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.
Supreme Court’s confirmation of position under English law
In its decision dated 27 October 2021, the UK Supreme Court affirmed the previous decisions of the English High Court and Court of Appeal, which both refused to recognise and enforce the award. The Supreme Court took its own view in determining that, by virtue of the particular wording of the contract, the parties’ choice of English law as the governing law of the Agreement extended to the law governing the validity of the arbitration agreement. The fact that the parties had chosen Paris as the seat was not enough to displace this finding. As a result, the Supreme Court applied English law and found that Kout Food had not become party to the arbitration agreement. This approach is in line with the long-standing position under English law.
The French position…
In a decision dated 23 June 2020, the Paris Court of Appeal rendered a decision that was perfectly in line with French case law, but diametrically opposed to that of the English courts. The Court of Appeal, contrary to the approach of the English courts, which sought to determine the applicable law through conflict of law rules, applied its well-established substantive rules of international arbitration and found that the parties had made no express choice of law applicable to the arbitration agreement, regardless of the governing law clause. Applying the French substantive rule of the validity of arbitration agreements, the court found that the arbitration agreement had been extended to Kout Food by virtue of Kout Food’s heavy involvement in the performance of the Agreement. Consequently, the court dismissed the application to set aside the award.
… confirmed by Cour de cassation
The French Court of Appeal’s decision was challenged before the French Cour de cassation, which issued its decision on 28 September 2022. As expected, the Cour de cassation confirmed that “the choice of English law as the law governing the contracts [...] is not sufficient to establish the common will of the parties to submit the effectiveness of the arbitration agreement to English law, in derogation of the substantive rules of the seat of arbitration expressly designated by the contracts”. The Cour de cassation added that Kout Food “did not provide evidence of any circumstances that could unequivocally establish the parties' common intention to designate English law as governing the effectiveness, transfer or extension of the arbitration clause”, and rejected the appeal.
The Cour de cassation thus reaffirmed the long-standing French position that, absent an express choice from the parties, it is the substantive rules of the seat that govern the arbitration clause. The reasoning of the Cour de cassation does allow the parties to submit the arbitration clause to the lex contractus; however, it made clear that this must be done “unequivocally” – this precaution might prove useful considering the divergence between the French and English rulings.
Practical consequences
The Kout Food saga sheds light on the importance of the law governing the arbitration agreement, and the risk of inconsistent decisions that can be reached in different jurisdictions if parties are not careful when negotiating. Parties generally give very little thought to the precise wording of their arbitration agreements, and almost never stipulate the law applicable to them. However, this lack of thought can lead to disastrous results and even, as illustrated by this saga, to decisions that can be enforced in one country, but not in another.
One solution may be for parties to unequivocally specify the law applicable to the arbitration agreement from now on, which will require a significant change in current habits. At the very least, this decision should alert any users of arbitration that might be tempted not to choose between multiple national laws in their contracts: this indecision may lead to legal insecurity and should be avoided.
Client Alert 2022-339
