CA upholds English Law as Express Choice of Law & Considers Oral Modification provisions

In Kabab-Ji S.A.L. (Lebanon) v Kout Food Group (Kuwait) [2020] EWCA Civ 6, the English Court of Appeal dealt with applications raising issues concerning the governing law of an arbitration agreement (which provided for arbitration in Paris but which was contained in a main agreement expressly governed by English law) and whether the respondent became a party to the main agreement and/or the arbitration agreement notwithstanding the presence of No Oral Modification provisions in the main contract.

Facts

Kabab entered into a Franchise Development Agreement (FDA) with AHFC, a Kuwaiti company, as Licensee. Following a corporate reorganisation, AHFC became a subsidiary of Kout Food group (KFG), the Respondent.  A dispute arose under the FDA which was referred to arbitration (ICC in Paris).  The arbitration was only commenced against KFG not AHFC.  The arbitrators considered that the question of whether KFG was bound by the arbitration agreement was a matter of French law, but the issue of whether a transfer of substantive rights and obligations took place was governed by English law, going on to conclude that, as a matter of English law, a ‘novation’ was to be inferred by the conduct of the parties adding KFG as the main franchisee, determining that, on the merits, KFG was in breach of the FDA.  The dissenting arbitrator agreed that French law applied to the issue of validity of the arbitration agreement, but dissented by concluding that KFG never became a counterparty to the FDA which meant that it owed no obligation to Kabab and that Kabab had sued the wrong party.

Following the publication of the award in December 2017, KFG filed an annulment application before the French courts (as Paris was the seat of the arbitration); the application is due to be heard by the Cour d’appel de Paris in February 2020.  Kabab issued proceedings in London for enforcement of the Award as a judgment (which was granted ex parte), which was met with an application by KFG for an order that recognition and enforcement of the Award as a judgment be refused and an order setting aside the ex parte order.

Issues at First Instance

Does the law governing the validity of the arbitration agreement govern the question of whether [KFG] became a party to the arbitration agreement?

The judge noted that there was no issue between the parties that the law governing the validity of the arbitration agreement governs the question of whether KFG became a party to the arbitration agreement.

What is that law?

The judge stated that the answer to this question was simply a matter of applying section 103(2)(b) of the Arbitration Act 1996 which provides that recognition or enforcement of the award may be refused if the person against whom it is invoked proves that the arbitration agreement was not valid under the law to which the parties subjected it or, failing any indication thereon, under the law of the country where the award was made.  The judge determined that the wording “the law to which the parties subjected [the arbitration agreement]” and “any indication thereon” allowed not simply for an express but an implied choice of law (which the CA considered clearly correct).  As this issue was not disputed by the appellant before the CA, it was not necessary to consider the point further.

In determining this issue, the judge considered what he described as “the competing views” as to the application of an implied choice of law between the law of the ‘host’ agreement and the law of the seat of the arbitration.  He cited:

  • Channel Tunnel Group Ltd v Balfour Beatty Ltd [1993] AC 334 at 357-8, where Lord Mustill stated that it would be exceptional for the proper law of the arbitration agreement to be different from an express choice of law for the host contract.
  • Sulamerica v Enesa Engelharia [2012] EWCA Civ 638; [2013] 1 WLR 102, where Moore-Bick LJ stated that where the arbitration agreement forms part of the substantive contract, an express choice of law to govern that substantive contract is “an important factor to be taken into account” and “likely…to lead to the conclusion that the parties intended the arbitration agreement to be governed by the same system of law as the substantive contract, unless there are other factors present which point to a different conclusion”.
  • C v D [2007] EWCA Civ 1282; [2008] All ER (Comm) 1001, where Longmore LJ said: “The question then arises whether, if there is no express law of the arbitration agreement, the law with which that agreement has its closest and most real connection is the law of the underlying contract or the law of the seat of the arbitration. It seems to me that …the answer is more likely to be the law of the seat of the arbitration than the law of the underlying contract.”
  • The Singapore decision in BCY v BCZ [2016] 2 Lloyd’s Rep 583 at [65], where Chong J said, adopting Sulamerica: “the governing law of the main 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.”
  • Arsanovia v Cruz City 1 Mauritius Holdings [2012] EWHC 3702 (Comm); [2013] 1 Lloyd’s Rep 235 at [21], where Andrew Smith J said: “The governing law clause is, at the least, a strong pointer to their intention about the law governing the arbitration agreement, and there is no contrary indication other than choice of a London seat for arbitration.”

The judge stated that there had been an express choice of English law as governing the arbitration agreement:

“However, whereas there would therefore be a powerful case for English law as being the implied choice in any event, by virtue of its governing the host agreement, I am satisfied that there is no need to resort to such implied agreement in this case, as there is an express choice. Article 15 provides for the laws of England as the governing law of the FDA. Article 14, the Settlement of Disputes clause, expressly states by clause 14.3, that “the arbitrators shall apply the provisions contained in the agreement”, which is the FDA, and Article 1 provides that “This Agreement …shall be considered as a whole.” Article 14 (3) then continues (with my underlining) “the arbitrators shall also apply principles of law generally recognised in international transactions. The arbitrators may have to take into consideration some mandatory provisions of some countries.” It is clear to me that, on the clear construction of Article 14.3, the provisions which the Arbitrators were thus required to apply included the provisions as to law in Article 15, because by Article 14 (3) they must also apply certain other principles of law.”

