Data

Date:: 27-10-2021
Country:: United Kingdom
Number:: [2021] UKSC 48
Court:: Supreme Court
Parties:: Kabab-Ji SAL v. Kout Food Group

Keywords

LONG-TERM CONTRACTS - FRANCHISE DEVELOPMENT AGREEMENT - BETWEEN A LEBANESE COMPANY AND A KUWAITI COMPANY - CHOICE OF LAW CLAUSE IN FAVOUR OF ENGLISH LAW - ARBITRATION CLAUSE REFERRING ALSO TO "PRINCIPLES OF LAW GENERALLY RECOGNIZED IN INTERNATIONAL TRANSACTIONS" REFERENCE BY THE ARBITRAL TRIBUNAL TO THE UNIDROIT PRINCIPLES

VALIDITY OF THE ARBITRATION AGREEMENT - APPLICABLE LAW - REFERENCE TO ENGLISH LAW TOGETHER WITH UNIDROIT PRINCIPLES IN THE ARBITRATION CLAUSE - CANNOT LEAD TO THE APPLICATION OF FRENCH LAW

UNIDROIT PRINCIPLES AS MEANS TO SUPPLEMENT NATIONAL APPLICABLE LAW - CANNOT SUBSTITUTE PARTIES' CLEAR CHOICE IN FAVOUR OF THE LATTER

Abstract

A Lebanese company (Claimant) entered into a Franchise Development Agreement ("the Agreement") for a period of 10 years with a Kuwaiti company. Few years later, following a corporate reorganisation, the Kuwaiti company became a subsidiary of Respondent, another Kuwaiti company. A dispute arose under the contract, leading Claimant to commence an arbitration against Respondent (and not against the company which concluded the Agreement). This raised a jurisdictional question as to whether Respondent had become an additional party to the Agreement, and therefore to the arbitration clause therein contained ("the Arbitration Clause"). On the merits the Arbitral Tribunal had to decide whether there had been a breach of contract by Respondent.

The Arbitration Clause specified that Paris would be the seat of arbitration and that “the arbitrator(s) shall apply the provision contained in the Agreement and … principles of law generally recognized in international transactions”. The governing law clause stipulated that the contract would be “governed and construed in accordance with English law”. The Agreement contained also a “No Oral Modification” clause.

The Arbitral Tribunal determined unanimously that (i) whether Respondent was bound by the Arbitration Clause was a matter of French law and (ii) that English law governed whether a transfer of substantive rights and obligations to Respondent took place. By majority decision, two of the arbitrators concluded that Respondent had become a counterparty to the Agreement according to French law and that, as a matter of English law and despite the “No Oral Modification” clause contained in the Agreement, a transfer / novation was to be inferred by the conduct of the parties. In doing so, the Arbitral Tribunal referred to UNIDROIT Principles 2016 edition. Having found jurisdiction, the Arbitral Tribunal went on to determine that, on the merits, Respondent was in breach of the Agreement.

Claimant made an application for the enforcement of the award under the English Arbitration Act (see the decision of the UK Court of Appeal of 20.01.2020 - already in Unilex), while Respondent filed an application before the Paris Court of Appeal to annul the award, alleging the lack of jurisdiction of the Arbitral Tribunal and the breach by the Arbitral Tribunal of its mandate (see the decision of the Paris Court of Appeal of 23.06.2020 - already in Unilex).

The French Court dismissed the action (see the decision of the Paris Court of Appeal of 23.06.2020 - already in Unilex) and Respondent lodged an appeal against the decision of the Paris Court of Appeal, currently pending before the French Court of Cassation.

The English High Court, which decided before the French Court, held that the governing law was English law, but that Respondent was not a party and hence not in breach of the Agreement. However, The Court refused to make a final determination on enforcement of the award pending determination of the proceedings before the Paris Court.

The English Court of Appeal agreed that the governing law was English law, that Respondent was not a party and not in breach but held that the court below should have made a final determination on the enforcement of the award. The Appellate Court affirmed then that the award was not enforceable against Respondent since it was not party to the contract or the arbitration agreement.

Claimant appealed the decision before the UK Supreme Court, contesting the application of English law and arguing that agreement as a whole did not indicate which law should apply to the validity of the arbitration agreement. Therefore, according to Claimant, the default rule (i.e. second limb) under Article V(1)(a) of the New York Convention and Section 103(2)(b) of the 1996 Arbitration Act came into effect and French law became applicable to the arbitration agreement as the law of the country where the award was made. In order to support its opinion, Claimant relied on Articles 1.7, 1.8 and 2.1.18 of the UNIDROIT Principles - since both parties agreed that the arbitrators shall also apply principles of law generally recognised in international transactions - in order to prove that Respondent consented to becoming a party to the arbitration agreement through conduct and therefore no written consent was needed. Claimant also argued that parties were free to agree to the application of the UNIDROIT Principles under Article 21(1) of the ICC Rules which allows the parties to “agree upon the rules of law” to be applied by the arbitral tribunal “to the merits of the dispute”.

The appeal was dismissed.

The Supreme Court held that where the law applicable to the arbitration agreement was not specified, a choice of governing law for the contract would generally apply to the arbitration agreement, and that a choice of a different country as the seat of the arbitration would not be sufficient in itself to negate such an inference

In reaching this conclusion, the Court rejected one of Claimant's key arguments, i.e. that the regime chosen by the parties did not qualify as a ‘law’ for the purposes of Article V(1)(a) of the New York Convention and Arbitration Act 1996, s 103(2)(b), since the parties had also agreed that the arbitrators would apply the UNIDROIT Principles. The Supreme Court affirmed that (i) this argument would mean that parties who wanted their arbitration agreement to be governed by the law of a designated country supplemented by additional principles would be denied their choice both of that country’s law and of the additional principles, a result which was illogical and inconsistent with the principle of party autonomy; (ii) the present case concerned the law governing the arbitration agreement, whereas the UNIDROIT Principles were to be applied by the arbitrators to the merits of the dispute; and (iii) the parties’ wish to supplement the national law to which they subjected their agreement with further non-binding principles provides no reason to ignore or nullify the parties’ clear choice of a governing “law”.

Therefore the Supreme Court concluded that the Court of Appeal was both entitled and correct in stating that, as a matter of English law, Respondent did not become party to the arbitration agreement and in refusing recognition and enforcement of the award, as the risk of contradictory judgments was unavoidable in circumstances where the English and French courts would be applying their own respective laws to the question of the existence and validity of the arbitration agreement.

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