UK Supreme Court Refuses to Enforce Arbitral Award Upheld by French Court

UK Supreme Court Refuses to Enforce Arbitral Award Upheld by French Court

November 12, 2021, Covington Alert

A year after the UK Supreme Court (“UKSC”) issued its judgment in Enka Insaat Ve Sanayi AS v OOO Insurance Company Chubb [2020] UKSC 38, the UK’s highest court has again addressed the issue of how to determine the law that governs the parties’ arbitration agreement, where this is not expressly stated, and the law of the main contract differs from the law of the seat.

In a highly-anticipated judgment, the UKSC unanimously upheld the English Court of Appeal’s decision to refuse the recognition and enforcement of an arbitral award issued by a Paris-seated arbitral tribunal, on the basis that the defendant is not bound by the arbitration agreements contained in a group of related agreements (Kabab-Ji SAL v Kout Food Group [2021] UKSC 48). The UKSC also clarified the application of the principles it stated in Enka, as well as the application of ‘no oral modification’ (“NOM”) clauses to arbitration agreements, and the English courts’ powers to resolve applications for enforcement by way of summary determination.

One notable feature of the UKSC’s decision, however, is that it conflicts with the Paris Court of Appeal’s decision in parallel annulment proceedings relating to the award, namely, the Paris Court of Appeal’s finding that the defendant is bound by the arbitration agreements. Even if Kabab-Ji provides additional and welcome clarity to the principles stated in Enka, these divergent outcomes underscore the potential risks and uncertainties for parties who do not expressly state the law that governs their arbitration agreement, where the law of the main contract differs from the law of the seat.

Kabab-Ji SAL (“Kabab-Ji”) commenced arbitration proceedings against Kout Food Group (“KFG”) under a series of franchising agreements between Kabab-Ji, as franchisor, and Al Homaizi Foodstuff Company (“AHFC”), as franchisee. KFG is not a party to the franchising agreements, but Kabab-Ji alleged that KFG – which became AHFC’s parent company after a corporate restructuring – was involved in their performance and, thus, should be bound to the arbitration agreements contained within them. English law governs the franchising agreements, and each provides for Paris-seated arbitration under the ICC Rules. The parties did not specifically provide for a law to govern the arbitration agreements in the arbitration clauses of the franchising agreements.

The arbitral tribunal unanimously agreed to apply French law to the question of whether KFG was bound by the arbitration agreements, and English law to the question of whether KFG had acquired AHFC’s substantive rights and obligations under the franchising agreements. The majority of the tribunal held that, applying French law, KFG was bound to the arbitration agreements and, applying English law, a “novation by addition” could be inferred by conduct, such that KFG became an additional party to the franchising agreements. The only English law-qualified member of the tribunal dissented from this English law finding.

KFG petitioned the English High Court to refuse recognition and enforcement of the award in England, on the basis that it was not bound to the arbitration agreements. Although the Commercial Court ruled that the law governing the validity of the arbitration agreements is English law, it adjourned a final decision on whether KFG was bound by the arbitration agreements. On appeal, however, the English Court of Appeal was prepared to rule on this issue, and summarily refused recognition and enforcement of the arbitral award. Kabab-Ji appealed this decision to the UKSC. 

On 27 October 2021, the UKSC handed down its decision in Kabab-Ji, determining three issues:

1. The “choice of law” issue: What law governs the arbitration agreements?
2. The “party” issue: If English law governs, is there any real prospect that a court might find at a further hearing that KFG became a party to the arbitration agreements in the franchising agreements?
3. The “procedural” issue: As a matter of procedure, was the Court of Appeal justified in giving summary judgment refusing recognition and enforcement of the award?

The UKSC unanimously dismissed Kabab-Ji’s appeal on all three issues, upholding the Court of Appeal’s decision that English law governs the arbitration agreements, and to refuse the recognition and enforcement of the arbitral award.  

The Choice of Law Issue

Unlike in Enka, the choice of law issue in Kabab-Ji arose at the enforcement stage of the proceedings – rather than pre-arbitration – and the UKSC was therefore required to apply s. 103(2)(b) of the Arbitration Act 1996 (the “1996 Act”), which transposes Article V(1)(a) of the New York Convention 1958 (the “Convention”) into English law. Although the UKSC’s conclusions in Enka are not directly applicable to Kabab-Ji, the UKSC unsurprisingly adopted a consistent and coherent approach in both cases, noting that it would be illogical if the law governing the validity of the arbitration agreements were to differ depending on whether the question is raised before or after an award has been made.

The UKSC observed that Article V(1)(a) of the Convention provides for two uniform international conflict of laws rules. First, the validity of an arbitration agreement is to be governed by the law “to which the parties subjected it”. This will either be the law that the parties have expressly chosen to govern the arbitration agreement or, consistent with Enka, it will be the law the parties chose to govern the main contract (on the basis that the parties presumably also intended this law to govern the arbitration agreement), subject to certain exceptions. Second, where there is no indication of the law to which the parties subjected the arbitration agreement – for example, where it is apparent that the parties deliberately did not choose a law to govern the arbitration agreement – the applicable law will be that of the country where the award was made, which will be the seat of arbitration if the parties have chosen one. Applying these principles to the facts in Kabab-Ji, the UKSC held that the parties had chosen English law to govern the arbitration agreements because: (1) the parties chose English law to govern the franchising agreements; and (2) the parties expressly stated that English law would govern all provisions of the franchising agreements (i.e., including the arbitration agreements).

