UK Supreme Court provides further guidance on determining the governing law of an arbitration agreement in upholding a summary judgment not to enforce an arbitral award against a non-party

The decision will be of interest to all users of arbitration agreements, and in particular in situations, as in this instance, where obligations of one group company in a long-term contract may in practice be performed (and for practical purposes assumed) by another group company.

Background

Kabab-Ji SAL (“KJS”), a Lebanese restaurant chain entered into a Franchise Development Agreement (“FDA”) in 2001 with Al Homaizi Foodstuff Company ("AHFC"), a Kuwaiti company. The FDA licensed AHFC to operate restaurant outlets in Kuwait under the KJS brand for 10 years. After the FDA was signed, AHFC subsequently became a subsidiary of the Kout Food Group ("KFG") in 2005.

The FDA contained an English governing law clause and in addition, an arbitration agreement which provided for arbitration to be seated in Paris (the “Arbitration Agreement”). However, the Arbitration Agreement did not specify the law which governed the arbitration clause. The FDA also contained a no oral modification clause which provided that any changes to the FDA had to be formally agreed in writing between the parties. Subsequently, a dispute arose under the FDA, which KJS referred to International Chamber of Commerce (“ICC”) arbitration in Paris pursuant to the FDA. KJS commenced the arbitration only against KFG, not AHFC.

Initial Proceedings before the ICC Tribunal, the Paris Court, and the English High Court

KFG participated in the ICC arbitration under protest submitting that, as a result of the no oral modification clause in the FDA and in the absence of a formal agreement, it was not a party either to the FDA or the Arbitration Agreement.

Faced with an English law contract and a French seated arbitration, the arbitral tribunal held that it should apply French law to construe the arbitration agreement, but also (by a majority) that, applying English law to the main contract, a “novation by addition” (rather than substitution) was to be inferred from the parties’ conduct adding KFG as the main franchisee. Consequently, on the merits, KFG was held to be in breach of the FDA (the “Award”). The dissenting arbitrator disagreed that KFG had become a party to the FDA (and hence also the Arbitration Agreement) as a matter of English law.

KFG applied to the Paris Court, as the supervising court, seeking to have the Award set aside. At the same time, KJS issued proceedings in the English High Court for enforcement of the Arbitration Award.

The application to enforce the Award as a judgment of the English Court under s.101 of the Arbitration Act 1996 (“Act”) was heard first, including an application by KJS to adjourn the decision on enforcement under s.103(5) of the Act pending a decision on the challenge to the Award in the Paris Court.

The English High Court held that the law governing whether KFG had become a party to the arbitration agreement was the law governing the validity of the arbitration agreement. The Judge held however that this was English law, and accordingly that KFG was not a party to the Arbitration Agreement or the FDA because of the presence of the ‘No Oral Modification clause’ (“NOM clause”) contained within the FDA. Such NOM clauses, as a matter of English law, are legally effective following the UKSC’s prior judgment in Rock Advertising v MWB [2018] UKSC 24, and KFG had not under the criteria of the NOM clause agreed to become a party to the FDA. However, the High Court declined to make a final determination on this last point (i.e. refusing enforcement), pending determination of the proceedings before the Paris Court, in case further evidence could come to light in the French proceedings that might help determine whether KJS had satisfied the conditions for an estoppel (as identified in Rock Advertising) allowing it to rely on conduct to show that KFG was to be deemed a party to the FDA.

Subsequently, the Paris Court heard KFG’s application and refused to set aside the Award. It held that KFG had not shown the parties intended to apply English law to the Arbitration Agreement, and since Paris was the seat of the arbitration, French law applied to the Arbitration Agreement as the law of the expressly designated seat. KFG is appealing this decision to the French Supreme Court.

English Court of Appeal

On appeal by both parties, the English enforcement proceedings progressed to the Court of Appeal.

The Court of Appeal upheld the analysis at First Instance finding that the terms of the FDA provided for the express choice of English law to govern the arbitration agreement. Also that, as a matter of English law, in the absence of written consent as required by the terms of the FDA or any matters capable of giving rise to an estoppel, KFG could not have become a party to the FDA and hence the arbitration agreement. The Court of Appeal further held that a final determination should be made refusing enforcement of the Arbitration Award on this basis, and proceeded to grant summary judgment on the issue.
KJS then sought and was granted permission to appeal to the UKSC.

UK Supreme Court Decision

The appeal to the UKSC concerned three issues:

• Was the Arbitration Agreement governed by English law? - the “Choice of Law Issue”
• If English law governed the Arbitration Agreement, was there any real prospect that a court might find at a further hearing that KFG became a party to the arbitration agreement in the FDA? - the “Party Issue”
• As a matter of procedure, was the Court of Appeal justified in giving summary judgment refusing recognition and enforcement of the award? - the “Procedural Issue”

The UKSC unanimously dismissed the appeal confirming the Court of Appeal’s summary judgment and refusing recognition or enforcement of the Award.

