Legal briefing | |

Kabab-Ji SAL (Lebanon) v Kout Food Group (Kuwait) [2021] UKSC 48

Kabab-Ji SAL (Lebanon) v Kout Food Group (Kuwait) [2021] UKSC 48

Overview

In Kabab-Ji SAL (Lebanon) v Kout Food Group (Kuwait), the Supreme Court ("UKSC") has provided further confirmation of the approach to determining the law that will govern an arbitration agreement.

The UKSC's judgment applied the principles established last year in its judgment in Enka v Chubb Russia [2020] UKSC 38.  In applying those principles, the UKSC has refused to enforce an ICC award against a Kuwait company after finding that (i) English law governed the arbitration agreement (notwithstanding the choice of Paris as the arbitral seat); and (ii) that the respondent to the arbitration (Kout Food Group) was not a party to the arbitration agreement as a matter of English law.

A reminder of the principles established in Enka v Chubb

A more detailed review of Enka v Chubb may be found in our previous briefing.

However, by way of reminder:

  • Enka, a Turkish company, was engaged as a sub-contractor on a project for the construction of the Berezovskaya power plant in Russia. Chubb Russia paid out approximately US$400 million under a property insurance policy to the owner of the plant in respect of damage caused by the fire at the plant.

  • Subsequently, Chubb Russia brought a subrogation claim for damages in the Moscow Arbitrazh Court against 11 defendants, including Enka, alleging that they were responsible for the fire. Enka responded by bringing anti-suit proceedings in England against Chubb Russia to prevent Chubb Russia from pursuing the Russian proceedings on the basis that the relevant construction contract contained an arbitration clause providing for ICC arbitration in London. The contract did not contain an explicit governing law provision. The question for the UKSC was which law governed the arbitration agreement itself.

In summary, a majority of the UKSC ruled that:

    • The law applicable to the arbitration agreement will be (a) the law chosen by the parties to govern it or (b) in the absence of such a choice, the system of law with which the arbitration agreement is most closely connected.

    • Whether the parties have agreed on a choice of law to govern the arbitration agreement is ascertained by construing the arbitration agreement and the contract containing it, applying the rules of contractual interpretation of English law as the law of the forum.

    • Where the law applicable to the 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.

    • The choice of a different country as the seat of the arbitration is not, without more, sufficient to negate an inference that a choice of law to govern the contract was intended to apply to the arbitration agreement.

    • Additional factors which may negate such an inference and may in some cases imply that the arbitration agreement was intended to be governed by the law of the seat are: (a) any provision of the law of the seat which indicates that, where an arbitration is subject to that law, the arbitration will also be treated as governed by that country’s law; or (b) the existence of a serious risk that, if governed by the same law as the main contract, the arbitration agreement would be ineffective.

    • In the absence of any choice of law to govern the arbitration agreement, the arbitration agreement is governed by the law with which it is most closely connected. Where the parties have chosen a seat of arbitration, this will generally be the law of the seat, even if this differs from the law applicable to the parties’ substantive contractual obligations.

The UKSC therefore held, in the absence of any express or implied choice of governing law for the relevant contract, that the arbitration agreement contained in Enka's contract was governed by the law of the seat – in that case, English law.

Factual background in Kabab-Ji SAL v Kout Food Group

Kabab-Ji SAL ("Kabab-Ji"), a Lebanese restaurant company, entered into a Franchise Development Agreement ("FDA") with Al Homaizi Foodstuff Company ("Al Homaizi"), a Kuwaiti company, which granted Al Homaizi a licence to operate its franchise in Kuwait for ten years. The FDA was expressly governed by English law and referred disputes to ICC arbitration with the seat of arbitration in Paris.  Following a corporate reorganisation, Al Homaizi became a subsidiary of the respondent, Kout Food Group ("Kout").

A dispute arose under the FDA, which Kabab-Ji referred to ICC arbitration in Paris. The arbitration was commenced against Kout alone, and not against Al Homaizi (the actual party to the FDA). Kout maintained that it was not a party to the FDA, nor the relevant arbitration agreement, but took part in the proceedings under protest. A final hearing took place in Paris before a tribunal of three arbitrators, which in 2017 made an award in favour of the Kabab-Ji.

