Reed Smith Client Alerts

Recent judgments from both the French and English courts determining the governing law of an arbitration agreement have reached diametrically opposed conclusions, serving as a stark reminder of the major cultural differences that exist between different jurisdictions, the legal uncertainty such differences create for users of international arbitration, and the impact of these differences on the effectiveness of arbitral proceedings.

Introduction: the Kout Food saga comes to a head

“Those who do not remember the past are condemned to repeat it.” George Santayana

Nowhere does this phrase hold true more than the Kout Food Saga. Much like Dallah before it1, this saga has once again thrown into conflict the French and English courts, leaving in their wake a certain degree of legal uncertainty, notably on the subject of determining the governing law of an arbitration agreement.

The Kout Food saga stems from a franchise development agreement entered into in 2001. A dispute arose and the franchisee initiated an International Chamber of Commerce (ICC) arbitration against the parent company of the franchisor, as opposed to the franchisor with whom it had entered into the underlying agreement. The Paris-based arbitral tribunal accepted that it had jurisdiction over the dispute, and issued an award on 13 December 2013 for nearly US$7 million in favour of the franchisee.

Following an attempt by the franchisee to enforce the arbitration award before the English courts2, on 22 January this year the English Court of Appeal, applying English law, refused to recognise and enforce the award on the ground that the arbitral tribunal lacked jurisdiction over the parent company.

In the meantime, the parent company sought to annul the award before the French courts. However, on 23 June this year the Paris Court of Appeal, applying French law, dismissed the application and affirmed the arbitral tribunal’s jurisdiction3.

These diametrically opposed judgments serve as a stark reminder that major cultural differences still exist between different jurisdictions; differences which may, in fact, hamper the very effectiveness of arbitral proceedings. The legal uncertainty created by these diverging judgments will have to be anticipated by parties whose contracts contain an arbitration agreement.

Background: A commonplace commercial context

The above-mentioned franchise development agreement was entered into by Al Homaizi Foodstuff Company (AHFC) (franchisor), and Kabab-Ji (franchisee). Following corporate restructuring in 2005, AHFC became a subsidiary of Kout Food Group (KFG).

The franchise development agreement included a plethora of typical contractual clauses that would not be out of place in other similar commercial agreements. It contained, inter alia, an English choice of law clause, an arbitration clause providing for ICC arbitration in Paris, an entire agreement clause, a contractual definition of the agreement that referred to all provisions, and a “No Oral Modification” clause providing that any amendment had to be signed in writing. It was also stipulated that the agreement had to be interpreted and executed in good faith.

The arbitration clause itself was relatively complex, stating that the arbitral tribunal should apply not only the provisions of the agreement, but also principles of law generally recognised in international transactions, all the while taking into consideration mandatory provisions of other countries. However, it also made clear that in no circumstances could the arbitral tribunal apply any rule that would contradict the terms of the agreement.

KFG, since corporate restructuring, was consistently involved in the performance of the franchise development agreement. However, when the time came to renew the agreement in 2011, KFG elected not to do so, and entered into discussions to terminate the agreement. In response, Kabab-Ji initiated an ICC arbitration against KFG in order to obtain damages. At no stage, however, was AHFC party to the proceedings.

In 2017, a final award was handed down ordering KFG to compensate Kabab-Ji to the tune of almost $US7 million. The arbitral tribunal unanimously found that French law governed the arbitration agreement, and considered that KFG had become party to the arbitration agreement by virtue of ‘novation’ under English law.

Challenging the jurisdiction of the arbitral tribunal, and taking issue with the very existence of a mechanism of ‘novation’ under English law, KFG sought to set aside the award at the seat of arbitration, Paris, and challenged its enforcement in London.

The scene was set for a collision between the two jurisdictions.

English approach: Potential import of the substantive law governing the contract

Under English law4, recognition or enforcement of an international arbitration award can be refused where the arbitration agreement is not valid under the law to which the parties subjected it or, failing any indication, under the law of the country in which the award was made.

Where required to determine the governing law of an arbitration agreement, English courts will thus carry out the following enquiry: First, the court will examine whether there is an express choice. Should this be the case, the court need look no further. Second, failing an express choice, the court must enquire whether there is an implied choice, which can be inferred either from the law of the arbitral seat or the law applicable to the underlying contract. Under English law, there is a rebuttable presumption of an implied choice in favour of the governing law of the underlying contract5.

Although – at least in principle – a choice of law clause found in the underlying contract will not automatically be extended to the arbitration agreement, in the present case the English Court of Appeal concluded that the cumulative effect of the aforementioned contractual provisions amounted to an express choice of English law as governing law of the arbitration agreement. There was, therefore, no need to proceed with any further enquiries: the fact that the seat of the arbitral tribunal was in Paris was of little to no importance.

Having established this, the English Court of Appeal looked at whether the arbitration agreement could be extended to KFG under English law. The Court, affirming the Supreme Court’s position laid down in Rock Advertising6, found that this was not possible due to the presence of the No Oral Modification clause. According to Rock Advertising, such clauses can only be set aside if an estoppel can be shown. Namely, it must be established that a party has engaged in words or conduct which unequivocally led to the belief that modification of the contract, notwithstanding the informal nature of the modification, was valid; more than a mere informal promise is required. The Court of Appeal found that no such estoppel could be established on the facts and refused enforcement of the award.

While there can be little doubt that the courts carried out an unwavering application of English law in this case, and the restrictive conditions regarding the extension of the arbitration agreement were not met, the very question of whether English law even applied to this issue is much less clear-cut and subject to debate. It is unclear to what extent the arbitral tribunal could have anticipated this, especially since the seat of the arbitration was in Paris and analysing the contract terms required a complex exercise of interpretation.

Before crossing the Channel to examine the French approach, it is worth remarking that the English courts took the time to fire a shot across the bow of the French courts, stating “I would hope that the firm opinion that I have expressed and am expressing as to the effect and impact of English law will not go unnoticed in the French courts, given that on any basis English law is central to the decision.7