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Include a choice of law to govern the arbitration clause – after the UK Supreme Court’s decisions in Kabab-Ji and Chubb

The Supreme Court in its Kabab-Ji decision emphasised the importance of lawyers agreeing on the law to govern the arbitration clause as distinct from that to apply to the substance of the contract. It declined to enforce an award rendered in France against which an application to set aside the award has already failed in front of the Cour d’appel de Paris on the basis that a choice of English law to govern the contract means that the issue of who is a party to the arbitration agreement is governed by English not French law.

This conclusion was inevitably once a majority of the Supreme Court led by Lords Sales, Leggatt and Hamblen indicated in Enka v Chubb that the Court of Appeal’s refusal in Kabab-Ji to enforce the award was correct, particularly since all three Lords appeared on the Supreme Court panel in Kabab-Ji.

The facts are relatively simple. Kabab-Ji licensed Al Homaizi to run one of its restaurants in Kuwait for a decade. The contract drafting was a mess with a choice of English law to govern the contract and a no variation or estoppel except in writing provision. Foolishly, the seat selected was in Paris, France. Clause 14.3 added that the arbitrators should apply the principles of law generally recognised in international transactions. Agreements to apply the lex mercatoria or any non-legal standard cause enough problems of uncertainty. This is exacerbated here by the clear choice in a different article of the contract of a relatively rigid legal system in English law.

The Kuwaiti company restructured and became a subsidiary of Kout. The claim in the French arbitration was brought against Kout. Applying well-known French caselaw going back to the Dow Chemicals case, the Tribunal concluded that it had jurisdiction over Kout. If it had applied English law correctly to the merits, it would then have found that the contract did not extend to Kout because there was no written novation of the contract to extend it to Kout. The contract barred any other form of change. The no waiver clause could only have been overcome by a highly unequivocal representation going well beyond an informal promise. If the Tribunal had made the right decision on the merits, this case would never have seen the light of day.

The French court was bound to reject the setting aside application because in French law, there is no scope for the application of any other law than French law, regardless of the parties’ choice, unless it unequivocally applies to the agreement to arbitrate. Here, the parties do not seem to have applied their minds to the law governing the arbitration clause. However, that presumably will be the battleground of a forthcoming Cour de cassation appeal.

The English Supreme Court in Enka decided that in the absence of a choice of law to govern the arbitration agreement, any express choice of law to govern the contract as a whole if unqualified will apply. A choice of a foreign seat will not change that. A provision of the law of the seat that indicates that the law of the seat will apply to the arbitration agreement or a risk that the application of the chosen law will invalidate the arbitration clause will potentially change that assumption. However, a choice of a seat in the absence of an express choice of law will not itself justify an inference that either the arbitration clause or the main contract is governed by the seat.

Inevitably, the court in Kabab-Ji looked at the express choice of English law, applied it to the arbitration clause and in particular the no-novation clause¬† and failed to find any extension of the clause to Kout. The award was refused enforcement under Article V(1)(a) of the Convention which supplies a defence where the clause is invalid under the law to which the parties have subjected their arbitration agreement. The problem with this decision is that there is no evidence that the parties did actually submit their agreement to arbitrate to English law, just a very general choice of law: “This Agreement shall be governed by and construed in accordance with the laws of England”. Was that the sort of agreement to which the draftsmen of the Convention were referring? Article V(1)(a) gives as a default, the law of the place where the award was rendered – here that of the France.

As a side issue, the Court concluded that the judge wrongly adjourned enforcement proceedings to await the outcome of the setting aside application in France. The Supreme Court’s logic is impeccable. Once you follow its approach in Enka, the French court’s decision is irrelevant. However, this begs a question. If Kabab-Ji had responded to the setting aside application by seeking an exequatur or enforcement order of the award in France, would not the French judgement (forget the award) have been enforceable in England? There is an old English case which allows the parties to skip the award and just enforce the enforcement judgement as there is in the US (the Curacao case).

Enka v Chubb https://www.bailii.org/uk/cases/UKSC/2020/38.html

Kabab-Ji https://www.bailii.org/uk/cases/UKSC/2021/48.html

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