The UK Supreme Court recently issued a welcome judgment in Kabab-Ji v Kout, confirming that the principles set out in Enka v Chubb extend to the assessment of governing law of the arbitration clause at the enforcement stage. The decision is helpful clarification that there is only one approach that will be taken by the English courts to this question, whenever it arises in the arbitration life cycle and this certainty can only be good news for arbitration users. While this was a summary judgment blocking enforcement, those looking to enforce awards will also be pleased to see confirmation from the Supreme Court that a full evidential hearing and trial of challenges to enforcement will not necessarily be required. When proportionate, a summary judgment process can be used to deal with such issues. Despite the deceptively simple scheme laid out in the judgments, there may however be something of a gap left by the decisions in Enka v Chubb and Kabab-Ji v Kout. Given this, we can expect to continue to see some volume of future litigation in relation to the validity of arbitration agreements where there is no express governing law set out in the arbitration clause.
In the years leading up to the Supreme Court’s definitive decision on the law of the arbitration agreement in Enka v Chubb, there had been considerable uncertainty around how to determine governing law where the arbitration clause itself was silent. There had been differing views as to whether the law of the seat should win out in this tussle of laws, or whether the law governing the main contract should also govern the arbitration agreement. The somewhat inconsistent case law was reflective of the lack of clarity on these issues. The Enka v Chubb decision last year provided a much clearer framework, ending much of the dispute in this area. It is now clear that a choice of law in the main contract will also operate as a choice of law for the arbitration agreement (unless there are particular factors to the contrary, such as invalidity of the arbitration clause). Where there is no choice of law in the main contract, the courts will look to the system of law with which the arbitration agreement has its closest and most real connection, which will usually be the law of the seat.
The Kabab-Ji v Kout case was the first time since the Enka v Chubb decision that this question has returned to the Supreme Court. The decision provided the first guidance from the Supreme Court on the appropriate approach at the post-award stage. The underlying contractual framework in this case involved Kabab-Ji SAL (Kabab-Ji), a Lebanese company, entering into a Franchise Development Agreement (FDA) with Al Homaizi Foodstuff Company (Al Homaizi), a Kuwaiti company. The FDA contained an English governing law clause and an arbitration agreement which provided for arbitration seated in Paris (Arbitration Agreement). Crucially, the Arbitration Agreement did not specify the law which governed the arbitration clause.
Later, Al Homaizi became a subsidiary of Kout Food Group (KFG) and a dispute arose under the FDA which Kabab-Ji referred to ICC arbitration. Importantly, Kabab-Ji only commenced the arbitration against KFG, not Al Homaizi. KFG, participating in the arbitration under protest, argued that under English law it was not a party to the FDA and accordingly was not bound by the Arbitration Agreement. In this context, KFG relied on the no oral modifications (NOM) clause in the FDA.
The tribunal determined that whether KFG was bound by the Arbitration Agreement was a question of French law, while English law applied to the question of whether there was a transfer of obligations to KFG. Ultimately the tribunal issued an award in favour of Kabab-Ji (Award), on the basis that, as a matter of English law, KFG was a party to the FDA and, therefore, the Arbitration Agreement.
To complicate matters, the French courts and English courts then issued directly opposing decisions. KFG applied to the Paris Court of Appeal to set aside the Award in December 2017, but later that same month Kabab-Ji commenced enforcement proceedings in England under section 101 of the English Arbitration Act 1996 (AA 1996) and in February 2018, the English High Court made an initial order without notice for the Award to be enforced as a judgment. The English High Court subsequently adjourned enforcement of the Award, pending a challenge to the Award before the French courts. However, it decided on some preliminary issues, including that English law governed the Arbitration Agreement and that, under English law, KFG was not a party to the Arbitration Agreement.
By contrast, the Paris Court of Appeal found in favour of Kabab-Ji in June 2020 and refused to annul the ICC Award. Therefore, as far as the French courts are concerned, the Award currently remains valid and enforceable. The enforcement proceedings then came before the English Court of Appeal, which in December 2020 found in favour of KFG and refused to enforce the Award in England. The conflicting decisions from the French and English appeal courts left Kabab-Ji in the unenviable position of having obtained an Award which had been upheld at the seat, but which it could not enforce in England. KFG then appealed to the Supreme Court.
