Background
Kabab-Ji SAL (Kabab-Ji) is a Lebanese company that developed a franchise restaurant model. In a 2001 agreement, Kabab-Ji granted a licence to operate franchise restaurants to Al Homaizi Foodstuff Company (Al Homaizi) based in Kuwait. It was expressly stated that the governing law of the agreement was to be English law. The agreement had an ICC arbitration clause with a Paris seat and stated that any changes to the agreement were to be made in writing only. However, the agreement was silent as to the law governing the arbitration clause. A rule of international arbitration law called “the separability principle” means that an arbitration clause is a separate contract, legally independent from the instrument in which it is contained.
In 2005, Al Homaizi entered a phase of corporate restructuring, leading to the establishment of a new holding company, Kout Food Group (KFG), which left Al Homaizi as a subsidiary of KFG.
When a dispute arose under the franchise agreement, Kabab-Ji took it to arbitration in Paris. The action was taken solely against the newly formed KFG.
KFG’s position was that they were not a party to the franchise agreement and thus were not bound by the agreement’s arbitration clause.
The Tribunal’s decision
The Tribunal made an award in favour of Kabab-Ji. The Tribunal in Paris held that:
- It had jurisdiction to hear the matter because the arbitration agreement was covered by French law, as that was the seat chosen in the agreement, and so it must apply French law to determine whether the arbitration clause bound KFG.
- English law was used to decide whether KFG had acquired the rights and obligations under the franchise agreement itself, being the substantive contract. KFG became an additional party to the franchise agreement through a novation of addition under English law.
KFG applied to the French Courts to set aside the award.
The French Court of Appeal decision
The Paris Court of Appeal dismissed KFG’s appeal and agreed with the Tribunal’s ruling. It found that the choice of English law as the governing law of the agreement was not enough to demonstrate a common intention that the arbitration clause was to be also governed by English law.
The UK Supreme Court decision
Kabab-Ji sought to recognise and enforce the award before the English Courts due to a want of jurisdiction of the arbitral Tribunal pursuant to section 103(2)(b) of the 1996 Arbitration Act.
In multiple appeals which led to the UK Supreme Court, the English Courts all found that the arbitration agreement was governed by English law, being the substantive law of the contract. There was found to be no change to the agreement in writing to include KFG as a party. Applying the principles laid down in Enka v Chubb [2020] UKSC 38, which held that where the law applicable to an arbitration agreement is not specified, a choice of governing law for the contract will generally apply to an arbitration agreement which forms part of the contract.
Analysis
First off, it should be noted that KFG is appealing to the Court of Cassation, the highest court in France.
However, as things stand, the English decisions are clearly in stark contrast to the French decisions.
It is worth noting that neither of the decisions in France or England changed the law in either country. Precedent in both countries just comes to two differing views on the same set of facts.
In the absence of an agreement between the parties, when looking at jurisdiction the French elect to look at what seat is chosen, whereas the English will infer that the applicable law will be the chosen law governing the substantive contractual agreement. This is not a discussion of the rights or wrongs of either view.
This case is, however, a stark demonstration of the consequences of the failure to foresee potential issues arising from the drafting of the arbitration agreement.
The sheer costs to the parties to resolve this one issue would not have been envisaged by either party when entering into this agreement (and, sadly, did not occur to their lawyers either). With hindsight, it is obvious that a governing law for the arbitration agreement should have been stipulated so as to avoid this issue in the first place.
The differing and often complex domestic and international laws governing these international agreements highlight the need for certainty at the drafting phase, along with sound legal advice.
The importance of specifying the law applicable to the arbitration agreement is clear – even more so where the laws governing the substantive contractual agreement are to be different from the seat at which the arbitral tribunal will sit, which is hardly a rare occurrence in and of itself.
