THE AUTHOR:
Nazifa Chowdhury , Associate and Solicitor-Advocate at Jenner & Block London LLP
Overview
The courts of England & Wales have historically demonstrated a pro-arbitration and pro-enforcement stance. That said, there are limited and exclusive grounds on which recognition and enforcement of an award may be refused, as the courts will not simply rubber stamp awards. These grounds are set out in Article V of the New York Convention on the recognition and enforcement of foreign arbitral awards (the “NY Convention”) and are replicated in section 103 of the English Arbitration Act (the “Act”).
In Kabab-Ji v Kout Food Group [2021], the Supreme Court had to consider an appeal by an award debtor on the ground that an arbitration agreement was not valid under the law to which the parties subjected it, pursuant to section 103(2)(b) of the Act. This raised the interesting question of what law governs an arbitration agreement in an enforcement context when the parties’ arbitration agreement does not expressly provide for a governing law. The case also considered whether it is appropriate for the English courts to deal with objections to recognition and enforcement of an arbitral award on a summary judgment basis.
Background
The underlying dispute concerned a Franchise Development Agreement (“FDA”), which was entered into by the claimant (“Kabab-Ji”) and Al Homaizi Foodstuff Company (“Al Homaizi”). Al Homaizi subsequently became a subsidiary of a holding company, Kout Food Group (“KFG”). A dispute arose under the FDA and its related contracts, following which Kabab-Ji referred the matter to ICC arbitration seated in Paris in accordance with Article 14.5 of the FDA. Crucially, Kabab-Ji commenced arbitration against KFG, rather than Al Homaizi.
The FDA was expressly governed by English law, but no governing law was specified in the arbitration agreement contained within the FDA. It also contained “No Oral Modification” provisions, whereby amendments and/or additions to the FDA could not take place without the written consent/waiver of the original parties to the FDA.
Although KFG argued that it was not a party to the FDA and could not be bound by any arbitral award, it took part in the ICC proceedings under protest. The jurisdictional issue before the tribunal was whether KFG had become party to the FDA and the arbitration agreement contained therein by virtue of its conduct. This raised the issue of the correct governing law of the arbitration agreement. The tribunal, comprising two French-qualified lawyers and one English-qualified lawyer, unanimously decided that (i) French law applied to the issue of whether KFG was in fact bound by the arbitration agreement in the FDA, but that (ii) the issue of whether KFG was bound by the substantive obligations in the FDA, was governed by English law.
First, having applied French law, the tribunal held that KFG was indeed bound by the terms of the arbitration agreement in the FDA. Second, applying English law, a majority (being the two French-qualified arbitrators) held that KFG was also bound by the substantive obligations of the FDA by way of novation, given its conduct. The third arbitrator, an English-qualified lawyer, dissented: English contract law principles precluded KFG from becoming an additional party to the FDA, given the FDA’s No Oral Modification provisions.
The tribunal found in favour of Kabab-Ji on the merits of the case and awarded it USD 6.7 million for unpaid licence fees and damages under the FDA. KFG thereafter applied to annul the award in the Paris Court of Appeal. In its annulment application, KFG emphasised that it was not a party to the FDA or the arbitration agreement. Therefore, the tribunal had erred in assuming jurisdiction over it in a dispute concerning the FDA. That application was dismissed by the Paris Court of Appeal on 23 June 2020 and is currently under appeal at the Court of Cassation in France.
English Proceedings
In the interim, Kabab-Ji applied to enforce the tribunal’s award in England. KFG applied under section 103(2) of the Act for an order setting aside the enforcement of the award on the basis that it never became a party to the arbitration agreement in the FDA. Following a preliminary issues hearing, the High Court held that English law applied to both the FDA and the arbitration agreement in the FDA: the choice of English law as the governing law of the FDA (Article 15) also constituted the choice of law for the arbitration agreement. Applying English law, KFG did not become a party to the FDA or the arbitration agreement, because the FDA’s No Oral Modification clauses prevented a novation of obligations from Al Homaizi to KFG taking place.
