The Law Of An Arbitration Agreement: Is It The Law Of The Seat Or The Law Of The Underlying Contract?

If there is no express law of the arbitration agreement, the law with which that agreement has its closest and most real connection is either the law of the underlying contract or the law of the seat of the arbitration. The English Court of Appeal judgement in Kabab-Ji SAL v. Kout Food Group, handed down on January 20, 2020, looked at the law of an arbitration agreement where the seat was Paris and where the underlying contract was governed by the law of England and Wales and contained a 'No Oral Modification' provision. The Court of Appeal held that the award was not enforceable, deciding:

Governing law clauses do not necessarily cover the arbitration agreement. However, in Kabab-Ji the proper construction of the underlying contract and the arbitration agreement concluded that English law did govern the arbitration agreement. In contrast, all three arbitrators had decided that French law applied to the issue of validity of the arbitration agreement. The concept of the separability of an arbitration agreement (enshrined, for example, in Section 7 of the Arbitration Act of 1996) ensures that the dispute resolution procedure chosen by the parties survives the main agreement becoming unenforceable for example because of fraud or misrepresentation. Separability does not preclude an arbitration agreement being construed with the remainder of the main agreement as a whole. The effectiveness of so-called 'No Oral Modification' clauses, as held by the Supreme Court in MWB Business Exchange Centres Limited v. Rock Advertising Limited [2018] UKSC 24; [2019] AC 119, can be circumvented by doctrines of estoppel (and clarified that Lord Sumption JSC set out how English law interprets the UNIDROIT principles and was not saying anything different from UNIDROIT). The Court of Appeal did not need to consider an implied choice of law. This means that the need for business efficacy before a term can be implied was not tested where there is a fallback position of either the law of the country with which the arbitration agreement has its closest and most real connection or the law of the country where the award is made.

Kabab-Ji SAL v. Kout Food Group is also noteworthy since the Court of Appeal refused to stay the English recognition proceedings while annulment proceedings at the seat in front of the Paris Cour d'appel are pending. This judgement sets the stage for potentially rival inconsistent judgements in England and Wales and France.

The Facts

In 2001, Kabab-JI SAL (“KJS”), a Lebanese company, entered into a franchise development agreement (“FDA”) with Al Homaizi Foodstuff Company (“AHFC”), a Kuwaiti company, as licensee. In 2005, following a corporate reorganization, AHFC became a subsidiary of a Kout Food Group (“KFG”). A dispute arose under the FDA which KJS referred to arbitration before the International Code Council (ICC) in Paris pursuant to Article 14 of the FDA against KFG, not AHFC.

Article 14 of the FDA stated:

Article 14: Settlement of Disputes

14.2. Except for those matters which specifically involve the Mark, any dispute, controversy or claim between LICENSOR and LICENSEE with respect to any issue arising out of or relating to this Agreement or the breach thereof, …shall, failing amicable settlement, on request of LICENSOR or LICENSEE, be finally settled under the Rules of Conciliation and Arbitration of the International Chamber of...