UK Supreme Court provides further guidance on laws applicable to arbitration agreements

The Supreme Court of the United Kingdom handed down judgment on 27 October 2021 in Kabab-Ji SAL (Lebanon) v Kout Food Group (Kuwait)[1] providing further guidance on the identification of the law applicable to arbitration agreements.  

The decision follows Enka Insaat Ve Sanayi AS v OOO “Insurance Company Chubb”[2]  where the Court held that:

• Where the parties have not chosen a governing law for their arbitration clause (either in express terms or impliedly), any express governing law of the contract will apply; however,
  
  
• Where there is no express governing law, the arbitration agreement will be governed by the law most closely connected with the arbitration agreement (usually the seat of the arbitration).

In this most recent case, the question of the governing law of an arbitration agreement arose in the context of an application by an award creditor to the English courts to enforce the arbitral award. Lord Hamblen and Lord Leggatt (with whom Lord Hodge, Lord Lloyd-Jones and Lord Sales agreed), observed that the task for the Court was:

_{“… [first] to identify which system of law the English court must apply to decide whether there is an enforceable arbitration agreement. That is the first issue in this appeal. If the courts below were correct to decide that English law should be applied, two further issues arise. One is whether the Court of Appeal was right to hold that, as a matter of English law, the defendant never became a party to the arbitration agreement. The other is whether, procedurally, the Court of Appeal was right to decide that question and give summary judgment refusing enforcement of the award.”}

The arbitration agreement under which the award was published was contained in a suite of agreements referred to by the Court as the Franchise Agreements. These agreements were expressly governed by English law. The respondent was the holding company of the entity which was a party to the Franchise Agreements (Al Homaizi Foodstuff Company); it came into existence after the Franchise Agreements had been executed as part of a corporate restructure.  

Disputes under the Franchise Agreements were referred to arbitration by the applicant with the respondent in this proceeding the only named respondent in the arbitration.

 The Court observed that:

_{“The arbitral tribunal unanimously considered that it must apply French law, as the law of the seat of the arbitration, to determine whether [the respondent] was bound by the arbitration agreements, but English law to decide whether [the respondent] had acquired substantive rights and obligations under the Franchise Agreements. A majority of the Tribunal … held that … [the respondent] was a party to the arbitration agreements; … [and that] there had been a ‘novation by addition’ (rather than substitution) whereby [the respondent] became an additional party to the Franchise Agreements.”}

The judgment notes that an award was made in favour of the applicant in this proceeding for license fees, damages and legal costs. It also notes that one tribunal member dissented.

The English proceeding was not the only proceeding commenced following publication of the award. The respondent sought to annul the award in the French courts, on grounds including that the tribunal lacked jurisdiction over the respondent because it was not a party to the relevant arbitration agreements. The Supreme Court judgment records that the respondent’s application in the French courts was dismissed, but that an appeal had been lodged with the Court of Cassation. A consequence was that at the time of the heading of the English application, the award had not been annulled.

The Court’s analysis commenced with observations on the Convention on the Recognition and Enforcement of Foreign Arbitral Awards (New York Convention) (to which both England and France are contracting states).   Uncontroversially, the Court observed that “[t]he Convention forms the bedrock on which modern international commercial arbitration rests”.

The focus of the Court was on Article V of the New York Convention which contains the grounds upon which recognition and enforcement of a foreign arbitral award may be refused, in particular, Article V(1)(a) which provides that:

_{“The parties to the [arbitration agreement] were, under the law applicable to them, under some incapacity, or the said agreement is not valid under the law to which the parties have subjected it or, failing any indication thereon, under the law of the country where the award was made.”}

The Court further observed that, under English law, having regard to the “principles and purposes underlying the Convention, a major object of which is the achievement of uniform international standards”, any residual discretion (outside of the New York Convention) to recognise or enforce an award was “correspondingly narrow” and “it is not suggested that it could be invoked in the present case”.

The trial judge found (in judgment handed down on 29 March 2019), that:

• the law governing the validity of the arbitration agreement governed the question of whether the respondent had become a party to the arbitration agreement;
  
  
• the law governing the validity of the arbitration agreement was English law; and
  
  
• at English law, the respondent did not become a party to the Franchise Agreements or the arbitration agreement.

In relation to the third point, the trial judge adjourned this issue to further hearing, noting that “there was something approximating to a consent in writing by the parties” to the addition of the respondent as a party to the Franchise Agreements and the arbitration agreement.

Both the applicant and the respondent appealed to the Court of Appeal, which in judgment handed down on 20 January 2020, determined that:

• the terms of the Franchise Agreements provided for the express choice of English law to govern the arbitration agreement;
  
  
• as a matter of English law, in the absence of written consent (required by the Franchise Agreements) or any matter giving rise to an estoppel, the respondent could not have become a party to the Franchise Agreements or the arbitration agreement; and
  
  
• the trial judge should not have granted an adjournment and should have made a final determination that the respondent was not a party to any of the agreements so that an award was not enforceable against the respondent.

In summary, the Court of Appeal upheld the respondent’s appeal and refused recognition and enforcement.

