An express choice hidden in plain sight…

In Kabab-Ji SAL (Lebanon) v Kout Food Group (Kuwait) [2020] EWCA Civ 6, the English Court of Appeal was faced with a dispute which turned on whether a company had become party to a contract and the arbitration agreement contained therein.

In resolving this, it needed to assess the applicable law to the arbitration agreement and, in particular, whether the parties had expressed a choice. The case illustrates that, where the parties have not otherwise explicitly addressed the issue, that might not quite be the end of the line for such an enquiry…

Background

A franchise development agreement (the “Agreement”) was concluded between the appellant (Kabab) and a company, AHFC. AHFC later became a subsidiary of the respondent (KFG).

The Agreement was governed by English law and contained an arbitration clause (ICC Rules, Paris seat). Disputes arose and Kabab commenced an arbitration, but against KFG. The tribunal determined that French law governed the arbitration clause, that KFG was a party to it and that it had, by earlier conduct, acquired the substantive rights and obligations of KHFC to the Agreement. An award against KFG was made for breach of the Agreement.

Kabab attempted to enforce the award in England. KFG resisted this on the basis of Article V(1)(a) New York Convention; in particular 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.”

Issues for the Court of Appeal

As this was not a case where the law governing the Agreement, and that of the seat/place of arbitration “matched” (in which case there could, on any view, have been only one law to be applied) the Court of Appeal was asked to determine whether English law governed the arbitration agreement (as being the law to which the parties subjected it). If so, there was a basis (discussed below) on which KFG could resist enforcement.

This required the Court to question whether such a choice had been made either expressly or impliedly (the Court accepted that, for the purposes of the above article, an implied choice could qualify [11]). As to an implied choice there followed a significant amount of debate, based on past cases, as to whether this should result in the application of the law governing the Agreement, or that of the seat.

The Court, however, cut through that by accepting KFG’s principal submission which was that the parties had made an express choice.

This might, at first blush, seem surprising. There was, after all, no explicit wording (in the arbitration agreement or otherwise) which clearly designated such a choice.

Instead, the Court found that the intention to make such a choice had been expressed differently. In particular it relied on the reference to “Agreement” in the main governing law clause carrying a wide definition. Also there was wording in the arbitration clause specifically directing the arbitrators to apply “…the provisions contained in the Agreement” which the Court construed as an instruction to apply that aforementioned choice to disputes concerning their jurisdiction [62-64].

In explaining this approach, the Court remarked the concept of separability of an arbitration agreement was no bar to it. It was a principle which preserved an arbitration agreement from unenforceability of the main contact, not insulation from it for all purposes. Thus if, as here, there was nothing in the wording of the arbitration agreement suggesting that was to be construed separately, then there was nothing preventing it from being construed together with the rest. [66-67]

That being so, English law governed the arbitration agreement. That, in turn, led to KFG succeeding in resisting enforcement. In that respect, KFG relied on a “no-oral variation” clause in the Agreement to argue that its earlier conduct was insufficient to render it a party to the Agreement and the arbitration agreement contained therein. The Court of Appeal, applying recent UK Supreme Court authority on such clauses to the facts of the case, agreed.

Comment

Disputes concerning the applicable law of an arbitration agreement arise most commonly where the law chosen to govern a contract and that of the chosen seat of arbitration do not “match.” It is well-known that, in such cases, disputes can be minimised at the contracting stage by giving due consideration to including a clear express choice over the matter.

For disputes lawyers, however, there is a lesson which might be more easily overlooked. That is, in such cases, do not assume that an express choice does not exist simply because one has not, on first blush, been explicitly made (either by way of inclusion of a clause in the arbitration agreement itself or, as sometimes happens, explicit extension of the main governing law clause to the arbitration agreement) it may pay to look again closely elsewhere. Or, as a quote deployed by the Court put it: “express terms do not stipulate only what is absolutely and unambiguously explicit."

(And finally, a very technical postscript: the acceptance by the Court of Appeal that an implied choice is relevant in the context of Article V(1)(a) NYC means, in England, that in cases where that article is invoked and there is room for doubt as to the law to be applied, then, in the absence of an express choice, the next step will be to consider whether an implied choice has been made (of the law governing the contract or that of the seat). It will not be an application of the law of the seat on the basis of the “failing any indication thereon” limb).

Click here for the judgment.