Fourth (and Final?) Act In The Kabab-Ji Saga'What Law Governs The Arbitration Agreement (Law Of The Seat Or Law Of The Underlying Contract)?

• Published date: 05 October 2022
• Subject Matter: Corporate/Commercial Law, Litigation, Mediation & Arbitration, Corporate and Company Law, Contracts and Commercial Law, Arbitration & Dispute Resolution, Franchising
• Law Firm: Akin Gump Strauss Hauer & Feld LLP
• Author: Mr Hamish Lal, Brendan Casey, Tania Iakovenko-Gr'sser and Léa Defranchi

On 28 September 2022, the French Cour de cassation¹ upheld the French Court of Appeal's decision in Kabab-Ji SAL v. Kout Food Group that the law of the seat, rather than the law governing the underlying contract, governed issues of validity and interpretation of the arbitration agreement. The approach by the French Cour de cassation diverges from the UK Supreme Court's earlier decision in the same matter which confirmed that, under English law (absent express agreement by the parties), (i) a choice of law clause governing the whole of the contract will presumptively apply to questions as to the validity of the arbitration agreement; and (ii) that the choice of an arbitral seat is not an express agreement which would displace the choice of law clause.² What does this mean in practice for international arbitrations where there is no express agreement by the parties on the law of the arbitration agreement?

• Parties need to correlate possible causes of action with enforcement risk. Uncertainty is a natural by-product of not having an express agreement.
• The jurisdiction(s) in which assets are located become even more important. Certain jurisdictions will follow the approach adopted by the French Courts while others will follow the UK Supreme Court.
• Advocates for developing 'soft law' to confirm that the courts at the seat must have primacy (except where there is reason to suspect an unfair trial) will be happy with the French Cour de cassation.

Factual Context

The dispute arose out of a Franchise Development Agreement (FDA) between Kabab-JI SAL (KJS), a Lebanese company, and Al Homaizi Foodstuff Company (AHFC), a Kuwaiti company, as licensee. The parties entered into a total of ten franchise outlet agreements (FOAs) in respect of individual outlets opened in Kuwait (collectively the FDA and FOAs are referred to as the "Franchise Agreements"). The Franchise Agreements were all expressly governed by English law but provided for Paris as the seat of arbitration. In 2005, following a corporate reorganization, AHFC became a subsidiary of a new holding company called Kout Food Group (KFG). However, the terms of the Franchise Agreements remained unchanged.

KJS pursued international arbitration against KFG, not AHFC. In those proceedings, the majority of the tribunal found that the question of whether KFG was bound by the arbitration agreement was a matter of the law of the seat (French law) and that a "novation" was to be inferred by the conduct of the parties...