Applicable law of the arbitration agreement | Allen & Overy LLP

The UK Supreme Court has refused to enforce an ICC arbitration award against a Kuwaiti company. Where the law applicable to an arbitration agreement was not specified, the law applicable to the contract (English law) applied, although Paris was the seat of the arbitration. The risk of an inconsistent decision in France (because the courts would probably apply French law) in an ongoing dispute relating to the same arbitration award could not, in the opinion of the Court of Cassation, be avoided. The case highlights the importance of specifying the applicable law clause both of the contract as a whole and also of the arbitration agreement when the seat of the arbitration and the applicable law of the contract are different. Otherwise, there is a risk of a protracted dispute regarding the law applicable to the arbitration agreement, as happened here: Kabab-Ji SAL (Lebanon) v Kout Food Group (Kuwait) [2021] UKSC 48

Applicable laws in English and French and parallel proceedings

Kabab-Ji (a Lebanese company) has entered into an agreement with Al Homaizi Foodstuff Company (Al Homaizi, a Kuwaiti company), granting the latter a license to operate its restaurant franchise in Kuwait for ten years (the Agreement). The Agreement was governed by English law and contained an arbitration clause providing for arbitration under the rules of the International Chamber of Commerce (ICC) in Paris. It did not expressly specify the law applicable to the arbitration agreement.

Following a corporate reorganization, Al Homaizi became a subsidiary of Kout Food Group (KFG). When a dispute arose under the Accord, Kabab-Ji initiated ICC arbitration proceedings against KFG only (and not against Al Homaizi). KFG argued that it was not a party to the arbitration agreement and that it participated in the arbitration only with reservations.

The arbitral tribunal ruled that it should apply French law (as the law of the seat) to determine whether KFG was bound by the arbitration agreement; but English law to decide whether KFG had acquired substantial rights under the Agreement. The court held that, under French law, KFG was a party to the arbitration agreement; and under English law KFG was an “additional party” to the Agreement by “novation by addition” (although the only English qualified arbitrator dissented on this point). The court found KFG liable for the damages and the unpaid license fees.

Kabab-Ji has requested the execution of this sentence in the London Commercial Court. KFG, on the other hand, asked the Paris Court of Appeal to set aside the award, in particular on the grounds that the arbitrators did not have jurisdiction over KFG because it was not a party to the arbitration agreement. KFG also asked the English commercial court to refuse recognition and enforcement of the award.

The English Commercial Court held that the validity of the arbitration agreement was governed by English law and that (subject to one point left open) it followed in English law that KFG was not a party to the convention or arbitration agreement. The court postponed the final decision on the execution pending the decision of the Paris Court of Appeal.

On appeal by both parties, the English Court of Appeal ruled that the Commercial Court was right but should have made a final decision (rather than adjourn pending a decision from the French Court). The Court of Appeal rendered a summary judgment in favor of KFG, refusing recognition and enforcement of the award. Kabab-Ji appealed to the Supreme Court.

Applicable law of the arbitration agreement

The only ground given by KFG to oppose enforcement was that the award was based on an invalid arbitration agreement. The law governing the arbitration agreement, which had not been specified by the parties, was therefore decisive.

The UK Supreme Court recalled its ruling from last year in Enka vs. Chubb: that, where the law applicable to an arbitration agreement is not specified, it will generally be regarded as the law governing the contract rather than that of the seat of the arbitration (unless there are good reasons to conclude otherwise).

The court clarified that this principle applies whether the issue is raised before (as in Enka vs. Chubb) or after (as in the present case) an award has been rendered.

Since the law applicable to the Contract was English law, the arbitration agreement was also governed by English law.

Parties to the arbitration agreement and impact on the enforceability of the award in England and Wales

The UK Supreme Court rejected Kabab Ji’s argument that KFG became a party to the novation arbitration agreement due to the conduct of the parties and KFG’s performance of various contractual obligations over a period of prolonged. The agreement contained a number of provisions which prescribed that it could only be amended in writing signed on behalf of both parties (“no oral modification” clauses), which are in effect under English law, such as ‘confirmed the Supreme Court in Rock Advertising v MWB Business Exchange Centers [2018] UKSC 24.

The Supreme Court ruled that under English law there was no real prospect of an English court ruling that KFG became a party to the arbitration agreement after Al Homaisi became a subsidiary. As such, summary judgment on this point was appropriate and proportionate.

The Court of Cassation also confirmed the decision of the Court of Appeal not to postpone the recognition and enforcement decision pending the decision of the French court. The Court recognized that when the French court applied French law to the issue in dispute and the English court applied English law, the risk of contradictory judgments could not be avoided and that an adjournment would therefore be of no use.

Comment

The decision of the Supreme Court of the United Kingdom is a clear application and confirmation of the rules on determining the applicable law of an arbitration agreement (if not specified in the agreement) set out in Enka vs. Chubb. There is no doubt that the same reasoning will apply when the issue arises at the enforcement stage.

The decision also illustrates the risk of inconsistent decisions, in the post-award phase of an arbitration, due to the options available to a losing party to challenge an award at the seat of the arbitration and to resist enforcement in d ‘other jurisdictions. While KFG prevailed in English courts, the Paris Court of Appeal dismissed KFG’s request to set aside the award in June 2020. The Paris Court ruled that KFG had failed to demonstrate that the parties had l The intention to apply English law to the arbitration agreement, and thus applied French law on the grounds that the law of the arbitration agreement had to follow the express law of the seat. KFG’s appeal is pending before the French Court of Cassation. The risk of inconsistent decisions is particularly acute if there is a disagreement between the parties on the law applicable to an arbitration agreement because, as this case shows, there is no internationally consistent approach to this issue.

This case demonstrates the value of expressly specifying not only (1) the law applicable to a contract, and (2) the seat of the arbitration, but also (3), when (1) and (2) are different, the law applicable to the arbitration agreement. Sometimes the headquarters are chosen to be a safe and predictable place to resolve international disputes, but the applicable law is less predictable local law. In these circumstances, it would be prudent to specify the law of the seat which will also govern the arbitration agreement. This case shows that the law applicable to the arbitration agreement can be decisive in the outcome of a dispute, so it should be paid attention.

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