WHICH LAW APPLIES TO AN ARBITRATION AGREEMENT?

When a court is called upon to assess the scope and validity of an arbitration agreement it must firstly identify which system of law to apply. Conflicting decisions from the UK Supreme Court (“UKSC”) and the French Court of Cassation[1] (“FCC”) in relation to Kabab-Ji v Kout Food Group certainly do not help clarify the situation. This, in turn, may have a significant impact on the ability (or inability) to enforce an arbitral award.

In October 2021, the UKSC unanimously refused to recognise and enforce the international Paris-seated arbitral award in Kabab-Ji v Kout Food Group on the grounds that, applying English law, Kout Food Group (“KFG”) had not become a party to a series of arbitration agreements.

In September 2022, the FCC reached the opposite conclusion in the same matter and refused to annul the award on the basis that, applying French law, KFG was indeed bound by the arbitration agreements.

So, English and French courts are adopting different approaches to identifying the law governing the arbitration agreement, where not expressly stated, and parties must factor this in when choosing their seat of arbitration.

BACKGROUND

Kabab-Ji v Kout Food Group arose from a series of franchise agreements concluded between Kabab-Ji Sal (“Kabab-Ji”), as franchisor, and Al Homaizi Foodstuff Company (“AHFC”), as franchisee. KFG became AHFC’s parent company following a corporate restructuring, but never signed the franchise agreements, governed by English law. Each franchise agreement contained a separate arbitration clause providing for ICC arbitration seated in Paris, but, crucially, without an express choice of law governing those arbitration agreements.

In 2015, a dispute arose.  Kabab-Ji commenced the arbitration proceedings against KFG alone, and not against AHFC. KFG objected to the arbitral tribunal’s jurisdiction on the grounds that it was a third-party non-signatory that was not bound by the arbitration agreements. Kabab-Ji alleged that KFG should be subject to the arbitration agreements because KFG was involved in the performance of various obligations under the franchise agreements over a sustained period of time.

In a 2017 award, the arbitral tribunal held that French law, as the law of the seat of arbitration, applied to the question of whether KFG was bound by the arbitration agreements. The majority of the tribunal held that, applying French law, non-signatory KFG was a party to the arbitration agreements and, on the merits, that KFG was in breach of the franchise agreements.

PROCEEDINGS IN ENGLAND AND IN FRANCE

Following that award, KFG commenced annulment proceedings before the Paris Court of Appeal. At the same time, Kabab-Ji commenced enforcement proceedings in the English Commercial Court. In the English proceedings, KFG resisted the recognition and enforcement of the award in England on the basis that it was not bound by the arbitration agreements.

The English Commercial Court ruled that English law, the law of the contracts, governed the validity of the arbitration agreements. Kabab-Ji appealed this decision to the English Court of Appeal, which refused recognition and enforcement of the award. Kabab-Ji appealed to the UKSC.

PARIS COURT OF APPEAL – JUNE 2020

Not long after, in June 2020, the Paris Court of Appeal issued its judgment determining that the parties’ choice of English law as the governing law of the franchise agreements did not affirmatively establish the “common will of the parties” to also submit to English law the arbitration agreements, which are to be considered as “autonomous” from the franchise agreements. The Paris Court of Appeal also noted that generally recognised principles of law established that the substantive law of the place of the seat of arbitration should apply to determinations involving the arbitration agreement, namely French law.

The Paris Court of Appeal found that, under French law, the arbitration agreements contained within the franchise agreements could be extended to a non-signatory directly involved in the performance of the contract and in any disputes arising out of the contract, dismissing KFG’s annulment action.

UK SUPREME COURT – OCTOBER 2021

In October 2021, the UKSC determined that English law governed the question of whether KFG became a party to the arbitration agreements, because: (i) the parties chose English law to govern the franchise agreements; and (ii) the parties expressly stated that English law would govern all provisions of the franchise agreements and that this must therefore include the arbitration agreements. Applying English law, the UKSC confirmed that KFG was not bound by the arbitration agreements between AHFC and Kabab-Ji and unanimously dismissed Kabab-Ji’s appeal.

FRENCH COUR PARIS FCC – SEPTEMBER 2022

Last month, the FCC upheld the decision of the Paris Court of Appeal, holding that, under French law, the law of the seat will govern an arbitration agreement, including its validity and effectiveness, except where the parties expressly submit the validity and effects of the arbitration agreement to a different choice of law. The FCC held that an arbitration agreement is legally independent from its underlying contract, and that the parties’ choice of English law as the substantive law of the contracts did not evidence common will to designate English law as the law governing the arbitration agreement. Rather, the arbitration agreements within the franchise agreements referred to Paris as the seat of the arbitration, and therefore, the substantive rules of the seat applied to the determination as to whether a non-signatory was bound by an arbitration agreement.

WHAT NOW?

These opposing decisions by the UKSC and the FCC reveal that there is, for the moment, no universal approach to determining which law applies to the interpretation of an arbitration agreement, in particular where the governing law of the underlying contract and the arbitral seat are in different jurisdictions.

However, these conflicting approaches and decisions do highlight a simple solution: parties should specify in the arbitration agreement which law governs that arbitration agreement.

For existing arbitration agreements where the arbitration agreement is silent as to the governing law and where the governing law of the main contract differs to the seat of a potential arbitration, parties will need to consider which jurisdictions in which to seek recognition and enforcement in light of these two opposing decisions.