U.K. Supreme Court Clarifies Law Governing International Arbitration Agreements

In a landmark ruling, the U.K. Supreme Court has provided further clarity on determining the governing law for international arbitration agreements.

The Case: Kabab-Ji SAL v Kout Food Group

On 27 October 2021, the Supreme Court issued its unanimous decision in Kabab-Ji SAL v Kout Food Group, ultimately refusing to enforce an ICC arbitral award against a non-signatory party. The crux of the dispute was whether Kout Food Group (KFG) was bound by an arbitration agreement with Kabab-Ji SAL, under which the award was granted. A key issue was the determination of whether French or English law governed the arbitration agreement—a matter that influenced the recognition and enforcement of the arbitral award.

Significance of the Ruling

The ruling is particularly significant for two reasons:

1. Interpretation of Article V(1)(a) of the New York Convention – This provision is crucial in the enforcement of international arbitral awards. Given that England and Wales are prominent arbitration jurisdictions, this ruling will likely influence global courts in interpreting this provision.
2. Consistency with Enka v Chubb – The decision aligns with the Supreme Court’s earlier ruling in Enka v Chubb (October 2020), which established guiding principles for determining the governing law of an arbitration agreement. Unlike Enka, which dealt with anti-suit injunctions before arbitration commenced, Kabab-Ji involved enforcing an arbitral award after contested proceedings. This consistency ensures a clear approach regardless of when the law governing an arbitration agreement is questioned.

The Supreme Court also addressed two procedural issues: the possibility of obtaining summary judgment in refusal applications and the conditions under which an English court might adjourn enforcement proceedings due to parallel challenges at the arbitration’s seat.

Legal Battle in England and France

While the Supreme Court’s ruling prevents enforcement under English law, the arbitral award remains valid. KFG initiated proceedings in France, the arbitration’s seat, seeking annulment of the award. In June 2020, the Paris Court of Appeal upheld the award under French law. However, KFG has appealed to the French Supreme Court (Cour de Cassation), with a final decision pending.

Case Background and Procedural History

Kabab-Ji, a Lebanese company specializing in Middle Eastern cuisine, entered a Franchise Development Agreement (FDA) with Kuwaiti company Al Homaizi Foodstuff Company in 2001. This agreement allowed Al Homaizi to operate franchises using Kabab-Ji’s branding and business model. The FDA, along with subsequent Franchise Outlet Agreements (FOAs), was governed by English law and included an ICC arbitration clause with a Paris seat.

Following a corporate restructuring in 2005, KFG became Al Homaizi’s parent company. When a dispute arose, Kabab-Ji initiated arbitration solely against KFG, which argued it was not bound by the arbitration agreement. The arbitral tribunal ruled by majority that KFG was a party to the arbitration under French law and had acquired rights and obligations under English law via ‘novation by addition.’ The dissenting arbitrator, the only English-qualified lawyer on the panel, disagreed.

The tribunal found KFG in breach of the agreements and awarded Kabab-Ji damages exceeding $6.7 million.

Parallel Legal Proceedings

Dissatisfied with the award, KFG refused to pay, prompting legal actions in both France and England:

• December 2017: KFG sought annulment of the award in the Paris Court of Appeal.
• February 2018: Kabab-Ji applied for enforcement in England under the Arbitration Act 1996.
• March 2018: KFG moved to set aside the enforcement order, arguing it was not a party to the arbitration agreement.
• March 2019: The English Commercial Court ruled the arbitration clause was governed by English law, meaning KFG was not bound by it. However, the court deferred a final enforcement decision pending the Paris Court of Appeal’s ruling.
• January 2020: The English Court of Appeal overturned this adjournment and ruled that enforcement should be refused outright.
• June 2020: The Paris Court of Appeal upheld the award’s validity under French law.
• Pending: KFG has appealed to the French Supreme Court (Cour de Cassation).

Supreme Court’s Decision

The U.K. Supreme Court distilled Kabab-Ji’s appeal into three key questions:

1. Which law governed the arbitration agreement?
2. If English law applied, was there any realistic possibility that KFG had become a party to the arbitration agreement?
3. Was summary judgment an appropriate means to refuse enforcement?

The Court ruled against Kabab-Ji on all points:

• It reaffirmed that the arbitration agreement was governed by English law.
• Applying English law, KFG was not a party to the arbitration agreement.
• Summary judgment was appropriate to refuse enforcement.

Key Legal Implications

Determining the Law Applicable to Arbitration Agreements

The Court confirmed its approach from Enka v Chubb: where no explicit choice of law exists for the arbitration agreement, a general governing law clause in the contract usually applies. The Court applied this principle under the New York Convention’s Article V(1)(a), which stipulates that arbitration agreements are valid under the law the parties have subjected them to or, in the absence of such an indication, under the law of the seat.

Since the FDA was expressly governed by English law, the Supreme Court held this was sufficient indication that the arbitration clause was also governed by English law, even though the arbitration’s seat was in Paris.

Summary Judgment and Enforcement Proceedings

The Supreme Court clarified that summary judgment can be used in enforcement disputes, rejecting Kabab-Ji’s argument that a full evidentiary hearing was required. The Court also provided guidance on when English courts might adjourn enforcement proceedings pending annulment challenges at the seat, emphasizing efficiency and avoiding unnecessary delays.

Conclusion

This decision solidifies English law’s approach to determining the governing law of arbitration agreements and reinforces consistency between pre- and post-award scenarios. By aligning with Enka v Chubb, the ruling provides international businesses and arbitration practitioners with clearer expectations regarding enforcement and recognition of arbitral awards under the New York Convention. While the French Supreme Court’s pending decision could further impact this dispute, the U.K. Supreme Court’s judgment serves as a crucial precedent in international arbitration law.