Facts
In 2011, Kabab-Ji Sal (Kabab-Ji), a Lebanese company specializing in food distribution, entered into a franchise agreement with a Kuwaiti company, Al-Homaizi Foodstuff (Al-Homaizi), which became its franchisee. Following Al-Homaizi’s restructuring, the Kout Food Group (Kout) became Al Homaizi’s parent company. The franchise contract between Kabab-Ji and Al-Homaizi stated that it was governed by English law and included an ICC arbitration clause with Paris as the arbitration seat.
In 2015, a dispute arose between Kabab-Ji and Al-Homaizi. Kabab-Ji commenced an ICC arbitration against Al-Homaizi’s parent company Kout, however, Al-Homaizi itself, signatory to the contract, was not initially mentioned in the arbitration. Kout objected to the tribunal’s jurisdiction, arguing it was not a signatory to the agreement containing the arbitration clause, and was not bound by the clause. Kabab-Ji argued for extension of the arbitration agreement to Kout on the basis Kout had carried out performance of the contract’s obligations over a significant length of time. The arbitral tribunal considered that French law, as the law of the seat, applied to the issue of whether Kout was bound by the arbitration agreement. The tribunal sided with Kabab-Ji, finding that under French law, Kout indeed became a party to the arbitration clause contained within the franchise agreement, and under English law as liable for damages caused.
Both parties then filed court proceedings in separate jurisdictions: Kabab-Ji tried to enforce the award before the English courts, while Kout tried to annul the award before the French Courts.
The English rulings
Successful in the arbitration proceeding, Kabab-Ji sought to enforce its award before the English Commercial Court. The English Court, however, reversed the arbitral tribunal’s findings and held that English law, as opposed to French law, governed the validity of the arbitration agreement. This decision was subsequently upheld by the English Court of Appeal in January 2020, and then again in October 2021 by the UK Supreme Court. In the English Courts’ view, by nominating a governing law for the contract and by placing the arbitration agreement within the contract, the parties had in essence selected the contract’s governing law to apply to the arbitration agreement.
The French rulings
Meanwhile, Kout initiated an opposite marathon before the French Courts. It first tried to get the award annulled before the Paris Court of Appeals, on grounds that English law should have been applied to the application of the arbitration clause as the law selected as governing law of the contract.
The Paris Court of Appeals (in line with past French jurisprudence) rejected Kout’s arguments and, in June 2020, upheld the award, recalling that under French law, the arbitration agreement was autonomous from the remainder of the contract, and the fact that English was governing law of the underlying contract was insufficient to establish the parties’ ‘common will’ to have English law govern the arbitration agreement.
The Cour de Cassation confirmed this ruling in September 2022, holding that the Paris Court of Appeals properly upheld the award by deeming the elected seat of the arbitration should determine the law applied to the arbitration agreement. The decision therefore reaffirms that, under French law, the arbitration agreement is autonomous from the contract and is judged according to the law of the seat – in this case, French law.
Observations
This is not the first time that the English and French Courts have differed when applying an agreement to arbitrate. This also occurred in the Dallah v Pakistan cases a decade or so ago when the two nations’ judiciaries gave contrasting views on whether Pakistan could be deemed a party to the relevant arbitration agreement. However, in those cases, they did not differ on the legal principles but rather the application of the facts to those principles.
In Kabab-Ji, the English courts applied the governing law that would apply to the merits of a dispute (English law), whereas the French courts respected the autonomy of the arbitration clause and the application of the law of the seat to questions of jurisdiction (French law). This latter approach is in line with the principles underlying the New York Convention that jurisdictional issues may be considered according to “the law of the country where the award is made”. As the extension of arbitration clauses is a particular area where the courts on opposite sides of the Channel have applied contrasting approaches, the outcome was therefore different - in England Kout was not bound by the agreement, whereas in France it was. The consequence in this situation is that the award, despite being upheld at its seat (France), is unenforceable in at least one foreign country (England).
Contrasting approaches between national courts provide potential uncertainty for the parties in a particular case. However, this is already part of the interplay between international arbitration and court proceedings related to awards. The New York Convention specifically allows for differing interpretations, referring to the application of national law on elements such as arbitrability and “the public policy of that country”. The English and French courts already differ on issues linked to arbitration, such as the recognition of awards set aside at the seat, with the memorable matter of Putrabali in 2007 leading to contrasting first and second awards being recognised in France and England respectively. The contrasts provide much room for thought and debate, but given the general respect for arbitration clauses and the arbitral process in both countries, the case which leads to contrasting results is nonetheless likely to remain exceptional.
What can certainly be said following the French court’s judgment is that if parties wish to apply a particular law to their arbitration agreement, rather than “the law of the country where the award is made” – which they may do if for example they wish for a more limited approach (under English law) or more open approach (under French law) – then going forward they should do so explicitly. If they do so, then notwithstanding the differences between the two legal systems their decision will be applied on both sides of the Channel.
Authored by Thomas Kendra, Ledea Sawadogo-Lewis, and Femi Williams.
