The Supreme Court hands down judgment in Kabab-Ji SAL v Kout Food Group: Clarification on the governing law of arbitration agreements

On 27 October, the Supreme Court handed down its highly anticipated decision in Kabab-Ji SAL (Lebanon) v Kout Food Group (Kuwait) [2021] UKSC 48, unanimously dismissing Kabab-Ji’s appeal and affirming the English Court of Appeal's refusal to enforce the arbitral award that Kabab-Ji had obtained against the Kout Food Group ("Kout") in a Paris-seated ICC arbitration. The decision highlights the differing approaches of different national legal systems to determining the governing law of an arbitration agreement, and the importance of including explicit governing law clauses in arbitration agreements themselves, in addition to the relevant underlying contracts.  

Background

Kabab-Ji entered into a series of franchise agreements with Al Homaizi Foodstuff Company (the “franchisee”) under which Kabab-Ji granted the franchisee licenses to operate franchises using Kabab-Ji’s restaurant concept. The franchise agreements were governed by English law. Following a restructuring of the wider Al Homaizi group, the franchisee became a subsidiary of Kout. When a dispute arose under the franchise agreements, Kabab-Ji commenced ICC arbitration proceedings against Kout (i.e. the parent), but not against the franchisee. The arbitration clause specified that the arbitration would be seated in Paris, and the governing law clause of the franchise agreement stipulated that it would be governed by English law.

The Tribunal determined that, on the merits, Kout was in breach of the franchise agreement, and this finding has not been the subject of further debate.

What has however been litigated at length is whether Kout was a party to the franchise agreements, or to the arbitration agreement(s) they contained. A majority of the ICC Tribunal found that, applying English law, there had been a “novation by addition” whereby Kout became an additional party to the franchise agreements alongside the franchisee by reason of the parties’ conduct. Kout filed an application asking the French courts to annul the award. Meanwhile, Kabab-Ji separately applied in England for enforcement of the award.

Which law governs arbitration agreements in the absence of an express or implied term?

The case turned on this fundamental issue, and the English and French courts' differing views in this respect have led to strikingly different outcomes.  

In 2020, the UK Supreme Court brought clarity to this issue when they handed down judgment in Enka Insaat Ve Sanayi A.S. v OOO Insurance Company Chubb [2020] UKSC 38. In summary, the Supreme Court ruled that if parties to a contract have not specified the law that governs their arbitration agreement, then the governing law of the contract (if specified) would apply – this generally being the law with which arbitration agreements are most closely connected.

Consistently with Enka, the Supreme Court held in Kabab-Ji that the arbitration agreement was governed by English law (i.e. the governing law of the franchise agreements generally), and that this was the case even though the governing law differed from the seat of the arbitration.  It flowed from that finding that Kout was not a party to the arbitration agreement, because under English law, there was no novation to Kout despite the parties' conduct (the existence of "No Oral Modification restrictions" was highly relevant, and there was a lack of evidence of estoppel).  The Supreme Court therefore refused to enforce the arbitral award against Kout.

By contrast, the French Court of Appeal has upheld the award on the basis that French law applied to the arbitration agreement.  Under French law, where an arbitration agreement is silent as to its governing law, it is the law of the seat (in this case, France) rather than the governing law of the underlying contract that generally applies. This led to a different result because, under French law, Kout was a party to the arbitration agreement. 

Conclusion

Although the Supreme Court decision brings Kabab-Ji's efforts to enforce its award in England to an end, Kout's efforts to have the award set aside in France remain ongoing as the French Court of Cassation has yet to deliver its findings. The saga demonstrates that although specifying the governing law of both the arbitration agreement and the underlying contract may strike some as repetitive and unnecessary, arbitration practitioners would be well-advised to always do so to minimise the risk of their clients becoming embroiled in expensive and protracted cross-jurisdictional litigation.