CASE COMMENTARY: KABAB-JI SAL V KOUT FOOD GROUP.

I. INTRODUCTION

The UK Supreme Court recently issued its second decision in as many years on the
legislation to be used in determining the legitimacy of an arbitration agreement. In Enka
Insaat Ve Sanayi AS v OOO Insurance Company Chubb1 last year, the question of whether
law regulated the legality and extent of an arbitration agreement arose prior to any arbitration
taking place. Likewise, in Kabab-Ji SAL (Lebanon) v Kout Food Group (Kuwait)2, a related
question emerged in the context of an arbitration that had previously occurred and actions
were initiated in England to enforce the verdict. With the Supreme Court's newest decision,
parties to arbitration agreements should now have no uncertainty about how the English
courts will handle the problem, regardless of when it occurs. This judgement is also an
example of an English court refusing to enforce an arbitral award due to "exceptional
circumstances."

II. FACTS AND THE TRIBUNAL’S DECISION

The primary disagreement stemmed from a franchise agreement between Kabab-Ji SAL
(Kabab-Ji), a Lebanese company, and Al-Homaizi Foodstuff Co WWL (AHFC), its Kuwaiti
licensee. Following a corporate reorganisation, AHFC became a subsidiary of the respondent
in the actions, Kout Food Group (KFG). The franchise agreement included (i) an express
choice of English law as the primary contract's law, (ii) an arbitration agreement requiring
arbitration to take place in Paris, and (iii) a No Oral Modification clause.

Kabab-Ji chose to have its issue with KFG resolved through arbitration in Paris under the
ICC Arbitration Rules. A majority of the tribunal decided that the question of whether KFG
was obligated by the arbitration agreement was controlled by French law, but that the
question of whether KFG had obtained substantive rights and obligations under the franchise
agreement by novation from AHFC to KFG was governed by English law. The Tribunal then
determined that KFG had violated the franchise agreement and awarded Kabab-Ji the
damages.

1
Enka Insaat Ve Sanayi AS v OOO Insurance Company Chubb [2020] UKSC 38.
2
Kabab-Ji SAL (Lebanon) v Kout Food Group (Kuwait) [2021] UKSC 48.
 KFG petitioned the French court for annulment as the competent authority of the country in
which the award was made. Meanwhile, Kabab-Ji sought recognition and enforcement of the
award from an English court.

III. THE HIGH COURT JUDGMENT – ENGLISH COURT

The judge at first place determined that the franchise agreement's choice of English law
constituted an express choice of law for the whole deal, including the arbitration agreement.
The judge also achieved the preliminary conclusion that, under English law the No Oral
Modification Clause, there has been no novation of the franchise agreement from AHFC to
KFG, and Kabab-Ji had not met the estoppel that would have prevented AHFC from
depending on the No Oral Modification Clause based on its conduct. Nevertheless, the judge
believed that further information may surface during the French procedures that might change
this decision, therefore he refrained to issue a definitive ruling on the matter. He adjourned
the further hearings until the Paris Court of Appeal determined on KFG's plea to annul the
award. Both parties filed an appeal.

IV. THE COURT OF APPEAL – JUDGMENT

The Court of Appeal concluded with the lower court that the parties' clear choice of English
law to control the main contract also applied to the arbitration agreement. Where there was no
signal that the arbitration agreement should be treated independently from the remainder of
the contract, the contract should be interpreted as a whole, and the stated choice of law should
apply to all of its provisions. The explicit choice of Paris as the seat of the arbitration did not
imply that this decision was superseded, because an inferred provision cannot supersede an
explicit one.

The court likewise concluded with the trial judge that the contract had not yet been novated.
It did, however, rule that he was incorrect to decline to issue a final ruling. There was little
chance that fresh evidence would emerge that would allow Kabab-Ji to meet the grounds for
estoppel. The award was refused recognition and enforcement. Kabab-ji filed an appeal with
the Supreme Court.
 V. THE FRENCH COURT – JUDGMENT

Meanwhile, in a contrasting judgment, the Paris Court of Appeal denied KFG's appeal to
annul the award. Because KFG was not a party to the franchise agreement, KFG claimed that
the arbitral tribunal lacked jurisdiction. In refusing to annul the verdict, the court determined
that the arbitration agreement was governed by French law, not English law.

Moreover, the French courts have repeatedly maintained that the presence and legality of an
arbitration agreement must be determined entirely by the criteria of international public
policy, regardless of any national legislation, including a law controlling the form or
substance of the primary contract. Instead, French courts adopt substantive norms of
international arbitration, such as the "separability principle." In this instance, the court ruled
that because the parties had not clearly agreed that English law would control the arbitration
agreement, the tribunal was instead required to apply the substantive law of the seat of
arbitration (French law). The arbitration agreement tied KFG under French law.

