In an important recent decision, the U.K. Supreme Court provided further guidance on how to determine the law that applies to an international arbitration agreement.

In its unanimous decision in Kabab-Ji SAL v Kout Food Group¹(available here), which was handed down on 27 October 2021, the Supreme Court refused to enforce an ICC arbitral award issued against a non-signatory party.  The decision centered on a challenge by Kout Food Group (“KFG”) that it was not bound by an arbitration agreement with Kabab-Ji SAL (“Kabab-Ji”) under which the award was rendered.  A central issue in deciding whether KFG was bound was whether the arbitration agreement was governed by French law or English law: the Supreme Court was accordingly required to analyse the principles that apply to determining the law governing an arbitration agreement in the context of contesting recognition and enforcement of an arbitral award.

The Supreme Court’s decision in Kabab-Ji is significant for two main reasons:

• First, it provides helpful guidance on the interpretation of one of the most important provisions (Article V(1)(a)) of the New York Convention, the international treaty that governs the recognition and enforcement of international arbitral awards. Given the status of England and Wales as one of the leading jurisdictions for international arbitration, the Supreme Court’s decision is likely to assist courts across the world in interpreting this key provision.
• Second, the Supreme Court’s decision builds on, and is consistent with, its earlier decision in Enka v Chubb² (a decision issued in October 2020, discussed in an earlier WilmerHale IA Blog article here). In Enka, the Supreme Court established a set of principles by which a court could determine the law governing an arbitration agreement. The circumstances of Enka were, however, very different to the circumstances in Kabab-Ji: the former involved an application for an anti-suit injunction in circumstances where no arbitration had been commenced, the latter an application to enforce an arbitral award that had been issued after contested arbitral proceedings. Litigants seeking clarity as to the law applicable to an arbitration agreement can therefore be confident that a consistent set of principles will be applied, irrespective of the circumstances in which this question must be determined.

The Supreme Court’s decision also provided helpful guidance on two procedural issues: the possibility of obtaining summary judgment on an application to refuse recognition and enforcement, and the circumstances in which an English court will adjourn enforcement proceedings pending a challenge to an arbitral award at the seat of the arbitration.

The decision of the U.K. Supreme Court is not the last word on the dispute between Kabab-Ji and KFG.  Although recognition and enforcement has been refused as a matter of English law, the arbitral award remains valid and enforceable.  KFG has commenced parallel proceedings in France – the seat of the arbitration – in which it has sought to annul the award.  In June 2020, the Paris Cour d’Appel (the Paris Court of Appeal) dismissed this challenge and confirmed the validity of the award as a matter of French law.  KFG has appealed to France’s highest court, the Cour de Cassation, whose decision remains outstanding.

The background to the Supreme Court’s decision and the key points emerging from the ruling are considered in more detail below.

Background to the Dispute and the Decisions Below

Kabab-Ji is a Lebanese company that developed a distinctive type of restaurant specializing in Lebanese and other Middle Eastern cuisines.  Kabab-Ji owns a series of trademarks and other rights underpinning this restaurant concept.  By a Franchise Development Agreement dated 16 July 2001 (“FDA”), Kabab-Ji granted a licence to a Kuwaiti company, Al Homaizi Foodstuff Company (“Al Homaizi”), to operate a franchise in Kuwait using its restaurant concept.  Under the framework of the FDA, the parties subsequently entered into ten Franchise Outlet Agreements (“FOAs”) in respect of individual outlets opened in Kuwait.  The FDA and FOAs are collectively referred to as the “Franchise Agreements”.  All of the Franchise Agreements are expressly governed by English law and contain an ICC arbitration clause with a Paris seat.

In 2005, the Al Homaizi Group underwent a corporate restructuring leading to the establishment of a new holding company, KFG.  Following the restructuring, Al Homaizi became a subsidiary of KFG.  A dispute subsequently arose under the FDA.  Kabab-Ji referred these disputes to Paris-seated arbitration under the ICC Rules, in accordance with the arbitration clause in the Franchise Agreements.

The arbitration was commenced against KFG alone; Al-Homaizi was not included as a respondent.  Throughout the arbitration, KFG maintained that it was not a party to any of the Franchise Agreements and was not bound by the arbitration clauses contained therein.

ICC Arbitration Proceedings

Before it could assess the merits of the case, the arbitral tribunal was required to decide two related issues.  The first was whether KFG was bound by the arbitration clause in the Franchise Agreements.  The second was whether KFG became a party to the Franchise Agreements and thereby acquired substantive rights and obligations under them.

