More conflicting judgments from England and France: uncertainty for users of international arbitration?

International

Introduction

In a significant case for international commercial arbitration, on 23 June 2020, the Paris Court of Appeal rejected an application to annul an ICC award, finding that the arbitral tribunal had jurisdiction over the parties’ dispute. This was despite the English Court of Appeal reaching the opposite conclusion just a few months earlier when refusing to enforce the same award. Pending review by the UK Supreme Court (and potentially by the French Court of Cassation), the award may now be enforced in France but not in England, creating a divergence between the two jurisdictions. This parting of ways appears to be rooted in the courts’ differing views on the principle of separability of an arbitration agreement from the underlying contract in which it is found, with the French court attributing greater significance to this principle than the English court in the context of determining the governing law of an arbitration agreement.

The parties’ agreements and the tribunal’s decision

The dispute, between Kout Food Group Company (“KFG”) and Kabab-Ji S.A.L Company (“Kabab-Ji”), relates to a franchise agreement between Al-Homaizi Foodstuff Co WWL (“AHFC”) and Kabab-Ji, whereby AHFC agreed to operate the “Kabab-Ji” branded restaurants in Kuwait for a period of ten years. Following a corporate reorganisation, KFG became the holding company of AHFC, but did not become a party to the franchise agreement. In 2015, Kabab-Ji commenced an arbitration against KFG, alleging breach of the franchise agreement.

The franchise agreement contained: (i) an express choice of English law as the law of the franchise agreement; (ii) an arbitration agreement providing for arbitration seated in Paris; and (iii) a No Oral Modification clause. There was no express choice of governing law for the arbitration agreement. 

In 2017, the tribunal found in favour of Kabab-Ji, finding that under English law, it was to be inferred from the parties’ conduct that the franchise agreement had been novated to KFG, but that the question of whether KFG was also bound by the arbitration agreement was governed by French law.

KFG subsequently brought annulment proceedings in Paris.

English enforcement proceedings

In the meantime, Kabab-Ji sought to enforce the award in England. The judge declined to reach a final view as to enforceability pending the final decision of the Paris Court of Appeal. 

Following Kabab-Ji’s appeal in England, the English Court of Appeal gave judgment in January 2020 (see our Law-Now here).The Court of Appeal held that English law applied to the arbitration agreement. It found that the parties’ express choice of English law to govern the main contract was also an express choice of the same law to govern the arbitration agreement. Where there was no indication that the arbitration agreement was to be construed separately from the rest of the contract, the contract should be construed as a whole and the express choice of law applied to all its terms. The express choice of Paris as the seat of the arbitration did not override this choice, since an implied provision cannot displace an express one. The court found that under English law, the No Oral Modification clause prevented a novation from occurring by conduct and there was no real prospect of new evidence coming to light in the Paris proceedings that would allow Kabab-Ji to satisfy the conditions for an estoppel. The Court of Appeal therefore refused to recognise and enforce the arbitral award.

The Paris Court of Appeal’s decision

In the annulment proceedings before the Paris Court, KFG argued that the arbitral tribunal did not have jurisdiction over KFG because it was not a party to the franchise agreement. In refusing to annul the award, the Court found that French law, not English law, was the governing law of the arbitration agreement. The Court, relying on the principle of separability of the arbitration agreement from the underlying contract, held that the existence and validity of the arbitration agreement is to be interpreted by reference to the common intention of the parties, without reference to any national law. The Court noted that the franchise agreement provided for English law as its governing law and included a prohibition on the tribunal applying any rules that would contradict the wording of the franchise agreement, but found that these were not sufficient reasons to establish that the parties had intended for the governing law of the arbitration agreement to be English law.

The Court held that as the parties had not expressly agreed that English law would govern the arbitration agreement specifically, the tribunal was instead bound to apply the substantive law of the place of the seat of arbitration, which is a generally recognised principle of law and would not amount to contradicting the wording of the franchise agreement. As the law of the seat of the arbitration, French law applied to the arbitration agreement. The Court found that it “could not be limited by the existence of foreign decisions” (i.e. the English Court of Appeal decision) in this regard.

KFG also argued that even if the substantive rules of French law applied, KFG was not bound by the arbitration agreement because AHFC’s rights had not been transferred to it. However, the Court held that the arbitration agreement had its own, separate, effectiveness from the franchise agreement, and that the arbitration agreement must be extended to parties who were directly involved in the performance of the franchise agreement, where their activities indicated that they had accepted the arbitration agreement and its scope, regardless of the fact that they had not signed the franchise agreement. As KFG had been involved in the performance of the franchise agreement, this was sufficient under French law to extend the effect of the arbitration agreement so as to include KFG.

Comment

Diverging decisions

On 8 July 2020, Kabab-Ji obtained permission to appeal the English Court of Appeal’s judgment to the Supreme Court. In granting permission to appeal, the three-judge panel noted that if Kabab-Ji wished to amend its grounds of appeal in the light of the Paris Court of Appeal’s decision, it would need to make an application to do so. KFG has four months from the date of the Paris Court of Appeal’s judgment to decide whether to appeal the Paris Court of Appeal’s decision to the French Court of Cassation. Pending review by the higher courts, the parties are now left in the unsatisfactory position where the French courts consider the award valid and enforceable, yet the English courts refuse to enforce it.

