Almost a decade after the first directly opposing decisions in the case of Dallah, the French and English courts have, once again, rendered contrary decisions in the case of Kabab-Ji v Kout Food Group.
Background
The case relates to a franchise development agreement (FDA) entered into between a Lebanese company, Kabab-Ji (Ji), and Al Homaizi Food Company (AHFC). The FDA was governed by English law. The arbitration agreement in the FDA provided for an ICC arbitration with the seat of arbitration to be in Paris, but it did not expressly state what law would govern the arbitration agreement.
In 2004, AHFC became a subsidiary of a Kuwaiti company (KFG) pursuant to a corporate re-organisation. Ji consented to the creation and incorporation of KFG on the condition that the operation by KFG would not affect “[the] terms and conditions of already signed agreements” between them. The FDA expired in 2011. In 2015, Ji initiated arbitral proceedings before the ICC against KFG (but not AHFC), accusing KFG of continuing to use the Kabab-Ji trademark after the expiry of the FDA. In an award dated 11 September 2017, the arbitral tribunal ruled, by a majority, that KFG was a party to the arbitration agreement and the substantive obligations under the FDA had been extended to KFG. In December 2017, KFG brought an action before the Paris Court of Appeal to set aside the arbitral award (the French proceedings).
English proceedings
In the meantime, Ji commenced enforcement proceedings against KFG in England. In January 2020, the English Court of Appeal found in favour of KFG, holding that English law had been expressly designated by the parties as the law applicable to the arbitration agreements and, consequently, English law governed any disputes as to the jurisdiction of the arbitrators. The English Court of Appeal held that KFG had not become a party to the FDA or to the arbitration agreement in the FDA. As a result, Ji’s application for recognition and enforcement of the arbitral award was rejected. Ji was also refused leave to appeal to the UK Supreme Court.
French proceedings
In February 2020, KFG filed its submissions in the French proceedings. KFG argued, relying on the English courts’ reasoning, that the tribunal had wrongly assumed jurisdiction over KFG as KFG had not been a party to the FDA and, thus, the arbitration agreement. KFG submitted that the tribunal should have applied English law to the arbitration agreement and consequently found that the tribunal had no jurisdiction over KFG. KFG also argued, in the alternative, that if French law did apply, then the French substantive rules for the transfer or extension of the arbitration agreement to KFG were not satisfied.
On 23 June 2020, the Paris Court of Appeal rejected KFG’s arguments, upholding the award and finding that the tribunal had been correct in its application of French law being the law of the expressly designated seat of arbitration. In reaching its decision, the French court looked closely at the performance of the contract and found that the activities undertaken by the parties gave rise to a presumption that they accepted the arbitration clause irrespective of the fact that they were not signatories to the contract containing the arbitration clause. The court found that the arbitral tribunal had been correct in finding that the arbitration agreement had been extended to and bound KFG, given KFG’s involvement in the performance of the FDA over several years, including, among other things, managing the operation of the Ji restaurants and taking steps to renegotiate and terminate the FDA with Ji.
Commentary
The FDA contained a “no oral modification clause” that the English court considered relevant to its determination as to whether KFG had been joined as a party to the contract. The Paris court departed from this strict interpretation, placing reliance instead on the conduct of the parties. The Paris court also made clear that it would not be impacted by foreign decisions, noting that it could not “be limited by the existence of foreign decisions interpreting the [FDA] and the arbitration clause and applying English law to them.”
The English Court of Appeal had already faced some criticism for not awaiting the decision from the Paris court (being the court of the designated seat of arbitration) when delivering its decision in January 2020. This conflicting decision will add further fuel to that debate. Ji has made an application for leave to appeal to the UK Supreme Court. Ji has also written to the UN to notify it of the English and French courts’ decision, noting that there is a “significant and continuing risk” to enforcement of arbitral awards.
Practical takeaways
As we await a response from the UK Supreme Court, the conflicting decisions between the French and English courts once again underline the importance of including an express governing law clause in an arbitration agreement, and not simply leaving that question to be determined by the parties’ selection of arbitral seat or the governing law of the underlying contract.
Equally, the decision also serves to emphasise the need properly to document any changes to contracting parties’ positions, particularly in the context of long-term contracts.
In the absence of these relatively simple but nevertheless crucial steps, the risk of further delay, and the inevitable costs involved in a lengthy enforcement/setting aside dispute, potentially takes away much of the benefit that the arbitration process has to offer.