Kout sought an annulment action through the French courts on the grounds that it were not a party to the original FDA and thus not bound by the arbitral tribunal's findings. The Paris Court of Appeal dismissed this claim on the basis that French law governed the arbitration agreement and under French law Kout was a party, however Kout have further appealed to French Court of Cassation.

In parallel, Kabab-Ji brought proceedings under section 101 of the Arbitration Act 1996 (the "Act") to enforce the award in the English Courts.  Section 101 of the Act applies to enforcement of arbitration awards under the New York Convention on the Recognition and Enforcement of Foreign Arbitral Awards, 1958 (the "New York Convention").

The UKSC's decision

The UKSC set out the 3 key issues it had to consider:

(i) What law governs the arbitration agreement?

(ii) If English law governs the arbitration agreement, is there any real prospect that a court might find at a further hearing that Kout became a party to the arbitration agreement in the FDA?

(iii) As a matter of procedure, was the Court of Appeal justified in giving summary judgment refusing recognition and enforcement of the award?

Issue (i) – what law governs the arbitration agreement?

The UKSC observed that it was desirable for a uniform meaning be provided for the conflict of laws rules in respect of arbitral awards under the New York Convention, but that there was “nothing approaching a consensus” among national courts and jurists on their application in cases such as this.

As a result, the UKSC had to form a view based on first principles, drawing from its own conclusions in Enka v Chubb. It recognised that the circumstances of Kabab-Ji v Kout differed from Enka v Chubb, where the governing law question arose prior to any arbitration proceedings and no governing law clause was present in the underlying agreement. However, it said that the Enka v Chubb principles applied “with equal force” after an award has been made.

The UKSC found that the governing law clause of the relevant contract (which stated that "this Agreement" shall be governed by the laws of England) was ordinarily and reasonably understood to denote all clauses incorporated into the contract, which included the arbitration clause.  The UKSC also found no good reason to infer that the parties intended to exclude the arbitration provisions from the governing law clause.  Therefore, applying the principles established in Enka v Chubb, it followed that the law applicable to the arbitration agreement was English law.

Counsel for Kabab-Ji raised two primary arguments in contesting this conclusion. Firstly, that a clause in the FDA referencing the arbitrator applying "principles of law generally recognised in international transactions" (i.e. UNIDROIT Principles of International Commercial Contracts) meant that the arbitration clause was governed by a composite of national law and international principles, which did not qualify as "law" for the purposes of the New York Convention and the Act. The UKSC recognised that this case was raised to determine which law governs the arbitration agreement and not to review the laws to be applied by arbitrators in the course of a dispute. Secondly, it was argued that the presumed position should be that both parties intended the arbitration agreement to be valid and effective, and thus where applying English law would invalidate the agreement, the UKSC should infer that English law would not extend to it. The UKSC noted that this 'validation principle' argument presupposed that an agreement had been made and did not apply to the wider question of whether a valid agreement has arisen at all.

 

Issue (ii) - if English law governs the arbitration agreement, is there any real prospect that a court might find at a further hearing that Kout became a party to the arbitration agreement in the FDA?

The Supreme Court held that the English Court of Appeal was both entitled and correct to conclude that as a matter of English law there was "no real prospect" that a court might find at a further hearing that Kout became a party to the arbitration agreement in the FDA.  Kabab-Ji could not point to any written agreement that joined Kout to the contract (and arbitration agreement) with Al Homaizi and, crucially, the contract contained a clause to the effect that it could only be modified in writing.

 

Issue (iii) - was the Court of Appeal justified in giving summary judgment refusing recognition and enforcement of the award?

Finally, the UKSC confirmed that the English Court of Appeal was correct to refuse an adjournment pending the French proceedings. In applying French laws, the French courts as the competent authority in this case, had departed from a conflict of laws approach and created “substantive rules of international arbitration”. It followed that the French and English courts were not considering the same issues and may well reach different final conclusions; in such circumstances the risk of contradictory judgments "cannot be avoided" and so that provided no reason for an adjournment.

Concluding remarks

This case confirms the principles established in Enka v Chubb will be applied when determining the governing law of an arbitration agreement, even in the different circumstances arising in Kabab-Ji v Kout.  The case also serves to highlight the need for careful and considered drafting if parties wish to apply a specific governing law to the arbitration agreement, particularly where they wish to depart from the broad principles established in Enka v Chubb

GET IN TOUCH

Back to top