Today, Wednesday 27 October 2021, the Supreme Court handed down its judgment in Kabab-Ji SAL (Lebanon) (Appellant) v Kout Food Group (Kuwait) (Respondent) [2021] UKSC 48.
The Supreme Court rejected Kabab-Ji’s appeal against the Court of Appeal’s decision to refuse recognition and enforcement of an ICC Award made in Paris (being the seat of the arbitration) on jurisdictional grounds within the meaning of Article V(1)(a) of the New York Convention (1958) (enacted in section 103(2)(b) of the Arbitration Act 1996) on the basis that the Respondent, KFG, never became a party to the Franchise Development Agreement (“FDA”) in question, which had been entered into by a separate company, AHFC, which later became KFG’s subsidiary.
Parallel annulment proceedings are taking place before the French courts, as the courts of the seat. The Paris Court of Appeal rejected KFG’s annulment application on jurisdictional grounds applying French law by judgment of 23 June 2020, and that is subject to an outstanding cassation application before the Court of Cassation.
The Supreme Court Judgment addresses important points of legal principle in the context of international arbitration.
First, it confirmed that the question of “validity” as that term is used in Article V(1)(a) applies to questions of whether a third party non-signatory to an arbitration agreement became a party to the arbitration agreement. In other words, where a third party asserts that it was never a party to the arbitration agreement in question one applies the law applicable to the putative arbitration agreement to determine the question in accordance with the rules set out in Article V(1)(a). The same approach is implicit in Dallah Real Estate & Tourism v Pakistan [2011] 1 AC 763, where the Supreme Court applied the rules contained in Article V(1)(a) to determine whether the Government of Pakistan, a non-signatory, was a party to the arbitration agreement in question.
Second, it held that in the absence of a uniform international approach under Article V(1)(a) for determining whether there has been a choice of law for the arbitration agreement, it was necessary to resort to first principles and that the principles identified in Enka v Chubb [2020] UKSC 38 should be applied for the purposes of Article V(1)(a) because:
- The language of Article V(1)(a) did not require there to be an express choice of law contained in the arbitration agreement itself (since it used the word “indication”).
- The considerations of principle in Enka as to why the governing law of the contract should ordinarily apply to the arbitration agreement applied with equal force. Indeed, it would be illogical and incoherent to apply a different rule to determine governing law questions depending upon whether the issue was raised prior to enforcement (i.e. under the Arbitration Act 1996) or after enforcement (i.e. under the New York Convention).
Third, on the facts it therefore held that English law applied to the arbitration agreement of the FDA, being the governing law of the substantive contract, contrary to the Tribunal’s conclusion that French law applied as the law of the seat.
Fourth, applying English law, it held that the No Oral Modification Clauses in the FDA presented insuperable hurdles to Kabab-Ji’s case that KFG became an additional party to the FDA applying the guidance given by the Supreme Court in MWB Business Exchange Centres Ltd v Rock Advertising Ltd [2018] UKSC 24; [2019] AC 119. This was on the basis that Kabab-Ji’s case as to amendment by conduct fell foul of the binding No Oral Modification Clauses of the FDA and further: (1) Kabab-Ji could not meet the minimum requirements for an estoppel as laid down by Lord Sumption in Rock Advertising; (2) the application of good faith or UNIDROIT principles as set out in the FDA could not dilute the requirements of English law since the Tribunal was directed by the terms of the contract not to contradict the requirements of English law; (3) there was no reason in any event to conclude that good faith would dilute express terms of an agreement.
Fifth, there was no requirement that a jurisdictional rehearing proceed by way of complete rehearing (i.e. trial) in all cases. That was a matter for case management under the CPR Rules and therefore a summary judgment approach was available and could be adopted depending upon the facts of the case.
Sixth, there was no good reason to adjourn the proceedings in favour of annulment proceedings before the French court (being the court of the seat) under Article VI of the New York Convention. The Paris Court of Appeal had applied French law to the issue, a reflection of the fact that French courts have abandoned the conflict of law approach of selecting a national law but instead applies substantive rules of international arbitration. As a result: (a) a French Court decision could not give rise to an issue estoppel on the English Court since it was not addressing the same issue; (b) the risk of contradictory judgments could not be avoided under the scheme of the New York Convention. This point is important to note in the context of some suggestions that the present case is a re-run of Dallah, a case where the English and French Courts came to opposite results on the application of French law. The present case is materially different since the English and French Courts applied different laws to the question of jurisdiction.
Finally, it is fitting to note that the late and distinguished international arbitration practitioner and academic, Professor Emmanuel Gaillard, acted as expert on French law for Kabab-Ji in the High Court proceedings giving rise to the Supreme Court Judgment and subsequently published an article on the Court of Appeal decision entitled (in translation): “The Virtues of the Substantive Rules Method Applied to the Arbitration Agreement (The lessons of the Kout Food case).”[1] In the article, Professor Gaillard, demonstrating all of his revered intellectual rigour, identified that the difference in approach between the English and French Courts reflected an almost philosophical opposition between French and English law on how to interpret a contract, a contrast between economic reality and legal formalism. Whether one agrees or not with that conclusion, one cannot but admire and mourn the loss of one of the leading lights in international arbitration.
Ricky Diwan QC of Essex Court Chambers acted as counsel and was instructed by Jeremy Drew, Partner and Head of the Commercial Division at Reynolds Porter Chamberlain LLP and Oliver Sainter, Senior Associate at Reynolds Porter Chamberlain LLP. Ricky Diwan QC and Jeremy Drew acted at all levels in the high court proceedings, and in the underlying arbitration.
Read the full judgment here.
[1] Revue de l’Arbitrage (2020) p 839 et seq.