VI. THE SUPREME COURT – JUDGMENT

In light of these conflicting judgements, the Supreme Court was urged to rule on three issues:

i. What law controls the arbitration agreement's validity?

ii. Is there a genuine possibility, if English law rules, that a court will determine at a
subsequent hearing that KFG is now a party to the arbitration agreement provided in
the franchise agreement?
iii. Was the Court of Appeal correct in issuing a summary decision refusing to recognise
and enforce the award on procedural grounds?

VII. THE ISSUE OF LAW SELECTION

The appeal was taken in June – July 2021, just a few months after the Supreme Court issued
its decision in Enka v Chubb, another key case involving the controlling law of arbitration
agreements. In that instance, the Supreme Court established a set of English law rules to be
applied systematically whenever the question of what law controls an arbitration agreement
arises.

But, the Supreme Court emphasised in the current decision that, in its earlier case, the
question of controlling law arose prior to any arbitration, and so the English common law
principles for resolving conflicts of laws applied. However, because an arbitral award had
been rendered in Kabab-ji, the rules to be followed were those outlined in the 1958
Convention on the Recognition and Enforcement of Foreign Arbitral Awards (the New York
Convention), as incorporated into English law by the Arbitration Act 1996. The relevant New
York Convention provision – article V(1)(a) – is found in section 103(2)(b) of the Arbitration
Act, and states that "the recognition or enforcement of the award may be refused if the
person against whom it is invoked proves that the arbitration agreement was just not valid
under the law to which the parties confined it or, having failed any indication thereof, there
under law of the country where the award was made."

Given the international status of the New York Convention, the Supreme Court stated that it
would be preferable if the rules for establishing whether there is a valid arbitration agreement
were not only provided an unified meaning, but were also applied uniformly by the courts of
the contracting states – perhaps a nod to the existence of contradictory decisions such as
those in the historical past of this case. The court observed that, “it is apparent, however, that
there is nothing approaching a consensus” on the question whether or when a choice of law
for the contract as a whole constitutes a sufficient indication of the parties’ choice of law for
the arbitration agreement, in particular where it differs from the law of the seat. The court
considered that, therefore, “the English courts must form their own view”.

The court considered the comments presented at the conference that established the New
York Convention, which suggested that an explicit agreement about the law that will control
the arbitration agreement is not essential and that any type of agreement will serve. On that
reasoning, the court considered it "impossible to reject" the result that a generic choice of law
language in a written contract including an arbitration clause is usually adequate indicative of
the law to which the parties committed the arbitration agreement.
 The court also referred back to the principles it established in its prior judgement, noting that
it would be "illogical" if the law regulating the legality of the arbitration agreement differed
depending on whether the dispute was presented before or after an award was reached.

The Supreme Court decided that the effect of the franchise agreement articles was "very
evident." The agreement included a standard governing law section, which stated that "this
Agreement" would be regulated by the laws of England. Even in the absence of a specific
definition, the court determined that the phrase is generally and fairly understood to refer to
all of the contract's terms, including the arbitration agreement. The Supreme Court
determined that there was no basis to conclude that the parties sought to exclude the
arbitration agreement from their choice of English law to control the terms of their contract.
As a result, the arbitration agreement was governed by English law.

Mentioning two of Kabab- Ji's objections to this conclusion, the court stated that a reference
in the franchise agreement to the arbitrator applying "principles of law generally
acknowledged in international transactions" (i.e., UNIDROIT Principles of International
Commercial Contracts) was a guide to the rules of law to be adapted to the merits of the
dispute, not the confirmability of the arbitration agreement. The court also dismissed Kabab-
Ji's argument that because the parties should be considered to desire that the arbitration
agreement be valid and effective, one should conclude that the choice of English law does not
extend to it if applying English law would render it invalid. This is the "validation principle,"
which is a contractual interpretation concept that assumes an agreement has been reached.
The court emerged to narrowly apply the validation principle, mentioning that this does not
adhere to questions of validity in the broad sense in which that concept is used in article V(1)
(a) of the New York Convention and section 103(2)(b) of the Arbitration Act, which includes
whether any contract has ever been made between the parties in dispute.

