It has been said that between Paris and London, the best thing is the Channel. And, undoubtedly, the entente cordiale is currently experiencing some "turbulence": diplomatic tensions have arisen recently in relation to such diverse matters as sausages, fishing rights and refugees. Little love appears to be lost between the two. And the law, it seems, is not entirely immune from the Franco-British tradition of a difference of opinion.
A recent decision of the UK Supreme Court has revealed a clash between the two nations' senior courts in relation to the law governing an arbitration agreement. The decision, which relates to a franchising development agreement (“FDA”), will be of interest to all businesses which operate across borders and favour arbitration to resolve their international disputes. It is a stark reminder of the issues that can arise where parties do not properly think about (and stipulate) the choice of law applicable to their arbitration agreement when agreeing the terms of a contract.
The tale begins back in 2001 when Al Homaizi Foodstuff Company ("AHFC"), a Kuwaiti operator of fast-food franchises, and Kabab-Ji SAL (“KJ”), a Lebanese company, entered into an FDA. Under the FDA, KJ and AHFC subsequently entered into a total of ten Franchise Outlet Agreements (“FOAs”) in respect of individual outlets opened in Kuwait. We will refer to the FDA and FOAs collectively as the “Franchise Agreements”. The Franchise Agreements all contained the same, typical, governing law clause, providing that the agreements "shall be governed by and construed in accordance with the laws of England" and an arbitration clause providing that disputes under the agreement would be settled by ICC arbitration seated in Paris, France. The arbitration clause made no express reference to the law governing the agreement to arbitrate.
Let us pause there for a moment to consider some general principles. Where an international commercial contract contains an agreement to resolve disputes by arbitration, at least three systems of national law are potentially applicable when a dispute occurs. They are:
• the law governing the substance of the dispute;
• the law governing the arbitration process; and
• the law governing the agreement to arbitrate.
The law governing the substance of the dispute is generally the law applicable to the contract from which the dispute has arisen (which in this case would be English law pursuant to the governing law clause quoted above). The law governing the arbitration process is generally the law of the “seat” of the arbitration, which is usually the place chosen for the arbitration in the arbitration agreement (so, French law, in terms of the Franchise Agreements). However, it will often be less clear what law applies to the agreement to arbitrate. Typically, the agreement to arbitrate consists of a specific clause in the contract and it is not uncommon that such a clause, as with that contained in the Franchise Agreements, will not make express reference to the law governing the agreement to arbitrate.
Let us return to the story. In 2005 the Al Homaizi Group underwent a corporate restructuring. A new holding company called Kout Food Group (“KFG”) was established and AHFC became a subsidiary of KFG. A dispute arose under the Franchise Agreements and, on 27 March 2015, KJ referred the matter to arbitration under the rules of the International Chamber of Commerce (“ICC”) in Paris. That arbitration was commenced against KFG alone, and not against AHFC. KFG took part in the arbitration under protest, maintaining that it was not a party to the Franchise Agreements or the arbitration agreements contained in them. In other words, KFG challenged the validity of the arbitration agreements as between KFG and KJ.
Before it could consider the merits of KJ's claim, the tribunal had to decide whether the arbitration agreements were valid. The first step in doing so was to identify which system of law must be applied in order to answer the question. Was it English law, as the governing law of the Franchise Agreements? Or was it French law, as the law governing the arbitration process according to where the arbitration was "seated"?
In an award dated 11 September 2017 (the “Award”), the tribunal concluded that French law governed the arbitration agreements and that, applying French law, KFG had become a party to the arbitration agreements. They went on to conclude that KFG was in breach of the Franchise Agreements and awarded unpaid licence fees, damages and legal costs (with interest on the sums awarded) against KFG. The principal amount of the Award was US$6,734,628.19.
Here's what happened next:
• 13 December 2017: KFG filed an annulment application in the French courts.
• 21 December 2017: KJ issued proceedings in the Commercial Court in London under section 101 of the Arbitration Act 1996 for enforcement of the Award as a judgment.
• 29 March 2019: the English Commercial Court found that the law governing the validity of the arbitration agreement is English law and that, applying English law, KFG never became a party to it. It therefore refused to grant enforcement of the Award and adjourned the proceedings pending the outcome of the French court proceedings.
• 20 January 2020: the English Court of Appeal affirmed that the applicable law is English law and that, applying English law, KFG never became a party to the arbitration agreement. It made an order refusing enforcement of the Award.
• 23 June 2020: the Paris Court of Appeal upheld the tribunal's Award, finding that the arbitration agreement was governed by French law and that KFG had become a party to it as a matter of French law.
• 27 October 2021: the UK Supreme Court upheld the English Court of Appeal's decision.
As will be apparent, the senior courts of the UK and France have come to directly opposing conclusions as to the governing law of the arbitration agreements, resulting in dramatically different consequences for each party depending on what side of the Channel one is on. Although the lack of consensus is unsatisfactory, it is worth noting that the question of whether the appropriate governing law of an arbitration agreement (which does not expressly refer to its governing law) should be that of the contract containing the agreement or that of the seat has been the subject of fierce debate and it is perhaps unsurprising that the answer to that question is one on which reasonable minds can readily differ. Indeed, it was only in October 2020 that the UK Supreme Court settled the correct approach to that question as a matter of English law in its landmark judgment in the case of Enka Insaat Ve Sanayi AS v OOO Insurance Company Chubb. KFG has lodged an appeal against the decision of the Paris Court of Appeal, so there may yet be judicial consensus on both sides of the Channel.
But we should not be surprised that two countries' senior courts could reach diametrically opposed answers to the same question: that is to be expected in a world where each country has its own legal system. What is notable, and is surely the lesson to be learned from this tale, is how easily the inconsistent outcomes in relation to the governing law of the arbitration agreement (and therefore who was party to the arbitration agreements) could have been avoided (along with much of the litigation in this case) had the arbitration agreements addressed these matters expressly rather than leaving the position ambiguous.
The safest course, to minimise the risk of uncertainty, will always be to expressly state the law governing the arbitration agreement when drafting the contract.
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