Deadlock has been reached between the Supreme Court of the UK and the Cour de Cassation in France in the dispute between Kabab-Ji SAL (Lebanon) (KJI) and Kout Food Group (Kuwait) (KFG). KJI as Licensor was party to a restaurant franchise agreement (FDA) with another Kuwaiti company, Al Homaizi Foodstuff Company, as Licensee, , and Al Homaizi subsequently became a subsidiary of KFG. KJI brought claims under the FDA not against Al Homaizi but against KFG, not a party to the FDA, relying upon the ICC arbitration clause in the FDA in order to do so. KFG challenged the validity of the arbitration claim on the basis hat it was not a party to the FDA, nor hence to the arbitration clause.
The relevant clauses of the FDA were:
“Article 3: Grant of rights
3.1 License… This grant is intended to be strictly personal in nature to the Licensee, and no rights hereunder whatsoever may be assigned or transferred by Licensee in whole or in part without the prior written approval of Licensor.
Article 14: Settlement of Disputes
…
14.2… any dispute, controversy or claim between License and Licensee, with respect to any issue, arising out of or relating to this Agreement, or the breach thereof… shall, failing amicable settlement, on request of Licensor or Licensee, be finally settled under the [ICC Rules…]
14.3. The arbitrator(s) shall apply the provisions contained in the Agreement. The arbitrator(s) shall also apply principles of law generally recognised in international transactions… Under no circumstances shall the arbitrator(s) apply any rule(s) that contradict(s) the strict wording of the Agreement.
…
14.5 The arbitration shall be conducted in the English language, in Paris, France.
…
Article 15: Governing Law.
This Agreement shall be governed by and construed in accordance with the laws of England.
…
Article 19: Rights not Transferable.
The parties hereto agree that all rights granted Licensee under this Agreement are personal in nature… Licensee’s interest under this Agreement is not transferable or assignable, under any circumstances whatsoever, voluntarily, by operation of law or otherwise, without the written consent of Licensor… ”
The arbitrators by a majority ( Klaus Reichert SC, the only English law arbitrator, dissenting), decided that the issue of whether or not the arbitrators had jurisdiction against KFG was governed by French law, and then applied French law (though purporting to address English law) to conclude that KFG had become a party to the FDA and was liable to pay to KJI unpaid licence fees, damages etc under the FDA.
KFG applied to the Paris Court of appeal to set aside the award. Meanwhile, KJI issued proceedings in the Commercial Court in London to enforce the award, in which proceedings KFG made a cross application for an order that recognition and enforcement be refused, relying on Article V (1) of the New York Convention and s.103 of the Arbitration Act 1996.
I heard the case as the judge in the Commercial Court , and gave a judgment [2019] EWHC 899 (Comm) concluding ( inter alia) that English law should be applied to the question of whether KFG was a party to the FDA, and that it was not and had not become a party. My judgment to that effect was unanimously upheld by the Court of Appeal, (McCombe and Flaux LJJ and Sir Bernard Rix) [2020} EWCA Civ 6, and was again unanimously upheld on appeal to the Supreme Court (Lord Hodge, Lord Lloyd-Jones, Lord Sales, Lord Hamblen, and Lord Leggatt JJ SC) [2021] UKSC 48 . The Supreme Court was quite clear, per Lord Hamblen, and Lord Leggatt, at [35], in line with the earlier Supreme Court decision of Enka Insaat ve Sanayi AS v OOO ‘Insurance Company Chubb’ [2020] UKSC 38, that “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 agreements” at [35] and at [53]“We would endorse the conclusion of the judge, and the Court of Appeal that the law governing the question of whether KFC became a party to the arbitration agreement is English law“: at [48} “cl. 14.3 of the FDA does not detract from the choice of English law as the law which, under S103 (2) (b) of the 1996 Act, the English court must apply to determine whether KFG became a party to the arbitration agreement within the FDA“. In the result, by Article 15 of the FDA English law governs the whole of the Agreement, including the arbitration clause.
That was the end of the opportunity for recognition or enforcement by KJI in England and Wales. However, the Cour de Cassation in France, on appeal from the Paris Court of Appeal (Decision no 20-20.260 of 28 September 2022) came to the opposite conclusion to that reached by the minority arbitrator ( with whom I am presently co-arbitrating!) and nine English judges. It confirmed the long-standing French position on the law applicable to an arbitration agreement, faced with an express choice of Paris as the seat of arbitration, that, even where the contract is governed by English law, it is the substantive rules of French arbitration law which govern the validity of the arbitration clause, including who is a party to it: at [8] “The choice of English law as the law governing the contracts… Is not sufficient to establish the common will of the parties to submit the effectiveness of the arbitration agreements to English law, in derogation from the substantive rules of the seat of arbitration expressly designated by the contracts.“ As for the parties to this arbitration, history does not relate whether there were assets of KFG in France against which KFI were hopeful of executing its Award (and which had perhaps led it to pursue KFG and not Al Homaizi), but it cannot execute in the UK, and it may be that other jurisdictions may prefer the firm view of the UK Courts (by reference to the New York Convention) rather than that of the French Court, notwithstanding that France is the seat of the arbitration. But for future draftsmen , given that the Cour de Cassation left open that the “common will of the parties“, if expressed, could be “sufficient to submit the effectiveness of the arbitration agreement ” to another law than that of the French seat, it is obviously essential when agreeing ICC Paris arbitration to provide, in a clause equivalent to Article 15 in this case, some such express provision as “This Agreement, including the arbitration provided for in Article [14.2] above, shall be governed by and construed in accordance with the laws of England.” That is of course what all 3 English courts found, but if the Entente Cordiale can be restored by saying it in terms, then let it be said!
Sir Michael Burton GBE
Littleton Chambers
Arbitrator and Mediator
