Kabab-Ji SAL v Kout Food Group [2021] UKSC 48: Supreme Court decision on action to enforce Paris arbitration award

Background

A Lebanese entity, Kabab-Ji SAL (claimant / appellant) entered into a franchise development agreement dated 16 July 2001 (“FDA”) with a Kuwaiti company, Al Homaizi Food Stuffs (“Al Homaizi”), under which Al Homaizi was licenced to use Kabab-Ji SAL’s restaurant concept in Kuwait for a 10-year period. Under the FDA the parties entered into ten franchise outlet agreements for the operating of ten outlets in Kuwait. The Al Homaizi Group was restructured in 2005 with Kout Food Group (“KFG”) being formed as a holding company and Al Homaizi Group becoming a subsidiary of KFG. The FDA and the franchise outlet agreements (together, the “Franchise Agreements”) were each expressly governed by English law.

Paris arbitration award

The claimant commenced ICC arbitration in Paris against KFG in respect of a dispute which had arisen under the Franchise Agreements. KFG participated in the arbitration but disputed the jurisdiction of the arbitral tribunal on the basis that it was not a party to the Franchise Agreements or to the arbitration agreements in the Franchise Agreements.

The three-person arbitral tribunal found unanimously that they had to apply the law of the seat - French law - to determine the issue as to whether KFG was bound by the arbitration agreements and apply English law to the question whether KFG had acquired substantive rights under the English law governed Franchise Agreements.  The majority decision of the tribunal was that having applied French law, KFG was a party to the arbitration agreements. It further decided that as a matter of English law KFG had become an additional party to the Franchise Agreements by virtue of a ‘novation by addition’. The tribunal went on to find KFG in breach of the Franchise Agreements and awarded damages against it of US$6.7m plus interest and costs. 

Appeals in France and enforcement action in England

KFG sought to have the award annulled by the French courts objecting to the jurisdiction of the tribunal, but on 23 June 2020, the Paris Court of Appeal dismissed KFG’s action. KFG appealed this decision to the Cour de Cassation. At the same time, the claimant brought proceedings before the English courts for the enforcement of the arbitral award.

High Court decision on enforcement

The claimant sought to enforce the arbitral award under the Arbitration Act 1996 which gives effect to the 1958 UN convention on the recognition and enforcement of arbitral awards and, in particular, section 101 of the 1996 Act which provides:

“(1) A New York Convention award shall be recognised as binding on the persons as between whom it was made, and may accordingly be relied on by those persons by way of defence, set-off or otherwise in any legal proceedings in England and Wales or Northern Ireland.

(2) A New York Convention award, may, by leave of the court, be enforced in the same manner as a judgment or order of the court to the same effect.  …

(3) Where leave is so given, judgment may be entered in terms of the award.”

KFG sought to resist the action under section 103(2)(b) of the 1996 Act which provides:

“(2)  Recognition or enforcement of the award may be refused if the person against whom it is invoked proves– …

(b)  that the arbitration agreement was not valid under the law to which the parties subjected it or, failing any indication thereon, under the law of the country where the award was made;”

On 29 March 2019 the High Court concluded that: (1) the law governing the validity of the arbitration agreement governs the question of whether KFG became a party to the arbitration agreement; (2) the law governing the validity of the arbitration agreement is English law; (3) under English law, KFG did not become a party to the FDA or the arbitration of the FDA (although the Judge did not finally decide this third question). The Judge also adjourned any further hearing until the decision had been given by the Court of Appeal in Paris on the annulment application.

The Court of Appeal’s decision

The Court of Appeal dismissed the claimant’s appeal.  In its decision given on 20 January 2020, it held that: (1) the FDA provided for the express choice of English law to govern the arbitration agreement in clause 14 of the FDA; (2) under English law, in the absence of written consent as required under the terms of the FDA or anything capable of giving rise to an estoppel, KFG could not have become a party to the FDA or arbitration agreement; and (3) the judge should not have adjourned the matter on account of the Paris appeal and he should have made a final determination that KFG was not a party to the FDA or arbitration agreement.

