Kabab-Ji and the cultural conflict over the autonomy of the arbitration clause and its extension to third parties

In a final decision dated 28 September 2022, France’s apex court, the Cour de cassation, brought an end to the long-lasting Kabab-ji v Kout Food Group dispute. The dispute, ongoing in the French and English courts over several years, has revealed contrasting approaches to the interpretation of arbitral agreements across the channel.

The Cour de cassation found that the governing law of the arbitration agreement was not necessarily the governing law of the relevant contract; rather, the law of the arbitration agreement was to be determined independently by applying the rules of the arbitral seat, i.e. French rules. This finding meant that the arbitral award was enforceable under French law, while the same award would have been annulled under English law. This decision confirmed the existence of an obvious cultural conflict between the two jurisdictions.

Parties should keep this judgment and the decisions that preceded it in mind when drafting arbitration agreements, and explicitly stipulate the law of the arbitration agreement when drafting their disputes resolution provisions.

Factual Summary

The dispute arose under a 2001 franchise agreement between Kabab-Ji, a Lebanese food chain, and Al Homaizi, a food retailer. Under the franchise agreement Al Homaizi obtained a 10-year licence to use Kabab-Ji’s restaurant concept in Kuwait. The franchise agreement was expressly governed by English law but contained an arbitration clause that called for ICC arbitration seated in Paris. Following a corporate reorganisation in 2005, Al Homaizi became a subsidiary of Kout Food Group (“KFG”).

When a dispute arose, Kabab-Ji commenced an ICC arbitration against KFG (not Al Homaizi) in Paris. KFG participated under protest, claiming it was not party to the franchise agreement or to the arbitration agreement contained therein.

A majority of the arbitral tribunal concluded that the question of whether KFG was bound by the arbitration agreement was to be determined by reference to the law of the seat, i.e., French law. Applying French law, the majority held that the arbitration agreement should extend to KFG.

One arbitrator dissented on the basis that because the franchise agreement was governed by English law, and under that law the arbitration agreement could not be extended to KFG as a non-signatory.

Based on the majority decision to apply French law, the arbitral tribunal found KFG in breach of the franchise agreement.

Previous applications for annulment/enforcement in France and the UK

French court proceedings

KFG sought to annul the arbitral award in the French courts on the basis that as a non-party to the arbitration agreement, the arbitral tribunal lacked jurisdiction over it.

On 23 June 2020, the French Court of Appeal (n°17/22943) rejected the annulment application, finding that the tribunal did in fact have jurisdiction over KFG.

Under French law, courts reviewing international arbitration awards do not undertake a standard conflict of law analysis to determine what the applicable law should be; rather, they apply a different set of rules known as “règles matérielles.” Under such rules, the French Court of Appeal found that the tribunal had correctly asserted jurisdiction over KFG based upon two well-established French law principles:

1. an arbitration agreement is autonomous and is not automatically governed by the law of the contract; and
2. an arbitration agreement can be extended to third parties when the third party has expressed its intention to participate in the performance of the contract containing the arbitration clause.

In this case, there was no doubt that KFG intended to participate in the performance of the franchise agreement even though it was not a signatory to it; KFG was fully aware of its existence and scope at the time it acquired Al Homaizi.

In upholding the tribunal’s jurisdiction, the French Court of Appeal focused on “the basis of the common will of the parties”, finding it unnecessary “to refer to a State law, unless the parties have expressly submitted the validity and effects of the arbitration agreement itself to such a law”. The Court highlighted that the parties chose Paris as the seat of arbitration leading to the application of French rules to determine the law applicable to the arbitration agreement itself.

English court proceedings

While the French proceedings were ongoing, Kabab-Ji brought enforcement proceedings before the English Commercial Court. The Commercial Court judge found that:

1. the law governing the validity of the arbitration agreement governs the question of whether KFG became party to the arbitration agreement; and
2. the law governing the validity of the arbitration agreement was the express law of the contract, i.e. English law.

Based on those two findings, and the English law principle of privity of contract, the English court found that KFG was not a party to either the franchise agreement or its arbitration agreement. However, the court acknowledged that it was “just possible” that the evidence might establish there was something approximate to consent in writing between the parties that might extend the franchise agreement or its arbitration agreement to include KFG. The Commercial Court judge allowed Kabab-Ji’s application to adjourn any further hearing until after the French Court of Appeal decision.

Both parties appealed this decision and in 2020, the English Court of Appeal gave summary judgment in favour of KFG and refused recognition and enforcement of the award. The Court of Appeal determined the Commercial Court judge was wrong to defer judgment pending further evidence or a ruling from the French Court; it should have made a final determination that KFG was neither party to the franchise agreement nor the arbitration agreement.

Kabab-Ji appealed this decision to the English Supreme Court, reiterating the central question of “what law governs the validity of the arbitration agreement?” In its judgment, the Supreme Court held 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.” It also agreed with the English Court of Appeal that the court of first instance had no reason to await a French court determination on French law before deciding the issue under English law.

Thus, the English Supreme Court and French Court of Appeal adopted opposing approaches for determining the law governing the arbitration agreement in this case.

All that was left was the final position under French law, the subject of KFG’s final appeal to the Cour de cassation.

The Cour de Cassation’s decision on the law applicable to arbitration agreements

Unsurprisingly, the Cour de cassation confirmed the decision of the French Court of Appeal and reinforced the French position on the validity of the arbitration agreement--validity is to be assessed by the intention of the parties without making any reference to a national law, unless the parties expressly submitted the validity and effect of the arbitration agreement to a precise legal system.

This decision accords with previous French case law. In a 2004 decision (Cour de cassation, 1ère Civ., 30 March 2004, n°01-14.311, Uni-kod v. Ouralkali), the Cour de cassation found that parties are free to submit the validity and effect of the arbitration agreement to the law of their choice.

In Kabab-Ji, however, the Cour de cassation went one step further by considering not only the possibility of an express choice by the parties, but also an implicit one. Here the parties expressly chose the law applicable to the contract, but there was no language or other evidence to indicate that such choice extended to the arbitration clause. The Cour de cassation therefore confirmed that an express choice of governing law was insufficient to demonstrate the parties’ intent to have the arbitration agreement governed by such law:

“the choice of English law as the law governing the contracts […] is not sufficient to establish the common will of the parties to submit the effectiveness of the arbitration agreement to English law, in derogation of the substantive rules of the seat of arbitration expressly designated by the contracts”.

Practical consequences

This case reveals the clear divergence between French and English law on the law applicable to arbitration agreements. More specifically, it underscores a lack of consensus between the two jurisdictions as to whether designating the law applicable to the contract is a sufficient indication of the parties’ intention to subject the arbitration agreement to the same law.

The position of the English Supreme Court appears to reflect the commercial reality that in practice, parties seldom distinguish between the law governing the contract and the law governing the arbitration agreement. In contrast, the Cour de cassation places greater importance on the parties’ choice of a seat as indicative of the party intent.

One consequence of these diverging approaches is that parties may “forum shop” to select a tribunal with a legal culture favourable to their position and seek to obtain enforcement decisions from the “friendliest jurisdiction” as quickly as possible.

In any event, regardless of the jurisdiction, the main takeaway for parties is to expressly identify the law applicable to the arbitration agreement itself. While this was not typically done historically, it is likely to become a more prevalent practice going forward.

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