The decision was appealed in the Court of Appeal, which unanimously held that the governing law clause of the FDA made it clear that the express choice of law governing both the terms of the FDA and the arbitration agreement, was English law. Nothing in the arbitration agreement suggested that it ought to be considered separately from the rest of the terms of the FDA.
Furthermore, in applying English contract law principles to the question of whether KFG had become an additional party to the FDA by novation, it was held that the No Oral Modification provisions of the FDA prevented KFG from doing so. The Entire Agreement clause of the FDA (Article 24 – and an example of a No Oral Modification provision) clearly stipulated that the terms of the FDA could not be varied without the written consent/waiver of the originally contracting parties.
Supreme Court’s Decision
Kabab-Ji appealed the Court of Appeal’s decision in the Supreme Court. In another unanimous decision, the Supreme Court upheld the decision of the lower English courts, having had the benefit of its seminal judgement in Enka v Chubb [2020] – which set out the approach for determining the applicable law of arbitration agreements. Although, as the Court noted here, it had to apply the conflict of laws rules in Article V(1)(a) of the NY Convention (Section 103(2)(b) of the Act) and not the English common law rules, as it had done in Enka.
The first and primary conflict of laws rule under Article V(1)(a) of the NY Convention is that the validity of an arbitration agreement is governed by “the law to which the parties have subjected it” (i.e., the law chosen by the parties). Having concluded that there was no clear international consensus among national courts on the approach to determining the applicable law of an arbitration agreement in the absence of an express choice by the parties, the Supreme Court stated that it must form its own view based on first principles. In doing so, the Supreme Court returned to its decision in Enka, and confirmed that a general choice of law to govern a contract containing an arbitration clause should normally be a sufficient “indication” of the law to which the parties had chosen to subject the arbitration agreement. It also held that the principles established in Enka apply with equal force where the question of validity arises after an award has been made, during enforcement proceedings. Accordingly, the Supreme Court held that the arbitration agreement in the FDA was governed by English law, because the governing law clause of the FDA provided for English law.
As to whether KFG had assumed Al Homaizi’s substantive obligations under the FDA, the Supreme Court upheld the Court of Appeal’s finding that Kabab-Ji had failed to establish a sufficiently arguable case given the presence of the No Oral Modification clauses. In doing so, the Supreme Court reiterated (a) the effectiveness of No Oral Modification clauses, and (b) the doctrine of estoppel established in MWB v Rock Advertising [2018] UKSC 24, whereby estoppel must include (i) some words or conduct unequivocally representing that a variation is valid notwithstanding its informality, and (ii) something more than an informal promise.
Finally, the Supreme Court held that it is for the English court to decide its own procedure when determining an application to resist enforcement of an arbitration award. Whether or not a summary procedure is appropriate will depend on the facts of the case, but in many cases (including this one), a summary approach will be suitable because the evidence will already be clear from the arbitration proceedings and the party seeking to enforce will want a speedy decision.
Key Takeaways
The Supreme Court’s decision serves as a useful reminder that the grounds for resisting enforcement of arbitration awards under English law have teeth and that decisions of tribunals on the validity of arbitration agreements will not necessarily be upheld by the enforcement courts. Perhaps unsurprisingly, the Supreme Court reinforced the long-standing tradition of the English courts of holding parties to the strict terms of their mutual bargain (in this case, No Oral Modifications clauses).
The extension of Enka principles to enforcement proceedings provides welcome clarity to questions of validity of governing law in arbitration agreements. Moreover, award creditors seeking to enforce their awards swiftly in England will welcome the Court’s inclination to take a summary judgment approach in enforcement proceedings.
ABOUT THE AUTHOR
Nazifa Chowdhury is an Associate and Solicitor-Advocate at Jenner & Block London LLP, practising in the International Arbitration and Complex Commercial Litigation groups. You can contact Nazifa at nchowdhury@jenner.com.
