HSF ANALYSIS OF SUPREME COURT DECISION IN KABAB-JI SAL (LEBANON) V KOUT FOOD GROUP (KUWAIT)

On 27 October the Supreme Court handed down its much anticipated decision in Kabab-Ji SAL (Lebanon) v Kout Food Group (Kuwait) [2021] UKSC 48 (see our blog post on the Supreme Court decision here for background to the decision). London-based Partner Craig Tevendale and Professional Support Lawyer Liz Kantor have authored a case analysis piece for LexisPSL on this decision, which is reproduced below.

This analysis was first published on Lexis®PSL on 29 October 2021 and can be found here (subscription required).

UK Supreme Court refuses enforcement of an arbitration award against a non-party (Kabab-Ji v Kout Food Group)

Arbitration analysis: In a landmark decision issued on 27 October 2021, the UK Supreme Court unanimously dismissed an appeal relating to the enforcement of an arbitration award against a non-party. In doing so, the Supreme Court clarified the approach under English law to the determination of the law governing the validity of an arbitration agreement, confirming that the same principles apply both before an award has been issued and also at the stage of enforcement. The Supreme Court held that the parties’ choice of English law as the governing law of the agreement extended to the law governing the validity of the arbitration agreement. As a matter of English law, the defendant was not a party to the arbitration agreement and thus the arbitration agreement was not valid. Accordingly, the Supreme Court refused recognition and enforcement of the award under section 103 of the English Arbitration Act 1996 (the AA 1996). The Supreme Court also confirmed that, as a matter of procedure, the English courts could determine an application for enforcement of
an award under AA 1996, s 103 by way of summary judgment, where appropriate and proportionate. Written by Craig Tevendale, partner, and Liz Kantor, professional support lawyer, at Herbert Smith Freehills LLP.

Kabab-Ji SAL (Lebanon) v Kout Food Group (Kuwait) [2021] UKSC 48

What are the practical implications of this case?

This judgment provides welcome confirmation of the English court’s approach to the question of which law applies to the validity of an arbitration agreement. In particular, that the principles laid down in the seminal Enka Insaat Ve Sanayi AS v OOO Insurance Company Chubb [2020] UKSC 38 apply with equal force both before an arbitration award is issued and also at the stage of enforcement. Those principles clarify that where parties have expressly included an applicable law/governing law clause in their contract, that choice of law will normally be a sufficient indication of the law to which the parties have subjected the arbitration agreement.

However, practically speaking, this case serves as a useful reminder for parties drafting arbitration clauses that they should include an express governing law provision in their arbitration clause in order to save the time and expense that can be incurred in this type of procedural dispute. This case also highlights the risk that parties face of inconsistent decisions at the court of the seat (here, Paris) and the court where they are seeking to enforce (here, England and Wales) when they are both applying their own domestic laws. While the French Court of Appeal (pending appeal to the French Supreme Court) has held that the law of the arbitration agreement is French law, the English court has determined that the law of the arbitration agreement is English law. This means that the French and English courts have reached inconsistent decisions on the question of whether KFG is a party to the arbitration agreement. Although KJS’s bid to enforce the arbitration award in England has come to an end, it remains to be seen whether the French Supreme Court will uphold the Court of Appeal’s refusal to set aside the award, and if so whether KJS will seek to enforce the award in another jurisdiction.

The court’s confirmation of the availability of the summary procedure when seeking to enforce an award under AA 1996, 103 will also be welcomed by parties seeking to enforce arbitration awards in the English courts, who will be concerned with achieving a speedy decision, having already
completed an entire arbitration procedure.

What was the 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 re-organisation, AHFC became a subsidiary of Kout Food Group (Kuwait) (KFG). A dispute arose under the FDA and related Franchise Agreements, leading KJS to commence arbitration proceedings against KFG (and not AHFC). The proceedings were commenced under the Arbitration Rules of the International Chamber of Commerce (ICC).

The arbitration clause in the FDA specified that Paris would be the seat of arbitration, and the governing law clause stipulated that the FDA would be governed and construed in accordance with English law. The contract did not specify a law governing the arbitration agreement. The contract
contained No Oral Modification (NOM) clauses.

