Law applicable to arbitration agreements: UK Supreme Court confirms law of the contract generally prevails
In the eagerly anticipated judgment of Kabab-ji v Kout,1 the English Supreme Court upheld the Court of Appeal's 2020 decision in the same matter (which you can read about here in our previous alert) that when English law is expressly chosen by the parties to govern a contract, English law will also usually govern the arbitration agreement contained in that contract.
In this case, the parties had chosen Paris as the seat of the arbitration, leading the claimant Kabab-Ji to argue that French law was the governing law of the arbitration agreement (a position which has now been rejected by the Supreme Court). Annulment proceedings in relation to the award are currently pending before the Cour de Cassation.
In this article, we summarise the UK Supreme Court's position, provide an update on the current status of proceedings in the French courts, and offer drafting guidance to minimise the risk of the issues in Kabab-ji arising.
The Supreme Court decision
The issue before the UK Supreme Court was whether the defendant/respondent, KFG, was a party to the arbitration agreements contained in distinct contracts relating to franchise agreements that the appellant, Kabab-Ji, had entered into with KFG’s subsidiary some years before (the Franchise Agreements).
In order to answer this question, the court had first to determine which law was applicable to the arbitration agreements: English law (as the law governing the Franchise Agreements), or French law, (as the law of the arbitration seat).
The UK Supreme Court concluded that: (i) when the law applicable to an arbitration agreement is not expressly specified, and (ii) there is an express choice of law for the underlying agreement, the law governing the underlying agreement will usually govern the arbitration agreement as well. In doing so, the court extended the test set out in Enka v Chubb2, to determine the law applicable to arbitration agreements before arbitral proceedings are commenced, to a scenario in which the award in the arbitration has been issued.
The Supreme Court held that where parties have made an express choice of governing law for their contract, the court will assume that the parties intended the same law to apply to arbitration agreements in that contract. The mere choice of a seat in a different jurisdiction will not, absent further indications, invalidate such assumption. However, the Supreme Court emphasised that the parties retain unfettered freedom to subject the arbitration agreement to a law different from that governing the contract more generally.
Proceedings in France
As noted above, the seat of the arbitration was Paris, and KFG accordingly brought annulment proceedings in France after the award (in which KFG was held to be in breach of the Franchise Agreements) was published. KFG argued that the arbitrators lacked jurisdiction on the basis that it was not properly a party to the arbitration agreement pursuant to which the award had been issued.
The French law position on the issue of the applicable law of an arbitration agreement is discussed in our alert on the Court of Appeal judgment, which was published before the Paris Cour d’Appel had issued its judgment.
On 23 June 2020, the Paris Cour d’Appel dismissed the action for annulment of the arbitration award brought by KFG. An appeal before the French Cour de Cassation has been filed by KFG, and is currently pending.
As things stand, therefore, the French courts consider KFG to be party to the arbitration agreement, while the Supreme Court in England reached the opposite conclusion.
Comment and drafting recommendations
As set out in our previous alert, parties (for good reason) often adopt standard institutional clauses in their contracts.
However, many of the standard arbitration clauses recommended by popular arbitral institutions suggest the inclusion of governing law provisions for the underlying contract - examples include clauses from the London Court of International Arbitration (LCIA), and from the Swedish Chamber of Commerce (SCC). Only one of the major arbitral institutions, the Hong Kong International Arbitration Centre (HKIAC), suggests a model arbitration clause which includes a choice of law for the arbitration agreement.3
As a result, arbitration agreements tend to lack an express governing law provision. Although Kabab-ji and Enka have clarified the English law position on this, in order to minimise the risk of complex and costly cross-border disputes concerning governing law (and jurisdiction), and/or inconsistent judgments between jurisdictions, it may be helpful for parties to take the following steps:
- Consider expressly identifying the governing law of the arbitration agreement, even if this approach is not mirrored in the standard clauses of the arbitral institution you have chosen to administer your arbitration;
- Ensure that, where the underlying contract is governed by an express choice of law, the respective provision is worded so as to apply to the entirety of the contractual terms (including the arbitration agreement);
- Where parties do not intend the arbitration agreement to be governed by the law generally applicable to the contract, the arbitration agreement should be carved out expressly from the choice-of-law provision; and
- Consider including express wording to align the law applicable to the arbitration agreement with the substantive law of the contract and the seat of the arbitration.
1 Kabab-Ji SAL (Lebanon) v Kout Food Group (Kuwait)  UKSC 48.
2 Enka Insaat Ve Sanayi AS v. OOO Insurance Company Chubb  UKSC 38.
3 The institutions included in the analysis are: Arbitration Institute of the Stockholm Chamber of Commerce (SCC); Hong Kong International Arbitration Centre (HKIAC); London Court of International Arbitration (LCIA); The International Court of Arbitration of the International Chamber of Commerce (ICC); and Singapore International Arbitration Centre (SIAC).