Choice of law issue

The UKSC began from a consideration of the relevant provisions of the New York Convention on the Recognition and Enforcement of Arbitral Awards (“Convention”), Article V of which sets out the grounds on which the recognition and enforcement of an award maybe refused. S.103 of the Act enacts these grounds into English law. For KFG to succeed in resisting enforcement of the Award, it had to come within one of these grounds – in particular, in this instance, to show that the Arbitration Agreement was not valid in relation to it.

The question of what law governed an arbitration agreement in a contract had recently, and decisively, been considered by the UKSC in its decision in Enka v Chubb [2020] USKC 38.

In Enka, the UKSC held that where parties have not determined the law of the arbitration agreement specifically, 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 will be the law most connected to the arbitration and this will be the law applied to the arbitration agreement.

In Enka, the governing law question arose before any arbitration had been commenced, whereas in this instance the question arose on enforcement of an award. However, the UKSC considered that it would be illogical if the law governing the validity of the arbitration agreement were to differ depending on whether the question is raised before or after an award has been made. Thus, the principles in Enka applied “with equal force” on enforcement actions after the arbitration award had been made.

The UKSC accordingly endorsed the decisions of both the High Court and the Court of Appeal that the law governing the Arbitration Agreement was English law.

The Party Issue

On the Party Issue, the Court of Appeal was correct to find that under English law in light of the NOM clause and the decision in Rock Advertising “there was no real prospect that a court might find at a further hearing that KFG became a party to the arbitration agreement in the FDA”. Further, there was “no realistic prospect of further evidence being put forward that might lead to a different conclusion”.

The Procedural Issue

Therefore, the UKSC held that the Court of Appeal was right to overturn the High Court decision on adjournment and to give summary judgment refusing recognition and enforcement of the Award. As to whether summary judgment was an appropriate mechanism to decide questions arising on enforcement of an award under the Convention, the UKSC stated:

“There is no reason in principle why a summary approach should not be adopted to determinations required under section 103 of the 1996 Act. Indeed, there is every reason to do so, not least because in many cases the nature and extent of the relevant evidence will already be clear from the hearing before the arbitral tribunal and it will be the party seeking to enforce the award who will be concerned to achieve a speedy decision and who will benefit from the availability of summary procedure. The availability of such procedure is therefore fully consistent with the pro-enforcement policy of the Convention and its equivalent provisions in the 1996 Act.”

Implications of the Judgment and practical steps

This latest judgment of the UKSC on the law to be held to govern arbitration agreements reinforces the approach and principles set out in its decision in Enka. While the approach taken by the English courts on this issue now appears to be settled and clear, this is not the case in many jurisdictions, nor do those jurisdictions which have decided the point necessarily agree. This varied landscape was noted by the UKSC in considering how to apply Article V(1)(a) of the Convention in determining whether there is a valid arbitration agreement. Ideally those rules “should not only be given a uniform meaning but should be applied by the courts of the contracting states in a uniform way. If, therefore, there was a clear consensus among national courts and jurists about whether or when a choice of law for the contract as a whole constitutes a sufficient indication of the law to which the parties subjected the arbitration agreement, in particular where it differs from the law of the seat, that would provide a cogent reason for the English courts to adopt the same approach. It is apparent, however, that there is nothing approaching a consensus on this question.”

Thus, it will be possible, as in this case (and subject to the decision of the French Supreme Court), that the arbitration agreement underlying an arbitral award may be considered to be governed by different laws, and therefore to be valid and enforceable (or not), depending on the courts in which the question is asked. While this is unfortunate, it is the reality for the time being. Here, the contrasting decisions from the English and French courts mean that KJS is left with an Arbitration Award which has been upheld at the seat of the arbitration (France), but that cannot be enforced in England.

The essential lesson from this case is therefore that parties are well advised to specify in their agreements the law which they wish to govern the arbitration agreement, as well as the law to govern the main contract (which may be the same). Whilst the framework for determining the governing law in the English courts is now clear following both Enka and Kabab Ji-SAL, it is always preferable for parties to avoid the question entirely with an express choice of law in their arbitration agreement.

The case also reinforces the impact of the decision in Rock Advertising and the implications of not complying with the variation provisions of an agreement where there is a NOM clause. This is particularly relevant in long term agreements where the parties may move away from the strict terms of the agreement over time, or even allow a related non-contracting party to carry out various obligations under the agreement, as was the position in this case.

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