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Which law governs an arbitration agreement where the governing law of the main contract and the seat of arbitration do not match?

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Tomasz Hara

Senior Associate

London

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Godwin Tan
Godwin Tan

Associate

London

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27 April 2020

The Court of Appeal held that the choice of English law to govern a franchise development agreement extended to the parties’ agreement to resolve disputes by ICC arbitration in Paris, which was contained in the same document. A choice of governing law for the main contract can amount to an express choice of law for the arbitration agreement and, in such circumstances, will not be displaced by the parties’ choice of an arbitral seat in a different jurisdiction: Kabab-Ji S.A.L. v Kout Food Group [2020] EWCA Civ 6

The appellant, Kabab-Ji S.A.L. (Kabab), entered into a franchise development agreement (FDA) with Al Homaizi Foodstuff Company (Al Homaizi). Following a corporate reorganisation, Al Homaizi became a subsidiary of the respondent, Kout Food Group (Kout). 

During the performance of the FDA, and after the corporate reorganisation had taken place, a dispute had arisen under the agreement and Kabab commenced arbitration directly against Kout, rather than against its newly acquired subsidiary, Al Homaizi, even though the latter remained the named licensee.  The FDA contained an arbitration agreement which specified the seat of arbitration to be Paris.  An arbitration tribunal seated in Paris applied French law to the question of whether Kout had become party to the arbitration agreement, and held that it had, based on the parties' conduct.  The tribunal then found Kout liable for breaching the FDA.

Kout successfully resisted enforcement of the award before the High Court in London on the grounds that:

  • English law (rather than French law) governed the validity of the arbitration agreement; and
  • under English law, Kout was not a party to the arbitration agreement. 

Kabab appealed on both points.  The Court of Appeal’s reasoning in dismissing the appeal on the first ground is explored in more detail below. 

On the second ground, the Court of Appeal agreed with the judge that a no “oral modification” clause in the FDA was effective in preventing Kout from becoming a party to the arbitration agreement through its conduct.  We consider this aspect of the decision in more detail here.

Which law governs the arbitration agreement?

The starting point in answering this question is to recognise that an arbitration agreement is separable from the main contract in which it is contained so that, for example, it can remain effective even if the main contract  did not come into existence or has become ineffective (s7 Arbitration Act 1996).  This is referred to as the “separability doctrine”. 

It follows that a governing law clause in the main contract does not necessarily cover the arbitration provision.  Indeed, arbitration clauses often contain their own governing law provisions.  The arbitration clause (Article 14) in the FDA did not specify its governing law. 

The Court of Appeal focused on the following provisions in other parts of the contract:

  • Article 1: “This Agreement consists of… the terms of agreement set forth herein below” – which the court construed as extending to the arbitration provision; and
  • Article 15: “This Agreement shall be governed by and construed in accordance with the laws of England” – because the provision used the capitalised “Agreement”, the court construed it as extending to all of the terms, including the arbitration clause.

Based on these provisions, the parties were found to have made an express choice of English law to govern the arbitration agreement.  This conclusion was reinforced by the arbitration clause itself, which provided, at Article 14(3), that: “The arbitrator(s) shall apply the provisions contained in the Agreement”.  The court construed this as requiring the arbitrator to apply all the provisions, including the English governing law clause, not just to substantive disputes but also to matters of jurisdiction. 

Following the Court of Appeal in Sulamérica,1 the court explained that the concept of separability cannot be used to prevent a court from construing the arbitration provision together with the remainder of the main agreement.

An express choice of governing law cannot be displaced by the choice of a different curial law (determined through the seat of arbitration – here Paris). 

Comment

The question of which law governs an arbitration agreement can be important, as plainly demonstrated by this case.  The outcome determined whether an entity was party to an arbitration agreement.  While there is a degree of discord in case law dealing with this issue, the (complex) hierarchy of considerations is relatively clear: 

  • If the parties make an express choice of the law governing the arbitration agreement, the courts will respect that choice.
  • The Kabab v Kout decision shows an increased willingness of the courts to construe a governing law provision in the remainder of the agreement as expressly extending to the arbitration clause.  Given the complexity of the considerations that follow, and the comprehensiveness of the judicial enquiry that they require, this is a welcome development.
  • In the absence of an express choice, the court will determine whether the parties made an implied choice of the law governing the arbitration agreement.  In accordance with the Sulamérica decision, the starting point is a rebuttable presumption that the governing law of the main agreement extends to the arbitration clause.  A different choice of seat, on its own, will not be sufficient to rebut that presumption, but it may do so in combination with other factors.  (In Sulamérica, the presumption that the parties’ choice of Brazilian law to govern the main agreement would extend to the arbitration agreement was rebutted on the basis that the arbitration clause provided that the seat of arbitration was in London and under Brazilian law the arbitration agreement was at risk of being ineffective.)
  • In the absence of an express or implied choice of law, the court will consider with which system of law the arbitration agreement has the closest and most real connection.  At this stage of the enquiry, the choice of the arbitral seat is likely to be the decisive consideration.  An important reason for that is that the choice of a country as the arbitral seat will import into the agreement the law of that country insofar as it relates to the supervision and conduct of arbitrations.  Most such laws, including the Arbitration Act 1996, contain mandatory provisions that extend to the validity of the arbitration agreement and the jurisdiction of the arbitrators.
  • In proceedings concerning the recognition and enforcement of foreign arbitral awards, the final step in the analysis is simplified.  Section 103(2) of the Arbitration Act 1996 (which mirrors article V.1(a) of the New York Convention) provides that, in the absence of an express or implied choice, the relevant law will be the law of the seat.2 
  • In light of these complex rules, it is best practice to expressly set out the governing law(s) of the main contract and, separately, of the arbitration agreement.  This will help to minimise the scope of disputes in court proceedings relating to interim measures, as well as at the jurisdictional and enforcement stages.

Footnotes:

Sulamérica CIA Nacional de Seguros SA & ors v Enesa Engenharia SA & ors [2012] EWCA Civ 638.

2 Under s103(2) of the Arbitration Act 1996, recognition and enforcement may be refused if “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”.  It was confirmed by the High Court in Kabab v Kout that the expression "the law to which the parties subjected it" extends to an express as well as an implied choice of law.

Further information

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, amy.edwards@allenovery.com