FRENCH COURT OF APPEAL UPHOLDS AWARD THAT WAS DENIED ENFORCEMENT IN ENGLAND

In Kabab-Ji SAL (Lebanon) v Kout Food Group (Kuwait) [CA Paris, 23 June 2020, n°17/22943], the Paris Court of Appeal refused to set aside an arbitral award handed down by an ICC Tribunal seated in Paris, although the same award had been denied enforcement and recognition in England on the basis that the award was made against a non-party (our post on the English decision can be accessed here). The French court expressly rejected the argument that it was bound by the English decision.

This case is another illustration of the differences in approach between French and English courts with respect to (i) the identification of the law governing the arbitration clause and (ii) the extension of arbitration agreements to third parties.

Background

The case concerned a Franchise Development Agreement (“FDA”) entered into by Kabab-Ji SAL (Lebanon) (“KJS”) and Al Homaizi Foodstuff Company (“AHFC”). Following a corporate reorganisation, AHFC became a subsidiary of Kout Food Group (Kuwait) (“KFG”). A dispute arose under the FDA, leading KJS to commence arbitration proceedings against KFG (and not AHFC).

This raised a jurisdictional question as to whether KFG had become an additional party to the FDA, and therefore to the arbitration agreement, and if so how. In order to answer that question, it was necessary to decide (i) which law governed the question of whether KFG had become a party to the arbitration agreement and (ii) whether, under the applicable law, KFG had become a party to the arbitration agreement.

The arbitration clause specified that the arbitration would be seated in Paris, and the governing law clause stipulated that the FDA would be governed and construed in accordance with English law. The contract contained No Oral Modification (“NOM”) clauses.

The Tribunal in the arbitration proceedings unanimously determined that (i) whether KFG was bound by the arbitration agreement was a matter of French law and (ii) that English law governed whether a transfer of substantive rights and obligations to KFG had taken place. By majority decision, two of the arbitrators (who were not English qualified) also concluded that, as a matter of English law and despite the NOM clauses, a novation was to be inferred as a result of the conduct of the parties. Having found that the arbitration agreement was to be extended to include, in particular, KFG, the tribunal went on to determine that, on the merits, KFG was in breach of the FDA.

KFG filed an application before the French courts to annul the award. It asked the Paris Court of Appeal to set aside the award and reject all of KJS’s claims. KFG claimed, under article 1520 of the French Code of Civil Procedure, that the Tribunal had wrongly upheld jurisdiction over KFG, a third party to the FDA, that it had ruled without complying with its mandate and that it had breached the principle of due process.

Separately, KJS applied for the enforcement of the award against KFG in England. The first instance court determined that English law governed the validity of the arbitration clause. It also considered that KFG had not become a party to the arbitration clause but declined to make a final determination on this point in case further evidence emerged on this issue after the French proceedings. The court therefore refused enforcement and recognition of the award. The first instance judgment was subsequently upheld by the Court of Appeal, which held that the first instance judge should have made a final decision that KFG was not a party to the arbitration clause.

KJS is now seeking leave to appeal the Court of Appeal’s decision before the English Supreme Court, while KFG has appealed the French decision before the French Supreme Court. This may lead to a new confrontation between the English and French courts, similar to those which arose out of the  the Dallah or Maximov judicial sagas.

The law governing the arbitration agreement

The English Court of Appeal held that, absent an express governing law provision for the arbitration agreement, the governing law provision of the FDA also applied to the arbitration agreement because the language of the contract demonstrated a clear intention that the entire FDA would be governed by English law.

Before the French court, KFG also argued that English law governed the arbitration clause and submitted the English decisions as exhibits.

On 23 June 2020, however, the Paris Court of Appeal found that it was not bound by the findings of the English courts and rejected the application of English law to the arbitration clause.

The ruling is a clear restatement of the well-established French position on the identification of the law governing arbitration agreements, which is distinct from the law applicable to the contract and the merits of the case.

