The law governing the arbitration agreement: additional clarity provided by the UK Supreme Court

In 2020, we shared a summary of Kabab-Ji SAL v Kout Food Group. Even though the case covers many significant legal issues, one of them is of particularly high importance for the arbitration community, i.e. the determination of the law applicable to the arbitration agreement.

The court of first instance held, while relying on Channel Tunnel, BCY v BCZ and Sulamerica, that there had been an express choice of English Law to govern the arbitration agreement: the law of the underlying contract is an abundant sign of the parties’ will, while the choice of the seat is not enough to undermine it. This decision was later upheld by the English court of Appeal and in October 2021 by the UK Supreme Court.

Kabab-Ji SAL v Kout Food Group provided welcome clarity on imperative legal matters, including party autonomy and choice of law, while confirming the stability and credibility of England as an arbitral seat.

Background

The case at hand reignited the heated debate over the determination of the law governing the arbitration agreement covered in the landmark Dallah v Pakistan. In 2001 Kabab-Ji and Al Homaizi Food Company, which later became a subsidiary of the Respondent (Kout) entered into a Franchise Development Agreement (FDA), governed by English law, with the lex arbitri in Paris. In 2015 Kabab-Ji commenced arbitration as a result of a trademark dispute that arose under the FDA.

The English Commercial and Appellate Courts reviewed, in particular, two issues: whether the arbitration agreement is governed by English or French law and, accordingly, if Kout was a party to such agreement (according to the award issued by the Tribunal, under French Law, which applied to this issue, Kout was a party to the arbitration agreement. English law, however, applied to whether contractual rights were reassigned to Kout).

What did the Courts find?

The English Commercial Court held that there had been an express choice of English Law to govern the arbitration agreement. The proceeding was adjourned. A final determination on whether Kout had become a party to the agreement was not made.

Both issues were reviewed by the English Court of Appeal, which upheld the lower court’s view as to the application of English law to the arbitration agreement. It gave summary judgement in favour of Kout and refused recognition and enforcement of the award.

The Claimant argued that the choice of lex arbitri surpassed the choice of English law to govern the FDA. Additionally, the Claimant stated that, in the determination of the issue as to whether Kout had become a party to the contract, the Commercial Court should have relied on UNIDROIT principles since, according to Article 14 (3) of the FDA, “arbitrators shall also apply principles of law generally recognised in international transactions...”

The Court of Appeal found that such application would be in contravention of the No Oral Modification Clause in the FDA.

With reference to the second issue, it found that determination of the applicability and efficiency of the No Oral Modification Clause might be assessed in accordance with the estoppel test in Rock Advertising. The judge concluded that the test had not been satisfied and thus the strict wording of the FDA, as well as No Oral Modification Clauses, cannot be ignored in the case at hand.

The Supreme Court of the UK

In October 2021 the Supreme Court reviewed the appeal and considered three main issues: on the choice of law (1), on whether Kout became a party to the arbitration agreement (2) and on the summary judgement given by the Court of Appeal which refused recognition and enforcement of the award (3). The Court dismissed the appeal on all issues and concluded as follows:

1. English law is the law applicable to the arbitration agreement. Here, the Court applied the approach on the law governing the arbitration agreement established by the Supreme Court in Enka v Chubb, inter alia, that parties’ decision to subject their contract containing an arbitration agreement to a particular law can be viewed as a sufficient indication of the law that shall govern the arbitration agreement: “Once it is accepted that an express agreement as to the law which is to govern the arbitration agreement is not required and that any form of agreement will suffice, it seems difficult to resist the conclusion that a general choice of law clause in a written contract containing an arbitration clause will normally be a sufficient “indication” of the law to which the parties subjected the arbitration agreement … Clause 15 of the FDA is a typical governing law clause, which provides that “this Agreement” shall be governed by the laws of England.”
   
   
2. The Court upheld the Court of Appeal’s judgement on the matter and held that the modification procedure set forth by the parties was not followed and that a novation of the FDA referred to by the Claimant did not take place: “For all these reasons, as a matter of English law, the No Oral Modification clauses are an insuperable obstacle to the claimant’s case of novation by addition, quite apart from the difficulty of establishing the terms of any such novation and when and how it was purportedly made”.
   
   
3. Finally, the Court upheld the Court of Appeal’s decision to overturn the adjournment and give the summary judgement. It found that whether a summary judgement should be issued depends on the circumstances of the case, where it is “appropriate and proportionate”.
   
   

The English judiciary’s approach to the issue of which law governs the validity of an arbitration agreement has now been once again clarified and confirmed: the decision of the parties to provide that a certain law shall govern their contract can also be viewed as an “indication” that such law shall also govern an arbitration agreement contained in such contract. It is important to point out that the French Court of Appeal reached a different decision and found that in this case French law governs the arbitration agreement. It remains to be seen whether the highest judicial instance in France will uphold this conclusion.