Update from the English Courts on Express Choice of Law in an Arbitration Agreement
Updated: Feb 8, 2021
In our previous article “the 5 reasons why you should draft an arbitration clause in a commercial agreement” we looked at the importance of jurisdiction and choice of law clauses in a commercial agreement. This article will focus on a recent Court of Appeal decision “Kabab Ji-S.A.L (Lebanon) v Kout Food Group (Kuwait)  EWCA Civ 6”on how the English Courts determine in an arbitration agreement where there is no express choice of governing law within the agreement.
The appellant (“Kabab Ji-S.A.L”), a Lebanese company, entered into a Franchise Development Agreement (“FDA”) with Al Homaizi Foodstuff Company (AHFC), a Kuwait company, dated 16 July 2001 for 10 years. Following a corporate reorganisation, AHFC become a subsidiary of Kout Food Group (“KFG”), also known as the respondent.
A dispute arose under the FDA and the appellant sought to settle this against KFG (and not AHFC, the original party to the FDA) through arbitration before the ICC in Paris pursuant to Article 14 of the FDA.
The key question for the arbitrators was a jurisdictional one. The arbitrators had to determine whether KFG had become an additional party to the FDA (which was originally signed between the appellant and AHFC) and the arbitration agreement. Majority of the arbitrators concluded that the question as to whether KFG was bound by the arbitration agreement was a matter of French law. In addition, they confirmed that under English law, the conduct of the parties inferred a ‘novation’ which made KFG a party to the FDA.
The legal issues of jurisdiction of the enforcement of the award were filed in the French and English Courts. Eventually, the matter was put before the Court of Appeal as to whether KFG had become a party to FDA.
The legal issues
The Court of Appeal were tasked to determine the following;
i) the governing law of an arbitration agreement where the seat of arbitration, being Paris, differed from the choice of law expressly stated in the main contract to govern it, being English law and
ii) whether the respondent had become a party to the main agreement and/or the arbitration agreement notwithstanding the presence of No Oral Modification provisions in the main contract.
The appellant’s appeal was only granted on grounds that the judge had erred in;
i) failing to apply French law to the issue of whether KFG had become a party to the arbitration agreement as a result of its conduct and performance of the host contract and
ii) incorrectly applying the English law to determine that there needed to be an agreement in writing to prove that KFG had become a party to the arbitration agreement or the host contract.
Key points from the Judgement
It was noted by Mr Ricky Diwan QC, the judge, that there was no doubt in this case that English law was the governing law of the entire FDA agreement and the arbitration agreement. Article 1 was clear in stating that ‘This Agreement’ consisted of all the terms of the agreement, including Article 14, and each of the documents (including the one containing the terms of the agreement) was an integral part of ‘This Agreement’. It is clear in Article 15 that ‘This Agreement’ was governed by English law which must include the arbitration agreement.
The judge emphasised that if there was any doubt that Articles 1 and 15 were enough to draw the above conclusion, then this was clarified by Article 14.3 which calls on the arbitrators to apply the provisions contained in the Agreement which include Article 14 and 15, the governing clause. This hence signifies that the governing law clause, which provides for English law as the governing law, also applies to the arbitration agreement.
Relying on the principles in Arsanovia and Sulamerica Mr Diwan QC also submitted that the seat of arbitration being different from the country whose law expressly governs the main agreement was merely not enough to override a strong indicator that there is an implied choice of English law set to govern the arbitration agreement by virtue of the FDA being expressly governed by English law.
Did KFG become a party to the Agreement?
In relation to whether KFG had become a party to the FDA and arbitration agreement, the judge referred to Article 24 and 26 of the FDA which provided for the mandatory signature of a written document by the parties or representatives of the parties in order for an amendment to the agreement to be effective. Article 17 was clear in stating that any waiver of such powers from the parties’ representatives would have to be in writing and signed by both parties. The addition of KFG to the FDA was a change or amendment to the FDA which would therefore have to be done according to the provisions of Article 24 or 26. It is clear that the parties intended to secure business certainty by including No Oral Modification clauses in their agreement under Article 24 and 26.
The judge added that any broad provisions such as the UNIDROIT principles could not be relied upon to contradict the terms of the No Oral Modification clauses. Conduct alone was not sufficient to override the strict provisions of Article 24 and 26. Only an estoppel was sufficient enough to override such clauses. For an estoppel to exist, there would have to be clear words or conduct representing the validity of the variation. As such the conduct based documents relied upon by the appellant were not enough to satisfy the requirements of an estoppel.
What is the position of English law in determining cases with ambiguous jurisdictional clauses and no oral modification clauses?
It was concluded that the parties had expressly chosen English law as the governing law for both the main contract and arbitration agreement by virtue of particular provisions that made it clear that all terms were consisted in the Agreement, including the arbitration agreement, which was governed by English law. It was also concluded that there wasn’t enough ‘conduct’ or ‘words’ to displace the No Oral Modification clauses of the agreement under estoppel.
Where the arbitration agreement forms part of the substantive contract, an express choice of law to govern that substantive contract is a strong indicator of the governing law of the arbitration agreement unless there are indications to the contrary. The choice of a seat different from the law of the governing contract would not in itself be sufficient to displace that starting point.
The English law holds in high regard the business certainty sought by parties in constructing No Oral Modification Clauses and will only override these in exceptional circumstances.
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Serenity Law LLP are a digital law firm, supporting businesses with their commercial legal needs throughout the UK and further afield. When working with corporate clients on dispute resolution matters, the team at Serenity Law aim provide practical advice and guidance covering all eventualities in your industry sector. Offering additional services, such as Mediation, Arbitration and court litigation, allow Ms. Laroya and her team to provide an all-round commercial law service.
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