Whose law is it anyway?

Court of Appeal determines an arbitration to be governed by English law despite French-seated arbitration clause

In a landmark decision, the Court of Appeal has determined that on the proper construction of an agreement, there was an express choice of English law governing the arbitration despite an arbitration clause stipulating Paris as the seat of arbitration.

Kabab-Ji S.A.L v Kout Food Group

Kabib-Ji (KJ), a Lebanese company, esubsntered into a Franchise Development Agreement (FDA) with a Kuwaiti company, Al Homaizi Foodstuff (AHF). Article 1 of the FDA provided that the FDA was to be read considering all the terms of agreement. The FDA also included an arbitration clause stipulating French seated arbitration. Despite this, Article 15 provided that the agreement was to be governed by English law. Crucially, pursuant to Article 14, the parties agreed, “Under no circumstances shall the arbitrator(s) apply any rule(s) that contradict(s) the strict wording of the Agreement."

AHF subsequently became a subsidiary of another Kuwaiti company, Kout Food (KF). As is common in cases of ambiguous agreements, a dispute arose under the FDA and KJ commenced an action against KF alone. This raised a jurisdictional query as to whether KF ought to be added as a party to the arbitration agreement.

The matter was referred to the International Chamber of Commerce in Paris, pursuant to the FDA arbitration clause. The arbitrators concluded that French law ought to be applied to whether KF was bound by the terms of the arbitration agreement. However, English law governed the issue of whether a transfer of substantive rights and obligations had taken place.

On appeal to the UK Court of Appeal, KJ argued that there was no express choice of English law as the FDA was supplemented by principles of law recognised in international transaction, including the UNIDROIT principles. In addition, there was no implied choice of English law as the seat of arbitration was in France.

KF argued that, as a matter of pure construction and in consideration of Article 1 of the FDA and the governing law provision electing English law, the mere fact that the seat of arbitration is a foreign country should not dislodge the indication that there was an implied choice of English law.

Judgment

The Court of Appeal found for KF and determined that reading Articles 1 and 15 together, there was an express choice for English law to govern the arbitration agreement. References to international law principles or specifying French seated arbitration were not sufficient reasons to overcome the proper construction of the FDA. 

Comment

This Judgment confirms and clarifies myriad nuances of arbitration. One particularly exciting impact is that it establishes that a governing law clause in a main agreement can constitute an express choice of governing law in a linked arbitration agreement.

From an academic perspective, the Court of Appeal’s decision is illustrative of the different approaches taken by international courts. French Courts, typified by their favour for party autonomy, tend to lend maximum power to arbitration clauses and treat them as wholly autonomous. On the contrary, the English Court in this case tempered the severability of arbitration agreements with the holistic approach that they must be interpreted, and construed, in line with connected contracts.

Kabab-Ji S.A.L also lends practical advice to parties drafting arbitration agreements. The ambiguity in the above case could have been resolved simply by referring to the governing law clause within the arbitration agreement. This serves as a helpful reminder that the drafting stage is the opportune time to consider potential dispute resolution and enforcement.