Food fight – French and English courts clash over correct law to apply to arbitration agreement

In 2011, Kabab-Ji SAL (Kabab-Ji), a Lebanese company specialising in food distribution, entered into a franchise agreement with a Kuwaiti company, Al-Homaizi Foodstuff (Al-Homaizi), which became its franchisee. Following All-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 arbitral 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, the 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 that 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 had indeed become a party to the arbitration clause contained within the franchise agreement and was liable under English law for damages caused.

Both parties then filed court proceedings in separate jurisdictions. Kabab-Ji tried to enforce the award before the English courts, whilst 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 view of the English courts, by nominating a governing law for the contract, placing the arbitration agreement within the contract, and not providing otherwise, the parties had (at least as a matter of construction of that particular contract) expressly selected the governing law of the contract to apply to the arbitration agreement.

The French rulings

Kout meanwhile had initiated proceedings before the French courts. It first tried to get the award annulled before the Paris Court of Appeals, on the ground that English law should have been applied to the arbitration clause, being the law selected to govern the contract.

The Paris Court of Appeals (in line with previous 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 law was the governing law of the underlying contract was insufficient to establish the parties' "common will" to have English law govern the arbitration agreement.

In its September 2022 decision, the Cour de Cassation has now confirmed this ruling, holding that the Paris Court of Appeals properly upheld the award by deeming the elected seat of the arbitration should determine the governing law of the arbitration agreement. The decision therefore reaffirms that, under French law, the arbitration agreement is autonomous from the contract and [(absent express provision)] is judged according to the law of the seat, in this case, French law.

Analysis

Commercial contracts containing an arbitration agreement often include a governing law clause which does not specifically stipulate the governing law of the arbitration agreement. For example, "This Deed shall be governed by and take effect in accordance with English law". The arbitration agreement is often silent as to its governing law.

In such instances, disputes are unlikely to arise regarding the governing law of the arbitration agreement if the legal seat of arbitration matches the governing law of the contract (for example, London seat and English governing law), in which case it will be clear that the governing law of the arbitration agreement is English law.

But where there is a difference between the seat of arbitration and the governing law of the contract (for example, Paris seat, English governing law), there may be scope for disputes regarding the governing law of the arbitration agreement.

This is due, in part, to the doctrine of "separability" under which an arbitration agreement is regarded as separable from the contract in which it is contained in order that it may survive the recission or termination of that contract.

In the view of the English courts, the separable nature of an arbitration agreement does not mean it is separated from the rest of the contract when it comes to construing that contract's governing law provisions (if any). The English courts' decision in Kabab-Ji chimes with the decision of the UK Supreme Court in Enka Insaat Ve Sanayi AS v OOO Insurance Company Chubb [2020] UKSC 38.

Enka Insaat confirmed the view that where there is no express choice of law governing the contract, a choice of the seat of the arbitration does not in itself justify an inference that the arbitration agreement is intended to be governed by the law of the seat.

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, then going forward they should do so explicitly. . If they do this, then notwithstanding the differences between legal systems, their decision is likely to be respected and applied by all relevant courts.

Authored by Thomas Kendra, Ben Hornan, Timothy Hill, and Nigel Sharman.