Once again, U.K. and French courts take opposite approaches to the extension of an arbitration agreement

20 January 2023
Jacques Bouyssou, Marie-Hélène Bartoli Vallet and Juan Diego Niño Vargas

Cass. 1st Civil Chamber, 28 September 2022, No. 20-20.260, Kabab-Ji v. Kout Food Group

Ten years after the Dallah v. Pakistan case, French and English courts once again rendered opposite decisions on the determination of the rules governing the application of an arbitration agreement to a non-signatory.

In 2021, the United Kingdom Supreme Court declined to recognize and enforce an award which extended the arbitration agreement to a non-signatory third party, on the ground that such an extension was not allowed under English law, the governing law of the contract.

By contrast, in a much-commented decision dated 28 September 2022, the Cour de cassation (French Supreme Civil Court) upheld the same award, considering that before French courts, the validity and effects of the arbitration agreement were not governed by English law but by French substantive rules (règles matérielles).

These opposite decisions illustrate a profound difference in the French and English conceptions of the autonomy of the arbitration agreement. More generally, it could be an incentive for practitioners anticipating enforcement in several jurisdictions, to specify in the contract which law is applicable to the validity and effects of the arbitration agreement

Background

In 2001, the Lebanese company Kabab-Ji SAL (hereafter, “Kabab-Ji”) entered into a ten-year franchise agreement with the Kuwaiti company Al-Homaizi Foodstuff Co. (hereafter, “AHFC”) for the exploitation of Kabab-Ji's restaurant brand in Kuwait. The franchise agreement and subsequent agreements contained governing law clauses providing for English law, and arbitration agreements providing for International Chamber of Commerce (ICC) arbitration seated in Paris.

In 2005, Kout Food Group (“Kout Food”) became the holding company of the AHFC group. Kout Food did not become a signatory party to the agreements but took part in its performance.

In 2011, the parties failed to renew their agreements which expired.

Arbitration proceedings seated in Paris

In 2015, Kabab-Ji commenced arbitration proceedings in Paris against Kout Food, claiming damages for breach of the agreements and unauthorized appropriation of know-how.

Kout Food challenged both the jurisdiction of the arbitral tribunal and the merits of Kabab-Ji claims, on the ground that it was not a signatory party to the agreements.

In 2017, by majority decision, the arbitral tribunal:

  • held that it had jurisdiction considering that under French law, the law of the seat of the arbitration, Kout Food was a party to the arbitration agreement;
  • found that Kout Food was bound by the agreements, held Kout Food liable for their breach and awarded Kabab-Ji USD 7 million in damages and legal costs.

Interestingly, the only English-qualified lawyer member of the arbitral tribunal issued a dissenting opinion, considering that the strict wording of the agreements precluded Koot Food from becoming a party to the agreements.

This award gave rise to parallel state court proceedings on both sides of the Channel: Kabab-Ji filed an application for an enforcement order before English courts and Kout Food filed an application to set aside the arbitral award before French courts.

U.K. courts refused to recognize and enforce the award

In 2018, Kabab-Ji obtained an ex parte order allowing the enforcement of the award in the United Kingdom. Kout Food appealed this order. On 27 October 2021, the United Kingdom Supreme Court ruled in favor of Kout Food.

The Supreme Court first considered which law applied to the issue at stake and decided that the answer would be found in the law governing the arbitration agreement rather than the law of the seat of arbitration. In the absence of a specific choice of law to govern the arbitration agreement, the Court considered that the parties’ choice of law to govern the contract (lex contractus) also applied to the arbitration agreement (see previously Enka v. Chubb case, schematically resorting to the law of the seat only if there is no other express choice of law). The parties had chosen English law to govern the agreements and therefore, the Court applied English law to determine the scope of the arbitration agreement.

Then, the Supreme Court held that Kout Food was not a party to the arbitration agreement under English law. The terms of the agreements provided that any modification had to be in writing, and the Court found that there was no evidence of such a written agreement of Kout Food.

The Supreme Court concluded that the arbitral tribunal lacked jurisdiction and refused recognition and enforcement to the arbitral award in the United Kingdom.

French courts dismissed the application to set aside the award

In parallel, in 2017, Kout Food filed an application to set aside the award before the Paris Court of Appeal, mainly for lack of jurisdiction of the arbitral tribunal. On 23 June 2020, the Court of Appeal upheld the arbitral tribunal’s jurisdiction and dismissed Kout Food’s application.

Firstly, the Court of Appeal did not seek to determine a law which would govern the arbitration agreement, but instead applied the well-established French substantive rule under which, as a result of the autonomy of the arbitration agreement from the contract containing it, the existence, validity and effects of the arbitration agreement are determined without any reference to a domestic law but exclusively by reference to the common will of the parties, subject to mandatory rules of French law and international public policy (see Dalico v. Khoms et El Mergeb case).

In the case at hand, the specific provisions contained in the agreements did not reflect, according to the Court, an express designation of English law to govern the arbitration agreement. Therefore, French substantive rules applied.

Secondly, the Court of Appeal recalled the French substantive rule allowing the extension of arbitration agreements to non-signatory parties which directly participated to the performance of the contract and the resulting disputes (see ABS case), “as long as their contractual situation and activities justify the presumption that they accepted the arbitration agreement, the existence and scope of which they were aware”.

The Court found that Kout Food had participated in the performance of the main agreement, notably by taking part in the exploitation of Kabab-Ji's restaurant brand in Kuwait and paying invoices addressed to AHFC, and concluded that Kout Food had become a party to the arbitration agreement.

Kout Food challenged this decision before the Cour de cassation.

On 28 September 2022, the Cour de cassation confirmed the Court of Appeal’s decision, endorsing the Cour of Appeal’s position and adding that if parties wish to apply a specific domestic law to the arbitration agreement, they must expressly provide for it.

Comments

The outcome of this matter before French and British courts calls for several comments.

Firstly, after these conflicting decisions on both sides of the Channel, Kabab-Ji is now confronted to a race to enforce the award around the world.

Secondly, both courts agree that parties can choose the law applicable to the arbitration agreement. The case at hand shows that this choice has consequences, notably when determining the parties bound by such agreement. However, in the absence of an express provision designing the law applicable to the validity and effects of the arbitration agreement, French courts apply their substantive rules while British courts principally apply the law chosen by the parties to govern the main contract, or failing such a choice, the law of the seat.

Finally, by contrast to the Dallah case where British courts applied French law but reached a decision opposite to that of the French courts, in this case, each court applied its own rules. It would be interesting to know what the position of the French courts would be if they were to apply English law to the existence and the validity of an arbitration agreement.

In any event, parties choosing arbitration in Paris, or anticipating enforcement of a future award in France, must be aware that French courts always review the arbitration tribunal’s jurisdiction under French substantive rules, unless otherwise expressly provided. In the latter case, the given provision would have to clearly designate the law governing “the arbitration agreement.” The designation of a law to govern the “arbitration” would not be considered specific enough to override the applicability of the substantive rules of French law (see Pharaon case).

Jacques Bouyssou, Partner, Marie-Hélène Bartoli Vallet, Counsel, and Juan Diego Niño-Vargas, Associate.