In order to decide each of these issues, the arbitral tribunal first had to decide whether the arbitration clause and the substantive obligations under the Franchise Agreements were governed by French or English law.  The tribunal unanimously held that the arbitration clause was governed by French law, as the law of the seat, notwithstanding the fact that the parties had expressly provided that the Franchise Agreements should be governed by English law.  Less controversially, the tribunal also held unanimously that the substantive obligations under the Franchise Agreements were governed by English law.

The arbitrators were not unanimous when it came to the application of these different laws to the circumstances of the case.  The two arbitrators in the majority found that (i) as a matter of French law, KFG was a party to the arbitration agreements; and (ii) as a matter of English law, KFG had become a party to the Franchise Agreements – and was therefore bound by the substantive rights and obligations thereunder – by a process of ‘novation by addition’.  The dissenting arbitrator, who happened to be the only English-qualified lawyer on the panel, held that the strict wording of the Franchise Agreements precluded the addition of KFG as a party.³

The majority went on to conclude that KFG had breached the Franchise Agreements, and awarded damages to Kabab-Ji of US$6,734,628.19, plus interest.

Parallel proceedings in the England and France

KFG was dissatisfied with the arbitral award and refused to pay the amount awarded.  This led to different sets of proceedings being commenced in France and England.  A brief chronological summary of the various proceedings on either side of the Channel is as follows:

• On 13 December 2017, KFG commenced proceedings before the Paris Cour d’Appel seeking to have the award annulled. One of the grounds on which KFG sought to annul the award was that the arbitral tribunal had no jurisdiction over it as it was not a party to the Franchise Agreements and therefore not bound by the arbitration clause contained therein.
• On 21 December 2017, Kabab-Ji brought proceedings under Section 101 of the Arbitration Act 1996 (the “AA 1996”) to enforce the award in England. On 7 February 2018, Popplewell J made an ex parte order allowing the enforcement of the award as a judgment.
• On 1 March 2018, KFG brought its own applications before the English Commercial Court. It applied to set aside the ex parte enforcement order of Popplewell J, and sought an order refusing recognition and enforcement of the awards pursuant to section 103(2) of the AA 1996.
• On 29 March 2019, Burton J handed down the judgment of the English Commercial Court.⁴ In contrast to the arbitral tribunal, Burton J held that the law governing the arbitration clause was English law, rather than French law. Subject to a point left open,⁵ Burton J went on to hold that, on a proper application of English law, KFG did not become a party to FDA.

  Burton J did not, however, order that recognition and enforcement of the arbitral award should be refused.  At Kabab-Ji’s request (and against KFG’s opposition), he adjourned the final decision on enforcement pending the decision of the Paris Cour d’Appel on KFG’s application to annul.

• Both parties appealed to the English Court of Appeal.Kabab-Ji appealed the findings that KFG was not bound by the arbitration agreements; KFG appealed Burton J’s decision to adjourn a final decision on enforcement pending the decision of the Paris Cour d’Appel.
• On 20 January 2020, the English Court of Appeal handed down its judgment.⁶ It found for KFG on all points. Dismissing Kabab-Ji’s appeal, the Court of Appeal held that the arbitration agreement was governed by English law, and that applying English law to the facts of the case, KFG had not become a party to the arbitration agreement. Allowing KFG’s cross appeal, the Court of Appeal held that Burton J was wrong to have granted an adjournment and should instead have made a final order refusing recognition and enforcement on the ground that KFG was not a party to the arbitration agreement in the FDA.
• On 23 June 2020, the Paris Cour d’Appel refused KFG’s application to annul the award. The Cour d’Appel held that, as a matter of French law, the arbitration extended to KFG and the award was accordingly valid.

• KFG has appealed that decision to the Cour de Cassation, the highest court in France. The decision of the Cour de Cassation remains outstanding.

The Decision of the U.K. Supreme Court⁷

Kabab-Ji was granted permission to appeal to the U.K. Supreme Court.  The Supreme Court distilled Kabab-Ji’s grounds of appeal into three issues:

• First, what law governed the arbitration agreement?
• Second, if English law governed the arbitration agreement, whether there was “any real prospect that a court might find at a further hearing that KFG became a party to the arbitration agreement in the FDA”?
• Third, as a matter of procedure, was the Court of Appeal justified in giving summary judgment refusing recognition and enforcement of the award?