This is not the first time the English and French courts have reached contradictory conclusions regarding the governing law of arbitration agreements. In Dallah Real Estate and Tourism Holding Company v The Ministry of Religious Affairs, Government of Pakistan [2010] UKSC 46, the UK Supreme Court refused to enforce an ICC award issued under an arbitration with its seat in Paris. That case concerned the interpretation of section 103(2) of the English Arbitration Act 1996, which restates Article V(1)(a) of the New York Convention and grants the court the power to refuse to enforce an international arbitration award where there was no valid arbitration agreement. As in the present case, there was no express provision in the contract as to the governing law of the arbitration agreement, yet both courts applied French law to the arbitration agreement, as the law of the seat. However, whereas the UK Supreme Court found that the award was not binding on the Government of Pakistan because it was not a signatory to the contract and there was no common intention for it to be a party to the arbitration agreement, the Paris Court of Appeal refused to set aside the award, holding that the tribunal did have jurisdiction over the Government of Pakistan, despite it not being a signatory. The Paris Court focused on the substantive elements of the transaction, namely that the Government of Pakistan was the “true party” to the economic transaction.

The contradictory decisions in Dallah were unfortunate, but those in the Kabab-Ji v KFG dispute are perhaps even more so. Whereas the Dallah courts largely agreed on the legal principles but diverged on the application of those principles to the facts, in Kabab-Ji v KFG the courts have not even managed to agree on which legal principles should apply and approached the interpretation of the arbitration agreement (specifically the governing law of the arbitration agreement) in wholly different ways, as we analyse further below. 

This way, or that way?

Where there is no express choice of governing law of the arbitration agreement, there are two principal choices in terms of the source of the governing law: (1) the law of the seat; and (2) the law governing the contract. Sometimes these will be the same, e.g. Paris seat and French law / London seat and English law, but that is not always the case, as was the situation in Kabab-Ji v KFG (Paris seat and English law). 

As illustrated in Kabab-Ji v KFG, the English courts have generally preferred to adopt the law governing the contract as the law governing the arbitration agreement. For example, in Channel Tunnel Group Ltd v Balfour Beatty Ltd [1993] AC 334, the Court held that it would be “exceptional” for the law of the arbitration agreement to be different from that of the express choice of law of the underlying contract. However, the English courts have not been entirely consistent in their approach. In Sulamerica CIA Nacional De Seguros SA v Enesa Engenharia SA [2012] EWCA Civ 638 (see our Law-Now here), the Court held that despite the underlying contract being governed by Brazilian law, as the seat of the arbitration was London, this indicated that the parties intended English law to govern the arbitration agreement. Similarly, in C v D [2007] EWCA Civ 1282 (see our Law-Now here), the Court held that in the absence of an express choice of law of the arbitration agreement, the governing law is “more likely to be the law of the seat of arbitration than the law of the underlying contract.” (Emphasis added.)

Meanwhile, the French courts have found an alternative option, construing the parties’ discernible common intentions, with the foundation of their analysis being the principle of separability of an arbitration agreement from the underlying contract. The French courts consider that the existence and validity of the arbitration agreement itself must be considered solely in the light of the requirements of international public policy, irrespective of any national law, even that governing the form or substance of the contract in which the arbitration agreement is contained.

The English judges have not attributed quite as much significance to the separability principle as their French colleagues, at least in this context. In Sulamerica v Enesa Engenharia, the English Court of Appeal noted that the purpose of the principle is to “give legal effect” to the presumed intention of the parties that their agreed procedure for resolving disputes should remain effective in circumstances that would render the substantive contract ineffective and “not to insulate the arbitration agreement from the substantive contract for all purposes.” (Emphasis added.)

Implications and practical takeaway

This divergence of views (including the inconsistency of the English courts) creates unwelcome uncertainty for users of international arbitration, who may make assumptions as to the governing law of their arbitration agreements (to the extent this aspect is considered at all in the course of negotiating a transaction) that are not borne out in the event of a dispute. Parties may find that the interpretation of their arbitration agreements (and therefore the validity and enforceability of their arbitral awards) depends on the jurisdiction in which enforcement is sought, and the chosen approach of the national court to the principle of separability.

Unless and until the courts adopt a common approach, there is a risk of conflicting decisions being reached on the governing law of arbitration agreements and a risk of awards themselves not being enforced in some jurisdictions. In the absence of a common approach, the risk of conflicting decisions could be reduced by the courts at the place of enforcement deferring their judgments until annulment proceedings in other jurisdictions have concluded as the English first instance judge did. However, courts may be reluctant to do so over concerns that it would give rise to more proceedings as parties seek to delay enforcement on the basis of a challenge to the award elsewhere. Given that the English Court of Appeal in Kabab-Ji v KFG commented that it had “great difficulty” in understanding the first instance judge’s “rationale in deciding not to make a final determination and to adjourn the matter” until after the Paris Court had ruled, the English court looks reluctant to adopt this approach. 

The key takeaway from the Kabab-Ji v KFG case for users of international arbitration is that it is not safe to assume that the governing law of an arbitration agreement is the same governing law as the main agreement in which the arbitration agreement is found. Parties should avoid uncertainty by including an express choice of the governing law of their arbitration agreements where they can. Where institutional rules are incorporated and their recommended clauses adopted, parties may wish to consider whether they need to include additional or amended wording if the wording of those clauses is not sufficiently specific. For example, the LCIA’s recommended clause states in the relevant part “The governing law of the contract shall be the substantive law of [    ].” Similarly, the ICC’s guidance on its standard clause merely notes that “The ICC Arbitration Rules do not limit the parties’ free choice of the place and language of the arbitration or the law governing the contract.” (Emphasis added.) Parties should endeavour to ensure that their intentions as to the governing law of both the contract and the arbitration agreement are clearly expressed at the outset, in order to ensure that any subsequent disputes do not become the subject of a jurisdictional turf war.

The authors would like to thank Imtiyaz Chowdhury for his assistance with the preparation of this article.