The Supreme Court was asked to consider which law governed the validity of the arbitration agreement (Governing Law Issue). Further, it was tasked with deciding, if English law applied, did KFG become a party to the arbitration agreement in the FDA (Party Issue) and, procedurally, was the Court of Appeal justified in giving summary judgment refusing recognition and enforcement of the Award (Summary Judgment Issue).
In relation to the Governing Law Issue, the Supreme Court reiterated the principles set out in Enka v Chubb. While in Enka v Chubb, the court was applying English common law rules to resolve the conflict of laws, in this case, the court emphasised that the rules to be applied were those in section 103(2)(b) of the AA 1996, which transposes the text of the New York Convention into English law. The Supreme Court highlighted the need for a view to be formed on “first principles” and emphasised that it would be illogical for a different approach to be taken to questions of governing law depending on whether the question was raised at the pre or post-award stage. In this case, Kabab-Ji had in fact accepted that the general principles set out in Enka v Chubb would be equally relevant to a determination of governing law in relation to section 103(2)(b) of the AA 1996.
In relation to the Summary Judgment Issue, the Supreme Court determined that a full evidential hearing and trial of the challenges to enforcement were not required. When proportionate, a summary judgment process can be used to deal with such issues. The Supreme Court considered Kabab-Ji’s argument that the English proceedings should have been adjourned pending the appeal process in the French courts. The court noted that in these circumstances the risk of contradictory judgments between two fundamentally different legal systems could not be avoided. This was therefore not a good reason to adjourn.
It is unsurprising to see the Supreme Court restating the helpful principles in Enka v Chubb, which now apply at the post-award stage. In this respect, the judgment in Kabab-Ji v Kout has provided additional reassurance for arbitration users navigating these previously murky waters. Regretfully, however, there is still room for argument on what some commentators had suggested was one of the remaining areas of potential ambiguity after the judgment in Enka v Chubb. Where the arbitration clause is silent and there is an orthodox express governing law clause in the main contract, there is now likely to be little potential for dispute, as the governing law clause will usually extend to the arbitration agreement. This said, in the wake of Enka v Chubb, it had been suggested that satellite litigation might continue to result from more ambiguous contractual wording, arising from parties attempting to exploit the argument that there has been an implied choice of law for the main agreement. The judgment in Kabab-Ji v Kout has not dealt specifically with how assertions of an implied choice of law for the main contract will be assessed and this question was left open in Enka v Chubb, therefore remaining an area of uncertainty.
On the practical side, the case is another reminder of the wisdom of including an express choice of law for the arbitration clause itself. While the issues surrounding choice of law of the arbitration agreement may now be much clearer as a matter of English law, parties are very well-advised to keep in mind the potential for arguments to be raised on governing law of the arbitration agreement. These points can be in play at the enforcement stage or earlier and may arise in jurisdictions where matters are less clear-cut. The judgment in Kabab-Ji v Kout also illustrates the importance of consideration of future disputes at the time of any corporate reorganisation, along with careful analysis of the appropriate respondents at the outset of any arbitration claim.
The Supreme Court was of the view that the effect of the governing law clause in the main contract was “absolutely clear” and determined that the “law to which the parties subjected the arbitration agreement [was]… English law”. The Supreme Court rejected the suggestion that the reference in the FDA to the UNIDROIT principles impacted the governing law, on the basis that it would lead to an illogical result inconsistent with the principle of party autonomy.
In relation to the Party Issue, the Supreme Court noted the presence of the NOM clause and that Kabab-Ji could not evidence any written modifications to the FDA. As the Supreme Court had previously established in Rock Advertising v MWB, such clauses are legally effective unless the conditions for an estoppel were met. The Supreme Court found that there was nothing to establish an estoppel in this case and KFG had not become a party to the FDA or, consequently, the Arbitration Agreement.
