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

Publication Date16 November 2021
SubjectCorporate/Commercial Law, Litigation, Mediation & Arbitration, Corporate and Company Law, Contracts and Commercial Law, Arbitration & Dispute Resolution, Franchising
Law FirmAkin Gump Strauss Hauer & Feld LLP
AuthorMr Hamish Lal, Brendan Casey, Tania Iakovenko-Gr'sser and Léa Defranchi

In a Judgement handed down on 27 October 20211, the UK Supreme Court upheld the English Court of Appeal finding in Kabab-Ji SAL v. Kout Food Group of 20 January 2020 that English law as the law governing the relevant contract, also governed questions of the validity of the arbitration agreement despite the fact that the arbitration agreement provided for a seat of arbitration in France, rather than in the United Kingdom.2 On that basis, the Supreme Court confirmed that the International Chamber of Commerce (ICC) Award rendered in September 2017 was unenforceable in the United Kingdom. The Supreme Court's position differed from the approach taken by the arbitral tribunal who found that French law applied to the arbitration agreement since the arbitration was seated in France. The Supreme Court Judgement is also in tension with the position of the Cour d'appel de Paris that found in its 23 June 2020 Judgement that French law governed the arbitration agreement and that the Award is enforceable in France. The French Cour de cassation is seized of an appeal but has yet to rule on the issue.

The Supreme Court Judgement is noteworthy to contract drafters as well as users of international arbitration for three reasons:

  • The Supreme Court analysis from Enka v Chubb3, on which we previously reported, was instructive in that under English law a choice of law clause governing the whole of the contract will presumptively apply to questions as to the validity of the arbitration agreement absent express agreement by the parties. The selection of an arbitral seat is not an express agreement which would displace the general choice of law clause.
  • Although many contract drafters and international arbitration practitioners (particularly those from civil law backgrounds) may find the position taken by the Supreme Court to be out of step with international practice (including under the New York Convention) the Supreme Court found that there was not a clear consensus among national laws / courts on whether a choice of an arbitral seat rather than a choice of law clause is a clear indication of the law to which the parties subjected the arbitration agreement. The Supreme Court was also unpersuaded that the "validation principle" should be extended to apply to questions of third-party non-signatories.
  • The Supreme Court underlined the importance of the Rock Advertising4 Judgement of 16 May 2018 upholding the enforceable (and restrictive) nature of "No Oral Modification clauses" under English law including in the context of construing third-party (non-signatory) consent to arbitration.

These reasons are discussed in further detail below.

Background

The claimant (and appellant) Kabab-Ji is a Lebanese company which licenced rights under a franchise development agreement dated 16 July 2001 (FDA), to a Kuwaiti company, Al Homaizi Foodstuff Company (Al Homaizi), to operate a franchise using its restaurant concept in Kuwait for a period of...

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