The Court of Appeal gave summary judgment refusing the recognition and enforcement of the arbitral award.  The claimant was given permission to appeal to the Supreme Court.

Supreme Court appeal - first issue: the law governing the arbitration agreement

On the authority of Dardana Ltd v Yukos Oil Co [2002] EWCA Civ 543, the parties accepted that the question as to whether KFG became a party to the arbitration agreement was to be determined by applying 103(2)(b) of the 1996 Act (which gave effect to Article V(1)(a) of the 1958 convention).

The parties also accepted the principles that the validity of the arbitration agreement is governed by the law to which the parties subjected it and that in the event of a dispute as to the existence of such an agreement, the court is to decide the issue by applying the law which would govern the agreement if it existed or was valid.    

The Supreme Court had given the view in Enka Insaat Ve Sanayi AS v OOO "Insurance Company Chubb" [2020] USKC 38  that a general choice of law to govern a contract containing an arbitration clause should normally be sufficient to satisfy the first rule in article V(1)(a) of the 1958 convention (and hence section 103(2)(b) of the 1996 Act: ‘the law to which the parties subjected it’). The Court concluded that that “indication” in the Convention/Act meant something less than an express agreement and that “it seems difficult to resist the conclusion that a general choice of law clause in a written contract containing an arbitration clause will normally be a sufficient “indication” of the law to which the parties subjected the arbitration agreement.”

The Franchise Agreements all contained express provisions that they were governed by English law (clause 15) and that disputes were to be referred to arbitration in Paris under the ICC Rules (clause 14).  The Supreme Court found that these provisions were clear and that since the agreements were expressly governed by English law, all clauses in the agreements were governed by English law including the arbitration agreement in clause 14.  English law was therefore the law to be applied to determine whether KFG had become a party to the arbitration agreement in the contracts.

Second issue: reasonable prospect a court might find KFG became a party to the arbitration agreement?

The claimant submitted that KFG became a party to the arbitration agreement in the FDA by becoming a party to the FDA itself and therefore the arbitration agreement within it.  It did not contend that it became a party to the arbitration agreement in any other way. 

However, the FDA contained ‘no oral modification clauses’ which required any amendments to be in writing signed by the parties.  The Court of Appeal had found that these clauses were effective and consequently the KFG did not become a party to the FDA or to the arbitration agreement and that there was no reasonable prospect that the claimant could avoid the effect of the clauses by virtue of estoppel or any other argument. 

The Supreme Court agreed with the Court of Appeal. The Supreme Court had held this type of clause to be effective in MWB Business Exchange Centres Ltd v Rock Advertising Ltd [2018] UKSC 24 and the Supreme Court was content that the clauses were effective in the present case.

The Supreme Court rejected additional arguments from the claimant. In particular, the claimant had argued that (as had been found by the arbitral tribunal) that there had been a ‘novation by addition’ whereby the FDA had been novated through the parties’ conduct and KFG’s performance of obligations under the FDA and FOAs alongside Al Homaizi.  The Supreme Court held that this argument was also caught by the no oral modification clauses and since the formalities under those clauses had not been fulfilled the claimant’s argument failed.  The Supreme Court concluded that the Court of Appeal was correct to find that as a matter of English law there was a no real prospect that a court would find at a further hearing that KFG had become a party to the FDA and the arbitration agreement. 

Third issue: summary judgment justified procedurally?

Section 103(2) of the 1996 Act requires the party against whom enforcement is sought to prove one of the matters set out in that subsection, in this case, that there was no valid arbitration agreement. The Supreme Court was satisfied that the English court is entitled to determine this question as to validity itself and that it was for the English court to decide how it was to reach its decision including by reference to the CPR.  It was satisfied that there was no reason in principle why a determination under section 103 of the 1996 Act should not be made on a summary basis.