UK Supreme Court refuses to enforce a Paris-seated award upheld by the French courts

In Kabab-Ji SAL v Kout Food Group, the UK Supreme Court has refused to enforce a Paris seated ICC award on the basis that there was no real prospect of a finding that the respondent was a party to the arbitration agreement. This has put the UK Supreme Court at odds with the French courts, with the Paris Court of Appeal having only last year dismissed annulment proceedings against the award and finding that, under French law, the respondent was a party to the arbitration agreement. 

The arbitral award

The claimant, Kabab-Ji, is a Lebanese company which owns a Middle Eastern food restaurant concept. In 2001, it entered into a Franchise Development Agreement with Kuwaiti company Al Homaizi Foodstuff Company and subsequently 10 Franchise Outlet Agreements to operate its restaurant concept in Kuwait. 

In 2005, the Al Homaizi group underwent a corporate restructuring. A new holding company was created called Kout Food Group and Al Homaizi became a subsidiary of Kout Food. 

The Franchise Agreements were all governed by English law and provided for ICC arbitration in Paris. When a dispute arose, Kabab-Ji commenced arbitration against Kout Food only. The claim was successful. The arbitral tribunal, consisting of three arbitrators, unanimously decided that it must apply French law, as the law of the seat, to determine whether Kout Food was bound by the arbitration agreement but English law to answer the question whether Kout Food had acquired rights and obligations under the Franchise Agreements. In its final award, the Tribunal held that Kout Food was a party to the arbitration agreement and a majority of the Tribunal also held that there had been a "novation by addition" whereby Kout Food had become an additional party to the Franchise Agreements. The third arbitrator dissented on the basis that the strict wording of the Franchise Agreements precluded any novation. 

Parallel proceedings in England and France

Following the award, Kout Food brought an annulment action before the French Courts under Article 1520 of the Civil Procedure Code, including on the ground that Kout Food was not a party to the arbitration agreement. On 23 June 2020, the Paris Court of Appeal dismissed the action. 

In parallel, Kabab-Ji commenced enforcement proceedings before the Commercial Court in London under section 101 of the Arbitration Act 1996 which provides for recognition and enforcement of awards under the New York Convention.¹ On 29 March 2019, the Commercial Court held that the law governing the validity of the arbitration agreement was English law and, as a matter of English law, Kout Food had not become a party to the arbitration agreement. However, the Commercial Court left open the issue of whether Kout Food had consented to being added to the arbitration agreement. The proceedings were stayed pending the Paris Court of Appeal decision (which had not yet been issued). 

Both Kabab-Ji and Kout Food appealed the decision. On 20 January 2020, the English Court of Appeal dismissed Kabab-Ji's appeal and allowed Kout Food's cross-appeal. The Court held that the Commercial Court judge should have made a final determination that Kout Food was not a party to the arbitration agreement and gave summary judgment in favour of Kout Food refusing the enforcement of the award. Kabab-Ji appealed to the Supreme Court. 

The appeal was dismissed. The Supreme Court agreed with the Court of Appeal that as a matter of English law, there was no real prospect that a court might find at a further evidentiary hearing that Kout Food had become a party to the arbitration agreement. The Supreme Court also endorsed the Court of Appeal's use of the summary judgment procedure to dispose of an application refusing recognition and enforcement of the award in the circumstances of this case. 

The clash

The UK Supreme Court's decision should not come as a surprise. The approach of the English courts following the Supreme Court's recent decision in Enka v Chubb is clear. Where there is no specific choice regarding the law governing the arbitration agreement, then as a matter of principle (subject to two potential exceptions which are not applicable here) the law governing the contract will also apply to the arbitration agreement. In the context of enforcement of an award under the New York Convention, section 103(2)(b) of the Arbitration Act 1996 (which transposes the second limb of Article V(1)(a) of the New York Convention into English law) provides that recognition or enforcement of an award may be refused "if the arbitration agreement was not valid under the law to which the parties subjected it, or failing any indication thereon, under the law of the country the award was made". Applying the principles in Enka v Chubb and considering the wording of the governing law clause of the Franchise Agreements, the Supreme Court concluded that the parties had subjected the arbitration agreement to English law. 

The Supreme Court then had no difficulty in concluding that there was no realistic prospect of a finding that Kout Food had become a party to the Franchise Agreements. The licence granted to Al Homaizi was expressed to be personal in nature. The Franchise Agreements further contained a "no oral modification" clause and there was no agreement in writing bringing Kout Food into the Franchise Agreements and the arbitration clause they contained. As the Supreme Court's recent decision in Rock Advertising made clear, English courts will give effect to no oral modification clauses. It is only in exceptional circumstances (which were not present in this case) where it might be possible for a party to rely on estoppel precluding the other party from relying on the no oral modification clause. 

The French courts' approach should not come as a surprise either. The Paris Court of Appeal has followed the long standing Dalico doctrine. An international arbitration agreement is not governed by any national law but French courts will consider the common intention of the parties, subject only to any French and international public policy rules. The Paris Court of Appeal concluded that having regard to the organisational chart of Kout Food, its involvement in the performance of the Franchise Agreements for several years and in their termination and renegotiation, the arbitral tribunal was right to conclude that Kout Food was bound by the arbitration agreement. While an appeal is pending before the Court of Cassation, a departure from its well established case law seems unlikely. 

Drafting for the future

The divergence between the courts of two pre-eminent arbitration seats on an issue as fundamental as the governing law and validity of an arbitration clause is regrettable. The UK Supreme Court noted that "the risk of contradictory judgments cannot be avoided" (paragraph 90). Perhaps the biggest lesson is for lawyers drafting arbitration clauses to always incorporate an express choice of governing law of the arbitration agreement. However, as the previous clash between the English and French courts in the Dallah saga a decade ago demonstrates, even when the English courts applied French law, it was still not possible to avoid contradictory judgments. 

Authors: Tom Cummins and Thomas Karalis

Cases referred to:

Kabab-Ji SAL v Kout Food Group [2021] UKSC 4

Enka Insaat Ve Sanayi AS v OOO "Insurance Company Chubb" [2020] 1 WLR 4117

MWB Business Exchange Centres Ltd v Rock Advertising Ltd [2018] UKSC 24

Dalico, Court of Cassation, First Civil Chamber, 20 December 1993, No. 91-16.828 

The UK Supreme Court in Dallah Real Estate and Tourism Holdings Co -v- Ministry of Religious Affairs of the Government of Pakistan [2011] 1 AC 763 and Paris Court of Appeal in Case No. 09/28533

1. Convention on the Recognition and Enforcement of Foreign Arbitral Awards adopted by the United Nations Conference on International Commercial Arbitration on 10 June 1958.