Reed Smith Client Alerts

The French Cour de cassation has just handed down its much-anticipated decision in the Kout Food saga (Decision no. 20-20.260 of 28 September 2022) in which it confirmed, to nobody’s surprise, the long-standing French position on the law applicable to arbitration agreements: faced with an express choice of Paris as the seat of arbitration, and even where the contract is governed by English law, it is the substantive rules of French arbitration law which govern the validity, effectiveness, transfer or extension of the arbitration clause.

This decision, which marks the final step in a legal saga that stretches back to early 2019, serves only to widen the gulf between the French position and the position of the English courts that the law applicable to contracts will, in general, be deemed to apply to arbitration agreements (recently reaffirmed by the English Supreme Court (Kabab-Ji SAL (Lebanon) (Appellant) v. Kout Food Group (Kuwait) (Respondent) [2021] UKSC 48)).

The Kout Food saga to date

As a reminder, the Kout Food saga has its roots in a franchise development agreement entered into in 2001 by Al Homaizi Foodstuff Company (AHFC) as franchisor and Kaba-Ji as franchisee (the Agreement). The Agreement provided that it would be governed by English law, and that any dispute would be referred to arbitration under the ICC Rules of Arbitration, with the seat being in Paris, France.

Following corporate restructuring in 2005, AHFC became a subsidiary of Kout Food Group (Kout Food), which was thereafter heavily involved in the performance of the Agreement despite not being a signatory. When the subject of renewal arose in 2011, Kout Food entered into discussions to terminate the Agreement. In response, Kabab-Ji initiated an ICC arbitration against Kout Food in order to obtain damages. Kabab-Ji’s co-contractor, AHFC, was not a party to the arbitration.

As Kout Food was not a signatory to the Agreement, and AHFC was not a party to the arbitration, the arbitral tribunal’s jurisdiction was understandably disputed.

The arbitral tribunal ultimately upheld its jurisdiction, and extended the arbitration agreement to Kout Food on the basis that (i) France being the seat of the arbitration, French law governed the arbitration agreement, and (ii) under French law, Kout Food had become party to the arbitration agreement by virtue of its involvement in the performance of the Agreement. Kabab-Ji was awarded nearly US$7 million in damages.

Kabab-Ji subsequently moved to have the award recognised and enforced before the English courts. However, unhappy with the award, Kout Food challenged the application on the grounds that it was not a party to the arbitration agreement and, hence, the arbitration had proceeded on the basis of an invalid arbitration agreement. Meanwhile, on the other side of the Channel, in parallel to the enforcement proceedings before the English courts, Kout Food sought to have the award annulled at the seat.