Entente Discordiale: a French seat v an English governing law

Nov 2021

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C’est la guerre!

Winter is coming and with it the narrow Channel or La Manche between England and France is looking chillier by the day – not least because of the fallout from Brexit and the ongoing debate over access by French fishing boats to UK fishing grounds.  The British Royal Navy had to intervene when French threats were made to block access to Jersey and cut off the island’s electricity supply.  And the British have complained that the threatened detention of their fishing vessels in France would represent an unacceptable breach of the Brexit trade deal – the French have been encouraged to respond that they only intend on doing so in a ‘specific way and limited way.’  Further problems have appeared in relation to the control of migrants and refugees making their way from France to England in dangerously unstable vessels – it is said the French are not doing enough to stop them from departing and the Brits are doing too much in attempting to push them back.

Eyebrows have also been raised with recent attempts by the French to seize upon the changed environment following Brexit as a golden opportunity to assert linguistic supremacy; a group of French politicians is pressing for la langue française to push aside English and German and become the EU’s sole working language.

There is a distinct air of frisson in the air and the recent AUKUS agreement involving the US, Britain and Australia (with the consequential cancellation of a key nuclear-propelled submarine deal with France) has not improved the temperature.

Kabab-Ji SAL (“Kabab-Ji”) v Kout Food Group (“Kout”) [2021] UKSC 48 (27.10.21)

Into this furore has jumped the English Supreme Court with a judgment (link here) although recognising the distinct likelihood of contradictory decisions from the English and French courts considers any finding by the French Court of Cassation to be mostly irrelevant.  It is not the language of diplomacy.

The judgment follows last year’s Supreme Court decision in Enka v Chubb [2020] USKC 38 (“Enka”) that looked at how to determine which law governs the scope and validity of an arbitration agreement.  The main distinction in this instance being that although the same issue has arisen – it is not in the context of an arbitration which has yet to take place (i.e., as was the position in Enka) – but in the context of an arbitration which has taken place and in relation to which attempts were being made to enforce the resulting arbitration award.

Main Issues

The matter arose out of an underlying contract that was governed by English law but which contained an arbitration agreement in respect of which the parties had agreed Paris as the arbitral seat (i.e., the procedural home of the arbitration which determines the governing procedural law).  Kout’s case was that the governing law of the contract should apply to issues concerning the validity of the arbitration agreement and that as a matter of English law, it was not a party to the arbitration agreement.  Kabab-Ji’s case was that as the agreed seat of the arbitration was in Paris, the parties intended French law to apply to the arbitration agreement and French law dictated that Kout was a party to that agreement. This issue has been the subject of litigation the world over, see our article here which discusses the Hong Kong, Singapore, and English approaches in earlier cases.

Some Background Facts

Following a corporate restructuring, the original party to a series of franchise contracts with Kabab-Ji, became a subsidiary of Kout.  Kabab-Ji therefore argued, and the Tribunal agreed, that as a matter of French law, Kout was a party to the arbitration agreements contained in the franchise contracts and as a matter of English law, there was a ‘novation by addition’ whereby Kout had become an additional party to the franchise contracts by way of conduct.  In contrast, Kout’s position was that not only did French law not apply to the arbitration agreement but that as a matter of English law, there could be no novation in relation to the franchise contracts in the absence of a written agreement – conduct alone would not suffice and accordingly, Kout owed no obligations to Kabab-Ji.  This was supported in part by the dissenting third arbitrator (an Irish senior counsel).

Following an award issued in favour of Kabab-Ji and various attempts to enforce the award in France and in England, an impasse was reached with the Paris Court of Appeal dismissing Kout’s objections, but the English High Court and Court of Appeal accepting them.  As matters stood, a further appeal was pending before the French Court of Cassation when the English Supreme Court was also asked to review the case.

Supreme Court (“SC”) Judgment

In a relatively straightforward application of the conclusions from Enka (set out at para 170 of that judgment ), the SC confirmed that in the absence of any choice by the parties, the law governing the underlying contract and not the law of the seat will apply to the arbitration agreement (which formed part of the underlying contract).