Like the Court of Appeal, the Supreme Court held in favour of KFG and against Kabab-Ji on all issues.  It first held that the arbitration agreement was governed by English law, rather than French law.  It then held that, applying English law to the facts of the case, KFG was not a party to the arbitration clauses in the FDA.  Finally, the Supreme Court held that it was entitled to give summary judgment refusing recognition and enforcement of the award.

Key Implications of the Decision of the Supreme Court

The Approach to Determining the Law Applicable to the Arbitration Agreement

The key point from the Supreme Court’s decision concerns the approach to determining the law applicable to the arbitration agreement.  This question of how to determine the law applicable to an arbitration agreement was recently addressed – in significant detail – in the Supreme Court’s October 2020 decision in Enka v Chubb.  However, the context to the Supreme Court’s decision in Kabab-Ji was different.  Whereas the Supreme Court in Enka was required to analyse the correct approach to determining the law applicable to the arbitration agreement under English common law rules, the Supreme Court in Kabab-Ji was tasked with determining this issue under the New York Convention (the international treaty that establishes the rules governing recognition and enforcement of international arbitral awards).  Importantly, notwithstanding the different context in which the two decisions were made, the Supreme Court’s decision in Kabab-Ji was fully consistent with its previous decision in Enka.

The New York Convention establishes to a pro-enforcement policy.  States Parties to the New York Convention (who now number nearly 170) are required to recognize and enforce foreign arbitral awards, subject to a very limited number of exceptions.  One of those exceptions – set out in Article V(1)(a) of the New York Convention – is that an arbitral award cannot be recognized and enforced in circumstances where the arbitration agreement:

[I]s not valid under the law to which the parties have subjected it or, failing any indication thereon, under the law of the country where the award was made.

The classic example of the arbitration agreement not being valid is where a party asserts that did not enter into an agreement to arbitrate.

The U.K. is a party to the New York Convention.  The rules on recognition and enforcement of foreign arbitral awards are set out in Part III of the AA 1996 (sections 99-104).  After Kabab-Ji applied to recognize and enforce the award, KFG challenged recognition and enforcement under section 103(2)(b) of the Act, which transposes into English law the language from Article V(1)(a) quoted above.

Article V(1)(a) sets out its own choice of law rule for determining the validity of an agreement to arbitrate.  (It was for this reason that the Supreme Court was required to carry out a different analysis to that conducted in Enka.)  Under Article V(1)(a), the validity of the arbitration agreement is to be determined “under the law to which the parties have subjected it or, failing any indication thereon, under the law of the country to where the award was made.”

It was common ground that the parties had not expressly chosen the law applicable to the arbitration agreement.  The outcome of the case therefore turned on the meaning to be given to the phrase “failing any indication thereon.”  If the Supreme Court found that the general choice of English law to govern the FDA constituted a sufficient indication, then English law would govern the arbitration clause.  If the Supreme Court found that there had not been such an indication, then the law of the country where the award was made – i.e., French law – would apply to this question.  This difference was likely to be decisive: the position at French law was likely that KFG was a party to the arbitration agreement (as indicated by the award and by the decision of the Cour d’Appel), whereas the position at English law was likely that KFG was not a party to the arbitration agreement (as indicated by the decisions of the Commercial Court and the Court of Appeal).

In interpreting the phrase “failing any indication thereon,” the Supreme Court first reviewed case law and authoritative commentary from other jurisdictions to determine whether a consensus had emerged on whether a general choice of law clause amounted to a sufficient indication. The Supreme Court concluded that there was “nothing approaching a consensus” among national courts and jurists on this issue.  The Supreme Court therefore decided that it was necessary to form its own view on the meaning based on first principles.⁸

Having considered this issue from first principles, the Supreme Court held that the phrase “failing any indication” does not require an express and specific agreement as to the law which is to govern the arbitration agreement.  Rather, any form of agreement will amount to a sufficient “indication”.⁹  Accordingly, a general choice of law clause in a written contract containing an arbitration clause will normally provide a sufficient indication of the law to which the parties subjected the arbitration agreement.¹⁰

The Supreme Court further supported this conclusion by reference to its previous decision in Enka v Chubb.  It began by noting that the principles established in Enka apply “with equal force” where the question of validity arises after an award has been made (rather than before an arbitration has taken place), noting that it would be “illogical” if the two were to differ.¹¹  The Court then referred to the series of principles that it set down in Enka for determining what law governed an arbitration agreement.  Two of these principles were in the following terms:

Where the law applicable to the arbitration agreement is not specified, a choice of governing law for the contract will generally apply to an arbitration agreement which forms part of the contract.