Parties to the arbitration agreement

Lord Hamblen and Lord Leggatt noted that it was common ground in this appeal that the question of whether the respondent was a party to the Franchise Agreements was to be determined by applying Article V(1)(a) of the New York Convention (as enacted into English law).  

Their Lordships referred to, and relied on, the Supreme Court decision in Enka (as discussed above). They noted, however, that the conclusions in Enka were not directly applicable because in this case the rules to be applied were those in s 103(2)(b) of the English Arbitration Act 1996 (enacting terms of the New York Convention), as opposed to English common law rules.  

The Court acknowledged the aim of the New York Convention was to “[establish] a single, uniform set of rules governing the recognition and enforcement of international arbitration agreements and awards” adding, that as a consequence, the rules for determining whether there is a valid arbitration agreement “should be applied by courts of the contracting states in a uniform way”.  

In this case, however, there was no consistent approach across contracting jurisdictions as to whether a choice of law for a contract as a whole was sufficient indication of the law chosen by the parties for the arbitration agreement.

After consideration of the parties’ submissions and reference to commentary pre-dating the final New York Convention, Lord Hamblen and Lord Leggatt concluded that:

_{“Once it is accepted that an express agreement as to the law which is to govern the arbitration agreement is not required and that any form of agreement will suffice, it seems difficult to resist the conclusion that a general choice of law clause in a written contract containing an arbitration clause will normally be a sufficient ‘indication’ of the law to which the parties subjected the arbitration agreement. Furthermore, the considerations of principle which led us in Enka to reach the conclusions [in that case] apply with equal force where the question of validity arises, as it does in this case, after an award has been made … it would be illogical if the law governing the validity of the arbitration agreement were to differ depending on whether the question is raised before or after an award has been made.”}

Applying these principles, their Lordships, having regard to the express choice of English law in the Franchise Agreements, determined that the governing law of the arbitration agreement was also English law and that, consequentially, the question of whether the respondent was a party to the arbitration agreement must be determined under English law.  

The judgment includes a discussion of two counter arguments submitted by the applicant. The first concerned the specific interpretation of the Franchise Agreement, where the applicant sought to incorporate the UNIDROIT Principles of Commercial Contracts (UNIDROIT Principles); and the second was based on the validation principle.[3] The Court was unpersuaded by these additional arguments.

The Court then moved to analyse, in the case before it and applying English law, whether the respondent might be found to have become a party to the arbitration agreement.

In summary, the Court was “satisfied that the Court of Appeal was both entitled and correct to conclude that as a matter of English law there was no real prospect that a court might find at a further hearing that [the respondent] became a party to the arbitration agreement in the Franchise Agreements”.  

In reaching this conclusion, the Court had regard to arguments advanced by the claimant before the arbitral tribunal regarding assignment and novation under the relevant agreements and submissions based on the UNIDROIT Principles.

The question of summary judgment

The third issue before the Supreme Court concerned the decision of the Court of Appeal to give summary judgment refusing recognition and enforcement of the award.

The claimant’s position, based on English authority, was that any decision of this kind required a full evidential hearing and trial. Lord Hamblen and Lord Leggatt rejected this submission, observing that “[w]hether or not a summary procedure is suitable in any particular case must depend on the facts and circumstances of that case. … It cannot be appropriate to mandate in advance a procedure for all cases, as the claimant suggests”.  

The Court also rejected the claimant’s argument that it was procedurally unfair for the Court of Appeal to dismiss the application to enforce the award on a summary basis in circumstances where the hearing before the judge had been for the trial of preliminary issues, as the claimant was unable to show that the opportunity to adduce further evidence could make any realistic difference to the outcome.

Adjournment

The Supreme Court also considered the claimant’s submission that the Court of Appeal was wrong to overturn the trial judge’s discretionary decision to adjourn the further hearing of the claimant’s application pending the outcome of the related French proceedings. It did so whilst at the same time noting that the Paris Court of Appeal had since made its decision.  

For the purpose of this article, it is useful to note only the following observations of Lord Hamblen and Lord Leggatt on this issue. As to the question of whether the risk of inconsistent judgments (in the English and French courts) would provide a ground for an adjournment, Lord Hamblen and Lord Leggatt said (having noted the divergence in principles to be applied in the different jurisdictions) that:

_{“… the risk of contradictory judgments cannot be avoided and so that provides no reason for an adjournment. Nor would any French court decision be relevant to the determination of the questions which the English Court had to decide. … This alone provided sufficient reason for the Court of Appeal to reconsider and overturn the judge’s decision.”}  

Their Lordships noted that the only circumstance in which a decision of the French Court might have assisted is if it had decided to annul the award as that would have provided a separate ground for refusing enforcement.  

Concluding comments

The Supreme Court judgment provides full reasoning and clear guidance on the matters which were before it in this appeal.

In addition to clarifying the position under English law (building on, and also distinguishing element of, the judgment in Enka), the Court’s clear emphasis on the importance of interpreting the provisions of the New York Convention (as enacted into English law) in a manner which is consistent with international practice to achieve ‘uniform standards’, is essential to preserve the ongoing role of arbitration in the resolution of cross border disputes.