What law governs an arbitration agreement and why it matters? Lessons from Kout Food Group v Kabab-Ji SAL

This issue was highlighted recently in a judgment by the French Supreme Court upholding an ICC award in the dispute between Kout Food Group (“Kout”) and Kabab-Ji SAL (“KJS”)^[1], in contrast to a decision by the UK Supreme Court (“UKSC”) in 2021 holding that the same award could not be enforced in England & Wales on the basis that the tribunal lacked jurisdiction under the arbitration agreement in question^[2]. The result for KJS is an award upheld in one jurisdiction, but denied recognition and enforcement in another. It underlines the importance for parties of properly drafted arbitration agreements which reduce the scope for such differential outcomes. 

In this article, we consider the decisions of both Supreme Courts, and provide some tips on drafting to ensure that parties have certainty as to which law governs the arbitration in any eventual dispute.

Background to the Dispute & the UK position

In October 2022, the French Supreme Court handed down its eagerly awaited decision in the dispute between Kout and KJS following the UK Supreme Court’s decision in late 2021. The background to the claim brought by KJS in it’s the arbitration proceedings and its subsequent actions in the English and French courts is set out in our previous article (accessible here).  

In brief, the dispute concerned a Franchise Development Agreement (“FDA”) under which a Kuwaiti company, Al Homaizi Foodstuff Company (“AHFC”), was licensed to operate restaurant outlets under the KJS brand. After the FDA was signed, AHFC became a subsidiary of Kout. It was said by KJS that Kout effectively performed the obligations of AHFC and so became the main franchisee. The FDA contained an English governing law clause and an arbitration agreement providing for arbitration seated in Paris. The arbitration clause in the FDA did not specify the law which governed the arbitration agreement. On a dispute being referred by KJS to arbitration against Kout (not AHFC), the tribunal held that Kout had breached the FDA and was liable to KJS. KJS sought enforcement of that award in England, in which proceedings Kout challenged that it was properly a party to the arbitration agreement in the FDA. This raised the question of how the English court was to interpret the arbitration agreement and under what governing law. 

The question of what law governed an arbitration agreement in a contract had previously been considered by the UKSC in its decision in Enka v Chubb [2020] UKSC 38. In Enka, the UKSC held that where parties have not specified the law of the arbitration agreement in a contract, but have indicated a law to govern the main contract, they will be presumed to have intended that this law will also apply to the arbitration agreement. Where there is no chosen law in either situation, then generally the law of the seat (i.e. place) of the arbitration will be the law most closely connected to the arbitration agreement and will be applied as the governing law of the arbitration agreement.

In Enka, the governing law question arose before any arbitration had been commenced, whereas in Kout the question arose on enforcement of an award. However, the UKSC considered that the same principles should apply whether the question is raised before or after an award has been made. 

On that basis, applying English law to the arbitration agreement, the UKSC held that Kout was not a party to the FDA (which contained a no oral modification clause requiring changes to the FDA to be formally agreed in writing). Accordingly, the arbitral tribunal did not have jurisdiction to make an award against Kout, and therefore the English court would refuse to enforce the award in KJS’s favour. 

The French position

The French Supreme Court then considered the same facts and reached a different decision finding that Kout was bound by the arbitration agreement and upholding the award.  

Under French law, such an international arbitration agreement is evaluated according to a specific regime of substantive rules (règles materielles). Those substantive rules are designed to neutralize all legal mechanisms provided by domestic legal systems that could invalidate or restrict the scope of an award in an international arbitration. Therefore, they are applicable to any international arbitration agreement which a French judge is called upon to consider regardless both of the law governing the dispute, and the seat of the arbitration. 

For instance, when dealing with the validity or effectiveness of an international arbitration agreement, French courts do not apply conflict of law rules, nor do they apply the law governing the main agreement, but look instead for the common intention of the parties. This is illustrated by the landmark Dalico decision^[3], where the French Supreme Court held that “according to a substantive rule of international arbitration law, the arbitration agreement is legally independent from the main contract in which it is included or which refers to it and, provided that no mandatory provision of French law or international public policy (ordre public) is affected, its existence and validity depend only on the common intention of the parties, without it being necessary to make reference to a national law.” 

The reasoning adopted by the French Supreme Court in Kabab-Ji SAL v. Kout Food Group is consistent with this approach such that, in the absence of an applicable law chosen by the parties to apply to the arbitration agreement, the validity and effectiveness of that arbitration agreement depends only on the common intention of the parties. The court quoted the Dalico decision and supplemented it by clarifying that the French substantive rules will not apply if the parties expressly departed from it “unless the parties have expressly subjected the validity and effect of the arbitration agreement itself to such law.”

Therefore, the French Supreme Court adopted a three-step reasoning:

• First, the Court looked for the non-equivocal common intention of the parties to deviate from the French substantive rules by submitting the validity and effectiveness of the arbitration agreement to a national law.  
  
  
• Second, the Court confirmed the sovereign judgment of the Court of Appeal judges according to which the facts^[4]- especially the choice of English law as the law governing the main contract - were insufficient to establish the common intention of the parties to submit the validity and effectiveness of the arbitration agreement to English law. 
  
  
• Third, the Court decided that Kout did not provide evidence of any circumstances that could unequivocally establish the common intention of the parties to designate English law as governing the effectiveness, transfer, or extension of the arbitration agreement in the FDA.

The French Supreme Court therefore confirmed that the choice of a law governing the main contract did not amount to an explicit or implicit choice to apply the same law to the arbitration agreement. 

How to ensure certainty?

Parties who draft arbitration agreements into their commercial contracts do so to avoid, as much as possible, litigation in national courts. The challenges and decisions in this instance illustrate the premium to be placed on achieving certainty in that drafting. As is so often the case, the remedy lies in clear and explicit drafting in the contract.  

Thus, in order to avoid disputes regarding the governing law of an arbitration agreement, parties are advised to:

• expressly specify the governing law of the arbitration agreement, as well as the governing law of the main contract (which may be the same) when drafting the contract. 
  
  
• take legal advice on the law chosen to govern the arbitration agreement to ensure that the outcome will be the one that the parties intend both during any arbitration and on any challenge or enforcement proceedings. 

The authors are grateful for the assistance of Camille Faure, Yvanna Miller, Louise Lanzkron, and Freddie Delmotte in preparing this article.

[1] Kabab-Ji SAL (Lebanon) v Kout Food Group (Kuwait) (Court of Cassation, Appeal No. 20-20.260)

[2] Kabab-Ji SAL (Lebanon) v Kout Food Group (Kuwait) [2021] UKSC 48

[3] Cour de Cassation, 1re civ., 20 Dec. 1993 : JDI 1994, p. 432, note E. Gaillard ; JDI 1994, p. 690, note E. Loquin ; Rev. arb. 1994, p. 116, note H. Gaudemet-Tallon ; Rev. crit. DIP 1994, p. 663, note P. Mayer.

[4] The choice of English law as the law governing the main contract as well as contractual provisions whereby arbitrators were forbidden to apply rules that would contradict the contracts.