While the UKSC’s analysis in Kabab-Ji was unsurprising, the claimant’s attempts to deploy creative arguments to resist the conclusion that English law governs the arbitration agreements are worthy of mention:

• First, Kabab-Ji argued that the arbitration agreements required the arbitrators to apply not only English law, but also “principles of law generally recognised in international transactions”, namely, the UNIDROIT Principles of International Commercial Contracts (the “UNIDROIT Principles”). Accordingly, there is no “law” to which the parties subjected the arbitration agreements for the purpose of Article V(1)(a) of the Convention and s. 103(2)(b) of the 1996 Act, and the validity of the arbitration agreements is governed by the law of the country where the award was made (France). The UKSC rejected this line of argument as unsound, considering that it would lead to a result that was “illogical and inconsistent with the principle of party autonomy”.
• Second, Kabab-Ji advanced an argument based on the “validation principle”. This principle permits the court to apply a law that would uphold the validity of an arbitration agreement, over a law that would not. Kabab-Ji argued that, if there were no valid arbitration agreement entered into between Kabab-Ji and KFG under English law, then it should be inferred that the parties intended French law to be the governing law. The UKSC dismissed this argument on the basis that it would extend the validation principle beyond its proper scope, as it would simply “beg the question” as to whether KFG should be joined to the valid arbitration agreements between Kabab-Ji and AHFC.

In our alert on the Enka decision, we anticipated that the framework set out by the UKSC in Enka for determining what law governs an arbitration agreement may be susceptible to creative and nuanced lawyering in cases where there may be material differences between how the law of the contract and the law of the arbitral seat would treat the validity and scope of the arbitration agreement. The claimant’s submissions regarding the UNIDROIT Principles and the validation principle in Kabab-Ji provide an illustration of how the lack of “bright-line” rules in determining the law that governs the arbitration agreement may lengthen and complicate proceedings, even if the claimant’s arguments were unsuccessful in this case. 

The Party Issue

The UKSC affirmed the Court of Appeal’s decision that as a matter of English law KFG is not a party to the franchising agreements or the arbitration agreements contained in them, and that there was no real prospect that a court might find otherwise at a further evidentiary hearing. The franchising agreements between Kabab-Ji and AHFC each contain a NOM clause, requiring any amendment to be in in writing and signed on behalf of the parties. Applying the decision in the Rock Advertising case [2018] UKSC 24, the UKSC held that the NOM clauses would prevent KFG from being added as a party to the franchising agreements by words or conduct save, perhaps, in the event of an unequivocal representation that a variation of the agreements was valid notwithstanding its informality. 

The Procedural Issue

On the third and final issue on appeal, the UKSC held that 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 UKSC rejected Kabab-Ji’s submission that this required a full evidential hearing, and considered that there was no reason in principle why summary judgment could not be used as a procedure for determinations under s. 103 of the 1996 Act, in light of considerations of reasonableness and proportionality.

Parallel Proceedings in France

Although the UKSC applied English law to the arbitration agreements, and declined to enforce the arbitral award against KFG, the Paris Court of Appeal in a parallel proceeding applied a different framework to determine which law applied to the arbitration agreements and, accordingly, reached an opposite outcome. 

The Paris Court of Appeal held that: (1) a French “material rule of international arbitration” is normally what governs an arbitration agreement, based on the will of the parties without the need to refer to any national law; and (2) the arbitration agreements extended to KFG. Applying the material rule of international arbitration law, the Paris Court of Appeal determined that it was not the common will of the parties to designate English law as the law governing the separable arbitration agreements. In the view of the French court, as the parties had not expressly and specifically provided for English law to govern the arbitration agreements, the tribunal was bound to apply the substantive law of the seat to the arbitration agreements. Accordingly, applying French law, the Court found that the arbitration agreements may be extended to a non-signatory directly involved in the performance of the contract and in any disputes arising out of the contract.

The divergence of interpretations of the arbitration agreements by different national courts demonstrates the risk of conflicting decisions depending on the jurisdiction where enforcement is sought.

Comment

KFG has appealed the decision of the Paris Court of Appeal, and it remains at least possible that the conflicting decisions in these parallel proceedings will be resolved. Irrespective of the outcome, however, it can be said that:

• The key lesson from Kabab-Ji, as in Enka, is that if the governing law of an arbitration agreement is not expressly and specifically stated, parties run the risk of conflicting outcomes across jurisdictions – and protracted proceedings in relation to them – regarding the validity and enforceability of an arbitration agreement. This risk is particularly acute where parties choose different systems for the substantive law of the contract and the law of the seat of arbitration.
• In this context, it is worth noting that the standard arbitration clauses provided by some arbitral institutions still do not address the issue of the law of the arbitration agreement, and to the extent that parties use such clauses, they should consider whether it serves their interests to state the law governing the arbitration agreement explicitly.

If you have any questions concerning the material discussed in this client alert, please contact the members of our International Arbitration practice.