Reinforcing principles on arbitration agreements and choice of law

The Supreme Court has clarified that the approach to determining the law applicable to a dispute as to the validity of an arbitration agreement, in the context of an attempt to resist recognition and enforcement of an award under the New York Convention, will be consistent with the principles it set down in its judgment in Enka v Chubb this time last year.

Summary

The Supreme Court has this week handed down its judgment in Kabab-Ji SAL v Kout Food Group,in which it was required to determine the law applicable to a dispute as to the validity of an arbitration agreement, in the context of an attempt to recognise and enforce a Paris ICC arbitration award in England under the New York Convention. Consistent with the principles it set out in Enka v Chubb (on which our article can be found here) the Supreme Court has found that in the absence of an express choice of law governing the arbitration agreement, the governing law of the main contract in which the arbitration agreement was contained was applicable to disputes as to its validity.

Background to the Supreme Court's decision

The question of what system of law governs an arbitration agreement can be contentious: in some cases it is determinative of whether a dispute falls within the scope of the arbitration clause (and, correspondingly, whether an arbitral tribunal has jurisdiction to hear the claim). Before parties started to become alive to this issue, they would often fail to choose a governing law for their arbitration clause (which is a separate agreement from the rest of the contract in which it appears), which can give rise to disputes over the applicable law. It is therefore unsurprising that we have, this week, seen a second case reach the English Supreme Court - Kabab-Ji SAL v Kout Food Group - where these issues were considered.

The Supreme Court's judgment follows its judgment from October 2020 in Enka v Chubb in which it determined that the objective for the court in such scenarios is to determine the system of law with which the arbitration agreement is most closely connected. In that case, in the absence of any governing law clause at all in the contract (which would give rise to a presumption in favour of that choice of law), the Supreme Court decided that the law of the arbitral seat, being London, was the law with which the dispute resolution clause was most closely connected, and therefore English law was applicable.

In Kabab-Ji, the Supreme Court had to consider a slightly different scenario. In contrast to Enka, the relevant contract contained a governing law clause in favour of English law, but also contained a separate clause incorporating, by reference, the UNIDROIT Principles into the contract. The dispute resolution clause in the contract mandated that disputes be arbitrated in Paris under the ICC Rules. Against that backdrop, as discussed below, the Supreme Court had to decide what system of law governed a dispute as to the validity of the arbitration agreement, in the context of an attempt to enforce an arbitral award in England under the New York Convention (the "Convention").

The Paris arbitration award

The claimant/appellant (Kabab-Ji), commenced arbitration in Paris against the defendant/respondent (Kout Food Group - "KFG"), who did not sign the underlying contract (which contained the arbitration agreement) under which the claims were brought (the Franchise Development Agreement - "FDA"), but who was the parent company of the signatory, Al Homaizi.

Kabab-Ji alleged that the FDA had been novated to KFG under English law, which allowed it to commence arbitration against KFG under the FDA, whereas KFG argued that this was precluded by clauses in the FDA prohibiting transfers and waivers/modifications of rights other than in writing (i.e. a no oral modification or 'NOM' clause). Despite these clauses, Kabab-Ji's claims were upheld by the majority of the Paris tribunal, who concluded that KFG was liable and issued an award against it amounting to around $6.7 million plus interest.

Kabab-Ji sought recognition and enforcement of the award in England under the Convention, as enacted in s.100 of the Arbitration Act 1996 (the "1996 Act"). KFG challenged enforcement on the basis that the underlying arbitration agreement was invalid, relying on article V(1)(a) of the Convention and s.103(2) of the 1996 Act.

The Supreme Court's decision on applicable law

The central issue for the Supreme Court was what system of law governed the dispute as to the validity of the arbitration agreement. The Court found that the conflicts of law provisions in the Convention provided that the applicable law of the arbitration agreement would govern any dispute as to its validity. In the absence of a uniform international approach to applying such rules, the Court held that principles identified in Enka should therefore be applied to determine what law the parties had - in the absence of an express choice of law - chosen to govern the arbitration agreement.

The Supreme Court therefore had to decide whether English law (as the law governing the FDA) was the law "to which the parties subjected" the arbitration agreement (per s.103(2)(b) of the 1996 Act) and was therefore applicable (as contended by KFG and as the lower courts had found) or whether (as Kabab-Ji argued) there was an implied choice of French law (as the law of the seat).

Kabab-Ji's argument based on the UNIDROIT Principles

As a point of interest for practitioners, Kabab-Ji relied on the fact that the parties had chosen to incorporate the UNIDROIT Principles into the FDA, which are not part of English law, and which Kabab-Ji contended thereby created a composite system of law to govern the FDA rather than the law of any particular country. Kabab-Ji argued that the first part of the rule in s.103(2)(b) of the 1996 Act and Article V(1)(a) of the Convention required the parties to have chosen the law of a particular country, and accordingly that the governing law clause in the FDA did not constitute a choice of law to govern the arbitration agreement. Kabab-Ji argued that second part of s.103(2)(b) of the 1996 Act therefore applied to make "the law of the country where the award was made" (i.e. France) the law applicable to a dispute as to the validity of the arbitration agreement.  

The Supreme Court gave this argument short shrift, holding that it would lead to the unsound implication that parties who choose for their arbitration agreement to be governed by the law of a designated country supplemented by additional principles would be denied that choice and instead have their arbitration agreement governed by a different system of law which they did not choose at all.

English law was applicable to disputes as to the validity of the arbitration agreement

The Supreme Court therefore held that the incorporation of the UNIDROIT Principles did not detract from the choice of English law as the law governing the FDA and, accordingly, the law to which the parties had subjected the arbitration agreement. The Supreme Court therefore upheld the decisions of the lower courts and found that English law governed the question of the validity of the arbitration agreement (and accordingly, whether KFG became a party to it).

The Supreme Court went on to find that, applying English law (and contrary to the majority decision of the Paris tribunal) there was no real prospect that, as a matter of English law, a court might find at a further hearing that KFG had become a party to the arbitration agreement, by operation of the no oral transfer and NOM clauses in the FDA which precluded assignment and novation, applying Lord Sumption's judgment in MWB Business Exchange Centres Ltd v Rock Advertising Ltd. The Court therefore upheld the Court of Appeal's decision to give summary judgment against Kabab-Ji, refusing recognition and enforcement of the Paris arbitration award.

What this means

The Supreme Court's decision confirms the principles it laid down in Enka last year - namely that the law governing the substantive contract will generally apply to any arbitration agreement contained therein. The fact that parties may have chosen to supplement that choice of law with additional principles does not detract from their choice.

The decision further highlights the importance for parties to expressly agree the governing law at the contract formation stage. Where the arbitration clause in the agreement contains a provision in favour of an arbitral seat which is in a different jurisdiction to the system of law chosen to govern the substantive contract (e.g. an arbitration seated in Paris but a substantive governing law clause in favour of England & Wales), it is especially important also to agree the law applicable to the arbitration agreement. A failure to do so can give rise to protracted (and expensive) disputes as to the applicable law, such as that in Kabab-Ji.