Who governs? UK Supreme Court clarifies applicable law for arbitration agreements in enforcement context

On 27 October 2021, the UK Supreme Court handed down its decision in Kabab-Ji SAL (Lebanon) v Kout Food Group (Kuwait) [2021] UKSC 48 ("Kabab-Ji"), confirming that – as a matter of English conflict of laws rules - the governing law chosen by contracting parties should generally be construed as applying also to the arbitration agreement in that contract.

The decision serves, amongst other things, as a caution that, where arbitration is the parties' chosen dispute resolution method, it is in general best practice wherever possible to specify a separate governing law provision for their arbitration agreements. Otherwise, there may be a risk that the differing rules applied by different national courts to determine the governing law of the arbitration agreement may lead to litigation with uncertain and possibly inconsistent outcomes.

This update provides an analysis of the Supreme Court's judgment in Kabab-Ji and considers its implications.

Background

In 2001, Kabab-Ji SAL ("KJS") entered into a Franchise Development Agreement and a number of related agreements with Al Homaizi Foodstuff Company ("AHFC") for the operation of a restaurant franchise in Kuwait (collectively, the "Agreements"). The Agreements, which were expressly to be governed by and construed in accordance with English law, included an agreement to submit any dispute to an ICC arbitration seated in Paris (the "Arbitration Agreement"), though the Arbitration Agreement itself did not separately specify the system of law applicable to it.

Following a corporate reorganisation in 2005, AHFC became a subsidiary of Kout Food Group ("KFG"), though KFG never became a party to the Agreements. Subsequently, a dispute arose under the Agreements, in relation to which KJS commenced an arbitration against KFG (and not AHFC), which the arbitral tribunal determined in favour of KJS.

Throughout, KFG had maintained that it was not a party to the Arbitration Agreement and was therefore not bound by the arbitral award. The key anterior issue was this - what law governed the Arbitration Agreement? English law, as the law governing the Agreements as a whole? Or French law, as the law of the seat of the arbitration?

The Tribunal, by a 2-1 majority, determined that:

• whether or not KFG was a party to the Arbitration Agreement was a matter of French law (as the law of the seat of the arbitration) rather than English law;
• applying French law to this issue, KFG had been a party to the Arbitration Agreement; and
• on the merits, KFG was in breach of the Agreements.

KFG made an application to the Paris Court of Appeal for an annulment of the award, which was unsuccessful. At the time of writing, a further appeal to the French Court of Cassation is pending.

In parallel, KJS applied to the English courts to enforce the award against KFG's assets in England, pursuant to the UN Convention on the Recognition and Enforcement of Foreign Arbitral Awards 1958, commonly known as the "New York Convention". Under the New York Convention, foreign arbitral awards should generally be recognised and enforced, unless one or more of the limited grounds for refusal is established. KFG argued that the English courts should refuse to recognise and enforce the award on the basis of the ground set out at section 103(2)(b) of the (English) Arbitration Act 1996 – "that 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…".

Decisions of the English courts

At first instance, the Commercial Court held that:

• the law governing the validity of the Arbitration Agreement also governs the question of whether KFG became a party to the same;
• that law was English law;
• applying English law to this issue, KFG was not, and had not become, a party to the Agreements or the Arbitration Agreement.

The Court of Appeal affirmed the decision at first instance and unanimously dismissed KJS' appeal, going further and giving summary judgment in favour of KFG and refusing recognition and enforcement of the award.

On further appeal by KJS, the Supreme Court considered that there were three issues to consider:

• what law governs the validity of the Arbitration Agreement?
• if English law, was there any real prospect that an English court might find that KFG became a party to the Arbitration Agreement?
• as a matter of civil procedure, was the Court of Appeal justified in refusing recognition and enforcement of the award in particular by way of summary judgment?

Lords Hamblen and Leggatt, with whom the other judges agreed, held that where there was no separate specification as to the law governing an arbitration agreement, the law expressly chosen by the parties to govern the contract as a whole would generally also be interpreted to govern the arbitration agreement (here, English law). A choice of a different jurisdiction as the seat of the arbitration would not be sufficient in itself to negate such an inference. The Court concluded that, accordingly:

"…The effect of these clauses is absolutely clear. Clause 15 of the [Franchise Development Agreement] is a typical governing law clause, which provides that 'this Agreement' shall be governed by the laws of England. Even without any express definition, that phrase is ordinarily and reasonably understood… to denote all the clauses incorporated in the contractual document, including therefore clause 14…. There is no good reason to infer that the parties intended to except clause 14 from their choice of English law to govern all the terms of their contract".

In so concluding, the Supreme Court confirmed that the principles it set out in its decision last year in Enka¹ applied with equal force after an award has been made, in the context of enforcement proceedings. In Enka, the Court had considered the same principles, though in that case an arbitration had not yet taken place. As the Court noted, it would be illogical for the law governing the validity of an Arbitration Agreement to differ depending purely on whether the question was raised before or after an award was made. As in Enka, where there is no express choice of law in the contract at all, the governing law of the arbitration agreement will be the system of law with which it is "most closely connected" which, as a general rule, will be the law of the seat of the arbitration.

On the second and third issues, the Supreme Court also found in favour of KFG. There was no real prospect that an English court might find that as a matter of English law KFG became a party to the Arbitration Agreement. This was primarily due to so-called "No Oral Modification" provisions in the Agreements to the effect that any amendments must be in writing and signed on behalf of the parties in order to be effective. Accordingly, KJS' position – that KFG had become a party to the Arbitration Agreement - was not sufficiently arguable. Given that, on this basis, there was no real prospect of KJS succeeding at trial, it followed that the Court of Appeal had been justified in giving summary judgment in favour of KFG.

Comment

To lawyers from common law jurisdictions, the Supreme Court's decision that KFG is not bound by the award because it had not been a party to the Arbitration Agreement will not seem surprising, especially following the Supreme Court's Enka decision. The decision does, however, provide further clarification of the principles which the English courts will apply in considering what law to apply to questions relating to the validity of an arbitration agreement. In general, this will be the governing law of the contract in which the arbitration agreement is contained, even though arbitration agreements may be treated separately from the contract when considering its validity. Where there is no choice of governing law in the contract at all, it will generally be the law of the seat that applies to the arbitration agreement.

In Kabab-Ji, the parties did not specify separately what law should govern the Arbitration Agreement. The results of this were ultimately costly, but not unforeseeable – whilst the French and English courts handed down diametrically opposed decisions in relation to this point, each did so in accordance with well-established legal principles of their respective jurisdictions.

In this sense, these inconsistent decisions could have been avoided. Had the parties separately specified that English law should also govern the Arbitration Agreement, then the French courts would likely have applied English law to the issue of whether KFG was a party to the Arbitration Agreement, on the basis that this was the common intention of the parties. The English courts would have reached the same conclusion, in accordance with Enka.

Accordingly, where parties include an arbitration agreement in a contract, they should as a matter of best practice specify the governing law that should govern the arbitration agreement in addition to choosing the governing law of the contract as a whole, in order to mitigate potential uncertainty and the risk of parallel proceedings and inconsistent judgments.