entered into an agreement with Al Homaizi Foodstuff Company (Al Homaizi, a Kuwaiti company), giving the latter a licence to operate its restaurant franchise in Kuwait for ten years (the Agreement). The Agreement was English law governed and contained an arbitration clause providing for arbitration under the rules of the International Chamber of Commerce (ICC) in Paris. It did not expressly specify the governing law of the arbitration agreement.
Following a corporate reorganisation, Al Homaizi became a subsidiary of Kout Food Group (KFG). When a dispute arose under the Agreement, Kabab-Ji brought ICC arbitration proceedings against KFG only (not Al Homaizi). KFG argued that it was not a party to the arbitration agreement, and participated in the arbitration only under protest.
The arbitration tribunal considered that it must apply 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 under the Agreement. The tribunal found that, under French law, KFG was a party to the arbitration agreement; and under English law, KFG was an “additional party” to the Agreement by “novation by addition” (although the sole English-qualified arbitrator dissented on this point). The tribunal found KFG liable for damages and unpaid licence fees.
Kabab-Ji sought enforcement of this award before the Commercial Court in London. KFG, on the other hand, applied to the Paris Court of Appeal to set aside the award, including on the basis that the arbitrators had no jurisdiction over KFG as it was not a party to the arbitration agreement. KFG also asked the English Commercial Court to refuse recognition and enforcement of the award.
The English Commercial Court held that the validity of the arbitration agreement was governed by English law and that (subject to a point left open) it followed, as a matter of English law, that KFG was not a party to the Agreement or the arbitration agreement. The court postponed making a final decision on enforcement pending the decision of the Paris Court of Appeal.
On appeal by both parties, the English Court of Appeal held that the Commercial Court was correct but should have made a final determination (rather than adjourning pending a decision of the French Court). The Court of Appeal gave summary judgment in favour of KFG, refusing recognition and enforcement of the award. Kabab-Ji appealed to the Supreme Court.
Governing law of the arbitration agreement
KFG’s only ground for resisting enforcement was that the award was based on an invalid arbitration agreement. The law governing the arbitration agreement, which had not been specified by the parties, was therefore key.
The UK Supreme Court referred back to its ruling of last year in Enka v Chubb: that, where the law applicable to an arbitration agreement is not specified, generally it will be considered to be the governing law of the contract rather than of the seat of the arbitration (unless there is good reason to conclude otherwise).
The court clarified that this principle applies whether the issue is raised before (as in Enka v Chubb) or after (as in the present case) an award is made.
As the governing law for the Agreement was English law, the arbitration agreement was also governed by English law.
Parties to the arbitration agreement and impact on enforceability of award in England and Wales
The UK Supreme Court dismissed Kabab Ji’s argument that KFG became a party to the arbitration agreement by novation because of the parties’ conduct and the performance by KFG of various contractual obligations over a sustained period of time. The Agreement contained a number of provisions which prescribed that it could not be amended save in writing signed on behalf of both parties (“no oral modification” clauses), which are effective under English law as confirmed by the Supreme Court in Rock Advertising v MWB Business Exchange Centres  UKSC 24.
The Supreme Court held that under English law there was no real prospect of an English court holding that KFG became a party to the arbitration agreement after Al Homaisi became a subsidiary. As such, summary judgment on the point was appropriate and proportionate.
The Supreme Court also upheld the Court of Appeal’s decision not to adjourn the ruling on recognition and enforcement pending determination by the French court. The Court recognised that where the French court applied French law to the question in issue and the English court applied English law, the risk of contradictory judgments could not be avoided, and so an adjournment would serve no purpose.
The UK Supreme Court’s decision is a clear application and confirmation of the rules on determining the governing law of an arbitration agreement (if not specified in the agreement) set out in Enka v Chubb. It puts beyond doubt that the same reasoning will apply when the issue arises at the enforcement stage.
The decision also illustrates the risk of inconsistent decisions, in the post-award phase of an arbitration, because of options available to a losing party to challenge an award at the seat of arbitration and to resist enforcement in other jurisdictions. While KFG has prevailed in the English courts, the Paris Court of Appeal rejected KFG’s application to set aside the award in June 2020. The Paris Court held that KFG had not shown that the parties intended to apply English law to the arbitration agreement, and so applied French law on the basis that the law of the arbitration agreement should follow the express law of the seat. KFG’s appeal is pending before the French Court of Cassation. The risk of inconsistent decisions is particularly acute if there is disagreement between the parties about which law applies to an arbitration agreement because, as this case shows, there is no internationally consistent approach to this issue.
This case demonstrates the value of expressly specifying not only (1) the governing law applicable to a contract, and (2) the seat of arbitration, but also (3), where (1) and (2) are different, the law applicable to the arbitration agreement. Sometimes the seat is chosen for being a safe and predictable place for resolving international disputes, but the governing law is a less predictable local law. In these circumstances, it would be prudent to specify the law of the seat that will govern the arbitration agreement too. This case shows that the law applicable to the arbitration agreement can be decisive in the outcome of a dispute, so it is worth paying attention to.
This case summary is part of the Allen & Overy Litigation and Dispute Resolution Review, a monthly publication. If you wish to receive this publication, please contact Amy Edwards, email@example.com