The ICC arbitration

The tribunal comprised Professor Dr Mohamed Abdel Wahab, M Bruno Leurent, and Mr Klaus Reichert SC. By an award dated 11 September 2017, the tribunal decided, with Mr Reichert dissenting, that the question of whether KFG was bound by the arbitration agreement was a matter of French law, but the issue of whether a transfer of substantive rights and obligations took place was governed by English law. They went on to conclude that, as a matter of English law, and taking account of the UNIDROIT Principles, a ‘novation’ was to be inferred by the conduct of the parties adding KFG as the main franchisee. They determined that, on the merits, KFG was in breach of the FDA.

KJS made an application for the enforcement of the award under AA 1996, s 101. KFG then applied under AA 1996, s 103(2)(b) (which replicates Article V(1)(e) of the New York Convention) for an order that recognition and enforcement of the award be refused. KFG also filed an application before the French courts to annul the award on the basis that the arbitrators had no jurisdiction over KFG as a non-party to the arbitration agreement.

Commercial Court judgment

The judge concluded that there had been an express choice of English law as governing the arbitration agreement. The judge considered that KFG did not become a party to the arbitration clause, as there had been no written consent in order to override the NOM clauses. However, the judge declined to make a final determination on this point in case further evidence on this issue might emerge after the Paris Court of Appeal had decided KFG’s application to annul the award. The court accordingly refused enforcement and recognition of the award. KJS appealed this decision.

Decision of the English Court of Appeal

The Court of Appeal concluded that the FDA provided for an express choice of English law to govern the arbitration agreement. The fact that the arbitration clause itself did not expressly refer to English law did not matter. The Court of Appeal agreed with KFG that, under English law, the NOM clauses could only be overridden to the extent that the test for an estoppel was satisfied. As that test was not satisfied in this case, KFG was not a party to the FDA or the arbitration agreement. The court also held that the first instance judge should not have granted an adjournment and should have made a final determination that KFG was not a party to the FDA, such that the award was not enforceable against KFG. It gave summary judgment in favour of KFG, refusing recognition and enforcement of the award.

What did the court decide?

The issues for the English Supreme Court to decide were as follows:

• which law governed the validity of the arbitration agreement (the ‘choice of law’ issue)
• if English law applied, whether, as a matter of English law, there was any real prospect that
  a court might find that KFG became a party to the arbitration agreement (the ‘party’ issue),
  and
• whether, procedurally, the Court of Appeal was correct in giving summary judgment refusing
  recognition and enforcement the award, or whether there should have been a full rehearing of
  whether there was a valid and binding arbitration agreement for the purposes of the New York
  Convention and the AA 1996 (the ‘procedural’ issue)

Choice of law issue

The Supreme Court confirmed that, pursuant to Article V(1)(a) of the New York Convention, for conflict of law purposes, the primary rule is that the validity of the arbitration agreement is governed by ‘the law to which the parties subjected it’. In other words, this was the law chosen by the parties. The second default rule, which applied where no choice had been indicated, was that the applicable law was that of ‘the country where the award was made’.

The Supreme Court had already considered how to identify the law applicable to an arbitration agreement in its judgment in the seminal case of Enka Insaat Ve Sanayi AS v OOO ‘Insurance Company Chubb’ [2020] UKSC 38. In that case, it held that where the law applicable to the arbitration agreement was not specified, a choice of governing law for the contract would generally apply to the arbitration agreement, and that a choice of a different country as the seat of the arbitration would not be sufficient in itself to negate such an inference. Here, the Supreme Court held that its considerations in Enka applied with equal force after an award has been made in the context of enforcement proceedings. This was because it would be illogical if the law governing the validity of an
arbitration agreement were to differ, depending on whether the question was raised before or after an award was made.

Further, the court held that this conclusion was supported by the text of the New York Convention, which did not require the parties’ choice of law to be in any particular form. Thus, a general choice of law clause in a written contract containing an arbitration clause sufficed. In any event, here, it was clear from the language of the FDA that the law to which the parties had subjected the arbitration agreement was English law, based on the governing law clause, which applied to all the clauses in the contractual document, including the arbitration clause.