The reasoning is in two stages, with the law of the seat informing the law applicable to the arbitration agreement:

• The Paris Court of Appeal agreed with the arbitral tribunal that a tribunal must first determine the law applicable at the seat of arbitration, where an application to set aside the award might be made, as the courts of the seat will rule upon the validity of the award. In the present case, therefore, French law was the law which determines the law applicable to the arbitration agreement.
• Under French law, there is a substantive rule of international arbitration law that the arbitration clause is legally independent from the main contract in which it is contained, and that the existence and effectiveness of the clause are assessed, pursuant to mandatory rules of French law and international public policy, on the basis of the common intention of the parties and the relevant circumstances of the matter, without the need to refer to a domestic law.

In that context, a general choice of law (here, English law) to govern the contract (here, the FDA) is insufficient evidence “to establish the common will of the parties to submit the arbitration clauses to English law and thus to derogate from the substantive rules of international arbitration applicable at the seat of arbitration expressly designated by the parties”.

The position under French law, although sometimes criticised for not being grounded in a domestic legal order, is also seen to offer a number of advantages:

• It avoids the need to carry out a conflicts-of-law analysis, which often proves difficult in complex disputes with multiple international parties and contracts.
• It gives precedence to the parties’ intention and to their choice of forum:
  • The choice of a seat (here, Paris) is meaningful and its legal effects must be given effect.
  • By including an arbitration agreement, the parties actively chose a certain type of dispute resolution to which it must be assumed to have consented.
  • The full autonomy of the arbitration clause preserves it from the fate of the contract, in the event that it is void or voidable, and preserves the parties’ choice of forum.
  • The parties may have deliberately chosen not to specify the law governing the arbitration clause, just as they chose to specify a choice of forum.

The extension of the arbitration agreement to a non-party

In the application to set aside the award before the Paris Court of Appeal, KFG argued that, under French law, the conditions for the transfer or extension of the arbitration clause to KFG were not satisfied, and alternatively, that even if the arbitration clause was extended or transferred, it would have been manifestly ineffective and inapplicable in the absence of a transfer of the agreements' substantive obligations to KFG, which English law did not permit.

The Paris Court of Appeal, here again following well-established case law, agreed with the arbitral tribunal that “where a party to the arbitration is a non-signatory of the arbitration clause, jurisprudence from the Cour de cassation and the Paris Court of Appeal is therefore that the [non-signatory] party should be deemed to have agreed to the [arbitration] clause if the arbitral tribunal finds that the [non-signatory] party intended to participate in the performance of the agreement”.

On the facts, the Court found that KFG participated in the management of KJS’s restaurants in accordance with the franchise agreements, KFG’s organisational chart included people in charge of the performance of the agreement, several documents demonstrated that KFG was responsible for the operation of KJS’ restaurants and complied with the agreements, KFG wrote emails presenting itself as a franchisee, paid royalties and was involved in the termination and renegotiations of the agreements. It followed that KFG had actively participated in the performance of the FDA and the Court therefore held that it was bound by the arbitration clause.

The Paris Court of Appeal further found that KFG’s alternative argument (i.e. that the arbitration clause was ineffective or inapplicable as a result of the failure to transfer the substantive rights and obligations under the agreements) was beyond its power as reviewing judge (as it would amount to a review of the merits), and held it was therefore not a ground of annulment under French law.

Comment

The Paris Court of Appeal’s decision is consistent with well-established principles of French law with respect to key issues in international arbitration, i.e. the full autonomy of the arbitration clause and its possible extension to third parties.

The decision also offers important insights for potential arbitration users concerning the drafting of dispute resolution agreements by highlighting the importance of the choice of seat and its direct consequences on the fate of jurisdictional issues and the award itself. It is also a reminder that the intention of the parties remains the cornerstone of arbitration. The clearer the drafting of the agreement and the arbitration clause, the easier it is for courts to identify and give effect to the parties’ intentions.

The detailed reasoning (by French standards) set out in the decision also offers insights on the key elements on which French courts will rely when deciding whether to extend an arbitration clause to third parties.

It remains to be seen how this international arbitration “culture clash” will be resolved – if at all – by the two Supreme Courts.

For more information, please contact Laurence Franc-Menget, Partner, Emily Fox, Of Counsel, Tiphaine Leverrier, Avocat, or your usual Herbert Smith Freehills contact.