The choice of a different country as the seat of the arbitration is not, without more, sufficient to displace the inference that the law chosen to govern the underlying contract was also intended to govern the arbitration agreement.

One exception to this may be where there is a serious risk that such an approach would result in the arbitration agreement being treated as ineffective under the law of the underlying contract – if this were to be the case, it may be that the law of the seat would be applied instead (i.e., an application of the so-called validation principle pursuant to which the law that gives effect to the parties’ agreement to arbitrate will be applied).

The Court came to these conclusions despite the fact that in Enka, its reasoning was based on an application of common law principles whereas in Kabab-Ji v Kout, it applied provisions set out in England’s 1996 Arbitration Act (which in turn transposed provisions from the 1956 New York Convention on the Recognition and Enforcement of Foreign Arbitral Awards (article V(1)(a)) (“New York Convention”)).  Kabab-Ji accepted the same general principles would apply in both scenarios.

The Court took the view that as any form of agreement as to the law that should govern the arbitration agreement would suffice, a general choice of law in relation to the underlying contract would suffice to indicate the parties’ intention regarding the arbitration agreement contained in that contract.

As for the fact that unlike in Enka, the arbitration in this case had already taken place and an award had been issued, the Court considered it would be illogical to apply a different approach dependent only on whether an award had been made or not.

With respect to the validation principle, the Court took the view that while it may be a relevant consideration in cases where there is no dispute as to the parties’ intention to arbitrate, it should not be used to create an agreement which would not otherwise exist – it is a principle of contractual interpretation, not formation: “There is no reason to approach the question whether parties to a dispute have made any agreement at all with each other with any presumption that they did so. Applying such a presumption would simply beg the question which the court has to answer in this case.” (§51 of the judgment)

Similarly, an argument by Kabab-Ji that the parties’ agreement to adopt the UNIDROIT principles in the context of the arbitration should not be extended to include an assumption that the parties had both actually agreed to arbitrate.  While the underlying franchise contract indicated the UNIDROIT principles were among the rules which the arbitrators could apply to the arbitration, the SC made clear that this did not mean the UNIDROIT principles were applicable to the “logically prior” question of whether Kout had entered into a legally binding arbitration agreement.

In any event, having determined that English law applied to the agreement, the Court then went onto hold that a ‘no oral modification clause’ could not as a matter of English law be circumvented by the conduct of either side – it meant what it expressed and a written agreement to modify the arrangements was necessary: Kout had not become an additional party to the franchise agreements by way of a novation through conduct.

Future

With a Gallic shrug, the SC acknowledged the likelihood of the French Court of Cassation finding in favour of Kabab-Ji and the risk of there being a contradictory judgment from their French cousins but took the view that an adjournment by the English Court of Appeal to wait and see would not have been necessary.  It noted that in applying French law, a French court ruling could not give rise to an issue estoppel that would be binding on the English courts as they were not addressing the same issues.  And if the French court were to apply English law, it would obviously be helpful for it to have the benefit of a judgment from the English courts.  In short, the French judgment would be mostly irrelevant.

The SC judgment underlines the view in England that under the New York Convention, no concept of deference towards the seat of an arbitration is incorporated into its framework.  And practically, the judgment underlines the importance of always including an express governing law provision in an arbitration agreement – it is often not done but such a straightforward provision can save parties significant sums and time on an otherwise avoidable and ancillary issue.  Indeed, in Asia, we see institutions like the HKIAC expressly incorporating a choice of law clause in respect of the arbitration agreement in their model clause.

While French, the ‘language of love’ was once also seen as the natural language of diplomacy and government – two of many English words derived from French over the centuries (as much as 30%) – it would seem that for the moment, as is currently evident in other public arenas, there is little love lost between the most senior courts in both jurisdictions these days.

As they say, “Ooh la, la!”

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