A tale of two cities – one award, two enforcement courts

Introduction

Applying the principles set out in its seminal judgment in Enka v Chubb, the UK Supreme Court has confirmed in Kabab-Ji SAL v Kout Food Group [2021] UKSC 48 that if the parties to a contract have not stipulated which law will govern their arbitration agreement, the governing law of the contract will apply (if specified). The decision is important in that it clarifies that

the approach set out in Enka v Chubb is relevant at all stages of the arbitral process, including at enforcement 

However, while the English law approach to this question is now settled, uncertainty remains at an international level. The case is currently being considered by the French Court of Cassation and a contradictory judgment to that of the UK Supreme Court is expected (though a decision is still pending). These potentially divergent approaches to the law governing the arbitration agreement (and therefore the issues that turn on that question) highlight the importance of expressly identifying the governing law of both the underlying main contract and the arbitration agreement so as to avoid any uncertainty and protracted legal proceedings.

Background

In 2001, Kabab-Ji SAL (Kabab-Ji) entered into a franchise development agreement (FDA) with Al Homaizi Foodstuff Company (AHFC). Under the FDA, Kabab-Ji granted a licence to AHFC to operate one of Kabab-Ji’s restaurant franchises in Kuwait.

Any dispute was to be referred to an ICC arbitration seated in Paris; however, the FDA itself was to be governed by English law. There were no express provisions regarding the governing law of the arbitration agreement.

After a dispute arose under the FDA, Kabab-Ji commenced proceedings at the ICC in Paris against AHFC’s parent company, Kout Food Group (Kout Food), on the basis that a novation of the FDA to Kout Food was to be inferred by the conduct of the parties. By majority decision, the ICC tribunal concluded that Kout Food was indeed bound by and in breach of the FDA, despite the FDA containing a number of no oral modification clauses.

Kout Food applied to the Paris Court of Appeal to have the arbitral award set aside on the basis that, amongst other things, it was not a party to the arbitration agreement. Kabab-Ji then issued proceedings in England for the enforcement of the award.

Both the Commercial Court and the Court of Appeal in England held that the governing law of the arbitration agreement was English law and that under English law, Kout Food was not a party to the FDA. The ICC tribunal therefore had no jurisdiction to issue an award against Kout Food. On that basis, the Court of Appeal refused to recognise and enforce the arbitral award.

The Supreme Court agreed with the lower courts and held that:

(i) In the absence of an express provision regarding the governing law of the arbitration agreement, the parties’ choice of the governing law of the main contract (English law) applied (per Enka v Chubb).

(ii) Under English law, Kout Food could not be said to be a party to the arbitration agreement.

(iii) The Court of Appeal was justified in refusing to recognise and enforce the arbitral award.

In contrast, the Paris Court of Appeal refused to set aside the award on the basis that French law applies to the arbitration agreement (as the law most closely connected with the seat), and under French law Kout Food was considered to be a party to the FDA.

Comment

Kabab-Ji v Kout Food illustrates the importance of specifying the governing law of the arbitration agreement

for three key reasons:

1. Not doing so exposes the parties to the risk of protracted and costly litigation.
2. Even if the courts in one jurisdiction uphold the arbitral award, in another the courts may refuse to enforce it.
3. Should a party to the arbitration agreement want to bring proceedings against a non-party, it is likely that English courts will apply the governing law of that agreement to determine whether that is possible.

On the latter point, the French courts have made clear that a non-party can be bound by an arbitration agreement by reason of the parties’ conduct or, as in the 2010/2011 case of Dallah v Government of Pakistan, if it can be proved that it was the common intention of the parties that the non-party be bound.

As in Kabab-Ji v Kout Food, in Dallah v Pakistan the UK Supreme Court declined to enforce an ICC award on the basis that the Government of Pakistan was a non-party and therefore was not bound by the arbitration agreement. Interestingly though in that case, the UK Supreme Court applied French, not English, law principles. In doing so, it came to the opposite conclusion of the ICC arbitrators and that of the Paris Court of Appeal.

In Kabab-Ji v Kout Food, it remains to be seen whether the French Court of Cassation will uphold the Paris Court of Appeal’s decision or come to a similar conclusion to that of the UK Supreme Court in Dallah v Pakistan. It is likely that the English and French courts will continue to diverge on this issue.