In reaching this conclusion, the Supreme Court rejected KJS’s two key arguments. The first was that the regime chosen by the parties did not qualify as a ‘law’ for the purposes of Article V(1)(a) of the New York Convention and AA 1996, s 103(2)(b). KJS had contended that, as the parties had also agreed that the arbitrators would apply the UNIDROIT Principles of International Commercial Contracts, which were not intended to have the force of law in their own right, there was no ‘law’ to which the parties subjected the arbitration agreement. This meant that the second default rule, that the law of the country where the award was made, applied.

This was wholly rejected by the Supreme Court on the basis that (i) this argument would mean that parties who wanted their arbitration agreement to be governed by the law of a designated country supplemented by additional principles would be denied their choice both of that country’s law and of the additional principles, a result which was illogical and inconsistent with the principle of party autonomy; (ii) the present case concerned the law governing the arbitration agreement, whereas the UNIDROIT Principles were to be applied by the arbitrators to the merits of the dispute; and (iii) even if the law was restricted to the law of a country, the law to be applied would simply exclude the UNIDROIT Principles.

KJS’s second argument that the ‘validation principl’ should be invoked was also rejected. This principle is that contractual provisions, including any choice of law provision, should be interpreted so as to give effect to an arbitration agreement. However, the Supreme Court held that this principle could not apply here, where the parties were disputing whether any arbitration agreement had been made between the parties in dispute at all.

Party issue

The Supreme Court held that the Court of Appeal was both entitled and correct to conclude that as a matter of English law, there was no real prospect that a court might find that KFG became a party to the arbitration agreement. Given the NOMs, the burden was on KJS to show a sufficiently arguable case that KFG had become a party to the FDA, or that KFG was estopped from relying on the failure to comply with those agreements. The NOM clauses were therefore an insuperable obstacle to KJS’s case of novation. As held by the Supreme Court in MWB Business Exchange Centres Ltd v Rock Advertising Ltd [2018] UKSC 24, NOM clauses are legally effective.

Procedural issue

KJS submitted that a full evidential hearing and trial were necessary before the court could make a determination under both Article V(1)(a) of the New York Convention and AA 1996, s 103. It also argued that the Supreme Court should set out a standard but streamlined procedure to be followed. The Supreme Court rejected those submissions.

Article V(1) of the New York Convention provides that recognition and enforcement of the award may only be refused if the party against whom it is invoked ‘furnishes…proof’ of one or more of the grounds set out in Article V(1)(a) to (e). Likewise, AA 1996, s 103 provides that recognition or enforcement shall not be refused except if the person against whom the award is invoked ‘proves’ one or more of the grounds set out AA 1996, s 103(2)(a) to (f), which mirror those set out in Article V(1)(a) to (e) of the New York Convention.

The Supreme Court held that there was nothing in the New York Convention or the AA 1996 which prescribed how the requisite ‘proof’ was to be established. In the case of Dallah Real Estate and Tourism Holding Co v Ministry of Religious Affairs of the Government of Pakistan [2011] 1 AC 763, the Supreme Court held that ‘ordinary judicial determination’ would apply to these provisions. Thus, it was for the English court to decide how the ‘ordinary judicial determination’ should be made in accordance with its own procedural rules.

The Supreme Court held that there was no reason in principle why a summary approach should not be adopted to determinations under AA 1996, s 103. Indeed, there was ‘every reason to do so’, because in many cases the nature and extent of the relevant evidence will already be clear from the hearing before the arbitration tribunal. Whether or not a summary procedure was suitable to any particular case would depend on the facts and circumstances of that case. Where there was no real prospect of a party’s case succeeding at trial, then it would generally be appropriate to determine the issue summarily, regardless of whether that party was the claimant or defendant. Thus, the Court of Appeal was justified in giving summary judgment.

Finally, the Supreme Court held that the Court of Appeal was also correct to overturn the first instance judge’s adjournment decision, as the risk of contradictory judgments was unavoidable in circumstances where the English and French courts would be applying their own respective laws to the question of the existence and validity of the arbitration agreement.

Case details:

• Court: UK Supreme Court
• Judge: Lord Hodge, Lord Lloyd-Jones, Lord Sales, Lord Hamblen, Lord Leggatt. Lord Hamblen and Lord Leggatt gave the court’s judgment, with which the others agreed
• Date of judgment: 27 October 2021

Fore more information, please contact Craig Tevendale, Partner, Liz Kantor, Professional Support Lawyer, or your usual Herbert Smith Freehills contact.