VIII. THE “PARTY” MATTER

After determining that English law was applicable, the court evaluated whether KFG had
become a party to the arbitration agreement. The Supreme Court cited the judgement in
MWB Business Exchange Centres Ltd v Rock Advertising Ltd 3, which found that No Oral
Modification provisions are legally valid. The court analysed the different sections and
determined that the terms applied to both termination of the franchise agreement (which
3
MWB Business Exchange Centres Ltd v Rock Advertising Ltd [2018] UKSC 24; [2019] AC 119.
 Kabab-ji envisaged as part of the novation) and changes and alterations to the agreement.
However, such a termination could only have been made in writing and by or on account of
both parties, that had not been done.

The court also determined that the standards for estoppel from reliance on No Oral
Modification provisions as outlined in Rock Advertising had not been met, and that if there
was evidence establishing an estoppel against AHFC, it would not generally correspond to
KFG.

As a result, the court concurred with the Court of Appeal that, under English law, there was
no genuine chance of a court finding at a subsequent hearing that KFG had become a party to
the arbitration clause in the franchise agreement.

IX. THE PROCEDURAL PROBLEM

Ultimately, the Supreme Court considered whether the Court of Appeal was right in issuing a
summary decision refusing to recognise and enforce the award. According to the New York
Convention, an award may be rejected recognition and enforcement only if the person against
whom it is claimed shows one or more of the reasons set out in article V(1)(a) (e). The
Supreme Court determined that nowhere in the New York Convention or the Arbitration Act
prescribes how the party must prove the ground is pleased, and that it is up to the English
courts to determine how the ordinary judicial determination must be designed in line with its
own procedural rules, including the overriding objective under the Civil Procedure Rules. In
certain circumstances, this may entail a full evidentiary hearing, while in others, a summary
finding may be acceptable.

In actuality, the Supreme Court noted that summary findings may be an altogether preferable
method of attaining a rapid resolution, because the form and scope of the relevant material
will be obvious from the hearing before the arbitral tribunal in many circumstances. Using
this approach would be perfectly compatible with the New York Convention's pro-
enforcement stance and the Arbitration Act's corresponding provisions. Regardless of
whether or not it is appropriate will be determined by the facts of the case.

In determining whether the judge at the first instance was correct to adjourn the enforcement
decision pending the decision of the French Court of Appeal, the Supreme Court considered
situations in which it would be reasonable and advantageous to adjourn a decision pending
 that of a court in another jurisdiction, and determined that because the French Court of
Appeal was deciding the matter on the basis of a different body of law (French law), its
decision would have no bearing.

As a result, the Supreme Court determined that the Court of Appeal was right in reversing the
first instance decision to grant an adjournment and in issuing a summary judgement refusing
recognition and execution of the award. The appeal was rejected.

X. COMMENT

The judgment in Kabab-Ji gives more reassurance on how the law applicable on
the arbitration agreement is to be decided under English law where the governing law is not
specifically indicated in the arbitration agreement explicitly. The reasoning of the Supreme
Court is aligned with its previous ruling on the same subject, but in the context of
enforcement under the New York Convention rather than reviewing the arbitration agreement
before rendering an award. These two instances represent the practical reality that, when
negotiating a contract, parties rarely discriminate between the arbitration agreement and the
contract as a whole when determining which governing law to use.

Commercial sides and arbitration practitioners need to, however, keep in mind the varied
views of French courts (and other countries) and come down on the side of caution by
precisely mentioning the controlling law of the arbitration agreement in their contracts.

The Supreme Court also clarified how English courts will interpret No Oral Modification
agreements in the aftermath of Rock Advertising. Its complete unwillingness to recognise a
novation by actions where the contract clearly stated that all amendments, modifications, and
terminations must be agreed in writing serves as a strong reminder to parties of the
importance attached to the relevant provisions of their contract when attempting to amend its
terms.

The Supreme Court's indication of the utility of the summary judgement method for resolving
the recognition and enforcement of an arbitral award also acknowledges the reality that
arbitration users frequently seek a rapid enforcement procedure, which a summary judgement
is most likely to accomplish.
The Supreme Court's ruling on the procedural matter of adjournment is also notable as a
potential test of the reciprocity concept. The ramifications of this part of the ruling, however,
should not be exaggerated. If the court had been mandated to consider Article V(1)(e) of the
New York Convention, while such a set-aside application was subject to review before the
French courts, the court would have probably granted an adjournment pending the French
courts' decision. The Supreme Court, on the other hand, was simply faced with an Article
V(1)(a) defence questioning the legitimacy of the arbitration agreement but was only obliged
to follow English law.

Considering KFG has moved the French Court of Appeal's denial of its set-aside case to the
Court of Cassation, it will be fascinating to watch whether and to what extent France's
highest court now attempts to close the gap.