The UK Supreme Court yesterday handed down its highly anticipated decision in Kabab-ji S.A.L. (Lebanon) v Kout Food Group (Kuwait)  UKSC 48, concerning enforcement of a Paris arbitral award in England and Wales. The decision provides further clarification on the English approach for determining the governing law of an arbitration agreement, and follows the UK Supreme Court decision in Enka v Chubb late last year.
Background and lead-up to Supreme Court appeal
In 2001, Kabab-ji, a Lebanese and Middle Eastern dining chain, entered into a Franchise Development Agreement (the “FDA”) with Al Homaizi Foodstuff Company (“AHFC”) to operate Kabab-ji’s franchise in Kuwait. A dispute arose under the FDA which Kabab-ji referred to arbitration. The arbitration was seated in Paris and governed by the rules of the ICC. Although the FDA contained a governing law clause in favour of English law, the arbitration agreement itself was silent as to which law it would be governed by. The FDA also provided that the arbitrators should apply “principles of law generally recognised in international transactions”, understood by both parties to be a reference to the UNIDROIT Principles of International Commercial Contracts.
The arbitration was commenced against KFG, not AHFC, because in 2005 AHFC became a subsidiary of Kout Food Group (“KFG”) following a corporate reorganisation. In their award, the majority arbitrators in the Paris hearing found that KFG was bound by and in breach of the FDA. KFG applied to the Paris Cour d’Appel to have the award set aside. Soon afterwards, Kabab-ji issued proceedings in the Commercial Court in London for enforcement of the award in England.
The Commercial Court held that the law governing the arbitration agreement was English law, and that under English law KFG was not a party to and hence not in breach of the FDA. It refused to make a final determination refusing enforcement pending determination of the proceedings before the Paris court. In Paris, the Cour d’Appel last year refused KFG’s application to have the award set aside, a decision which is currently subject to an appeal from KFG to the Cour de Cassation.
Nonetheless, on appeal, the English Court of Appeal then agreed that the governing law was English law, that KFG was not a party and not in breach, and further held that the court below should have made a final determination refusing enforcement, and it made such a determination. Kabab-ji appealed against that judgment to the Supreme Court. The question of whether French or English law applied was crucial in part because of the potentially different treatment of no oral modification clauses under the laws of the two countries.
The UK Supreme Court approached the appeal on the basis of three questions:
- What law governed the validity of the arbitration agreement?
- Was the Court of Appeal 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?
- A procedural issue as to whether the Court of Appeal erred in ruling that summary judgment should be given refusing recognition and enforcement of the award in England and Wales, without a full evidential hearing and trial of the issue.
UK Supreme Court decision
The Court answered these questions in the following way:
- The law governing the question of whether KFG became a party to the arbitration agreement was English law:
- The Court held that the FDA’s governing law clause applied to all clauses in the FDA, including the arbitration agreement.
- The Court declined to apply the UNIDROIT principles, finding that the wording of the relevant provision was directed at the arbitrators when deciding the substantive issues in dispute, and not the English court hearing an appeal on enforcement.
- The Court also declined to invoke the validation principle – to interpret contractual provisions in order to give effect to the presumed intention that an arbitration agreement will be valid and effective – finding that it did not apply to the question of whether a contract was made.
- There was no real prospect that a court might find at a further hearing that KFG had become a party to the arbitration agreement. In reaching this conclusion, particular weight was placed on the FDA’s no oral modification clause.
- 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.
The decision follows Enka v Chubb, another recent UK Supreme Court case dealing with related issues, in that case in the context of an anti-suit injunction. Here, the Supreme Court has clarified that the principles first set out in that decision on the English approach to the governing law of arbitration agreements apply equally in the context of enforcement under s.103 of the Arbitration Act 1996 (which enacted article V(1)(a) of the New York Convention).
The decision leads to the unusual outcome, similar to that in Dallah, that in France the Paris Cour d’Appel dismissed KFG’s annulment action (albeit subject to KFG’s appeal to the Court of Cassation) yet in England the Supreme Court declined to enforce the arbitral award. Here, in contrast to Dallah, the Supreme Court applied English law, rather than French law, and affirmed the Court of Appeal’s findings that decisions of the French courts were not relevant to the Supreme Court appeal. As noted by the Court, the law applied to the questions raised in this case differs in the English courts and French courts, and “the risk of contradictory judgments cannot be avoided”.
The decision of the Cour de Cassation will provide insightful context to the UK Supreme Court’s decision. Putting aside differing national approaches, the decision makes it clear that parties to an agreement should ensure that arbitration agreements are suitable for their purpose at the drafting stage. In particular and for the avoidance of doubt, the law governing the arbitration agreement should be specified in such agreements.
Partners Seamus Andrew and Christopher Lillywhite, and associate Jason Rose, of Velitor Law acted for the Appellant in this case, along with the Beirut headquartered firm Alem & Associates and Counsel Nicholas Tse of Alem and Crown Office Chambers.