The choice of a different country as the seat of the arbitration is not, without more, sufficient to negate an inference that a choice of law to govern the contract was intended to apply to the arbitration agreement.¹²

These principles were consistent with that adopted by the Supreme Court to the interpretation of the phrase “failing any indication thereon”.  In both cases, the court will assume that – absent special circumstances – the parties intended their general choice of law to also govern the interpretation of the arbitration agreement, notwithstanding the fact that the parties have chosen a different jurisdiction as the seat of the arbitration.

The Supreme Court then applied all of these principles to the circumstances of the case.  It concluded that:

• Absent any good reason to infer that the parties intended to except the arbitration agreement from their choice of English law to govern all the terms of their contract, the arbitration agreement is governed by English law.¹³
• If the arbitration agreement were interpreted in accordance with English law, KFG was not a party to that agreement. The Supreme Court noted that there was no evidence of a written agreement under which KFG agreed to become a party to the Franchise Agreements or otherwise be bound by the arbitration agreement. The Supreme Court then pointed to the provisions of the contract – which included a clause that expressed the rights thereunder to be personal to Al Homaizi, and a clause providing that any waiver of any term had to be in writing – and held that these clauses precluded KFG from being bound by the Franchise Agreements in the absence of a written agreement.

Two Observations on Enforcement Procedure

The Supreme Court also made important observations on two procedural issues that often arise on applications to recognize and enforce foreign arbitral awards.

The first was the nature of the procedure.  Article V(1) of the New York Convention provides that recognition and enforcement may only be refused upon the furnishing of “proof” of one of the grounds set out in Article V(1)(a) to (e).¹⁴  KFG asked the Supreme Court to grant summary judgment on its application to refuse recognition and enforcement.  This application sought judgment in KFG’s favour on the ground that Kabab-Ji had no reasonable prospect of succeeding with its application to enforce the awards if a full hearing were to be held.  Kabab-Ji argued that a summary procedure was inappropriate.  It referred (among others) to the decision of the Supreme Court in Dallah v Pakistan,¹⁵ which held that the question of whether a non-signatory was bound by an arbitral award was to be determined by means of “ordinary judicial determination” (as opposed to a mere review of the findings of the arbitral tribunal).  Kabab-Ji argued that this required a full evidential hearing to take place, rather than the question being decided summarily.

The Supreme Court disagreed.  It held that there was nothing in the New York Convention or the AA 1996 prescribing how the requisite “proof” is to be established.¹⁶  It went on to hold that, while a full evidential hearing may sometimes be appropriate, there was nothing in any of the AA 1996, the Civil Procedure Rules or the phrase “ordinary judicial determination” that precluded it from deciding an issue of recognition and enforcement by means of summary judgment.  It went on to hold that KRG’s application was one on which it was appropriate to decide this issue summarily.

The second procedural issue was the possibility of adjourning the application to refuse recognition and enforcement, pending the decision of the Paris Cour d’Appel.¹⁷  Article VI of the New York Convention (transposed into English law by means of Article 103(5) of the AA 1996) provides that where there are two (or more) sets of parallel proceedings in relation to an arbitral award, whereby annulment has been sought at the seat and an application has been made in another jurisdiction to enforce the award, the court hearing the application to recognize and enforce has the right to adjourn its proceedings pending the decision in the annulment application.

The Supreme Court gave helpful guidance as to the circumstances in which it would, and would not, be appropriate to grant such an adjournment.  The Supreme Court held:

• Where the grounds relied on in the two sets of proceedings are the same, and governed by the foreign State’s law, an English court is likely to grant an adjournment. This is because it is sensible to have the foreign court determine the issue of foreign law. Adjourning the proceedings in these circumstances also avoids the possibility of inconsistent judgments.
• Where the grounds relied on in the two sets of proceedings are the same, but governed by English law, this rationale does not apply. An English court should not wait for a foreign court to give its view on a question of English law. To the contrary, a foreign court would benefit from the view of an English court on a question of English law.
• Where the grounds relied on in the two sets of proceedings are the same, and each court would apply its own law to that question, there is once again no reason to grant an adjournment. Given that the two courts would be addressing two different questions under two different systems of law, there would be no possibility of inconsistent judgments, or an issue estoppel being created.

The Supreme Court held that the present case fell into this final category: the English court considered this to be a matter of English law, the French court a matter of French law.  There was accordingly no need for the English court to adjourn its proceedings, and the Court of Appeal was right not to do so.