The judge concluded that irrespective of the approach of the arbitrators – who concluded that French law was the governing law of the arbitration agreement – English law governs the validity of the arbitration clause and the issue of whether KFG ever became a party to it.

At English law, has [KFG] become a party to (i) the FDA and (ii) if different, the arbitration agreement?

The judge considered whether KFG had become an additional party to the FDA by referring to the extensive conduct of KFG and unequivocal performance by KFG of the FDA, and whether that was sufficient to override the formality of the No Oral Modification clauses and make KFG an additional party to the FDA.  The conduct relied upon included: (i) unequivocal conduct by KFG in performing the contract such as paying invoices for royalty payments (which were apparently addressed to KFG) for some 30 months; (ii) the exercise of and claim to contractual rights under the FDA by KFG; and (iii) evidence of silence amounting to acquiescence on the part of KFG.

The Court noted that since the date of the award, English law in relation to “No Oral Modification” clauses had been clarified by the majority of the Supreme Court in MWB Business Exchange Centres Limited v Rock Advertising Limited [2018] UKSC 24; [2019] AC 119, stating that that decision made it even more difficult to surmount and evade the strict provisions of such a contract as the FDA at English law (which imposed a strict interpretation of and strict limits to the obligations of both the licensor and licensee).

The judge considered that behaving in such a manner that the Claimant considered that KFG had become the Licensee would be unlikely to be sufficient without some words or conduct unequivocally representing that the transfer of rights and obligations to it was valid, notwithstanding its informality.

Ultimately, the judge held that, under English law, the Defendant had not become a party to the FDA, but decided not to make a final determination on the basis that evidence might arise at the set aside hearing in Paris; if it were not set aside in Paris the matter could be restored and the claimant could again pursue enforcement proceedings in the English courts.

Court of Appeal

All three members of the CA indicated that they great difficulty in understanding the judge’s rationale in deciding not to make a final determination and to adjourn the matter until after the decision of the Cour d’appel de Paris.  Given his findings on the evidence and his conclusion that, as a matter of English law, the No Oral Modification clauses in the FDA would mean that KFG was not a party to the FDA or the arbitration agreement unless the appellant could satisfy the conditions for estoppel or preclusion set out by Lord Sumption JSC at [16] of Rock Advertising (which on his findings the appellant could not), it was difficult to see what further evidence the judge was envisaging could emerge after the decision of the French Court.

Accordingly, in considering whether the order enforcing the judgment should be set aside, the CA considered two key issues:

  • Whether English law governed the arbitration agreement; and
  • Whether KFG had become a party to the arbitration agreement by virtue of its inconsistent behaviour and KFG’s conduct (and, consequently, whether the judge was correct in not making a final determination).

English Law Governing the Arbitration Agreement

Regarding whether English law governed the arbitration agreement, the CA stated [62]:

“In my judgment… Articles 1 and 15 of the FDA in themselves provide for the express choice of English law to govern the arbitration agreement in Article 14. Article 1 makes it clear that “This Agreement” (capitalised) includes all the terms of agreement then set out, which include Article 14. Because Article 15 provides that: “This Agreement [again capitalised] shall be governed by and construed in accordance with the laws of England” it is making clear that all the terms of the Agreement, including Article 14, are governed by English law. The answer to the suggestion that, if this analysis were correct, there would be an express choice of governing law of the arbitration clause in every contract which contains a governing law clause is essentially that given by Andrew Smith J in Arsanovia at [22]. Governing law clauses do not necessarily cover the arbitration agreement. This one does because of the correct construction of the terms of Articles 1 and 15 taken together.”

And concluded [70]:

“Accordingly, in my judgment, the judge was correct in his determination that there was an express choice of English law as the governing law of the arbitration agreement. That conclusion means that it is not necessary to consider KFG’s alternative case that there was an implied choice of English law, thereby avoiding deciding the questions whether the correct analysis of Sulamerica is the one for which Mr Diwan QC contends and how the requirement of necessity for business efficacy before a term can be implied can be satisfied in any given case where there is a fallback position of either the law of the country with which the arbitration agreement has its closest and most real connection or the law of the country where the award is made. Since those questions do not require to be answered, it seems to me better to leave them for determination in another case where they are a necessary part of the determination to be made by the Court.”

Whether KFG had become a party to the arbitration agreement

The CA considered that that there was no question of the addition of KFG as a party having been agreed in writing or of any consent in writing to their addition.  The No Oral Modification clauses in the FDA would mean that KFG did not become a party to the FDA or the arbitration agreement unless, applying the Rock Advertising test there were “(i)…some words or conduct unequivocally representing that the variation was valid notwithstanding its informality; and (ii) something more would be required for this purpose than the informal promise itself.” It was clear from the judge’s findings of fact, particularly at [50] to [53] of his judgment that the appellant could not satisfy the Rock Advertising test.

The CA concluded [81-82]:

“In my judgment, given that the appellant could not satisfy the Rock Advertising test, the judge should have made a final determination that KFG was not a party to the FDA or the arbitration agreement, so that the Award was not enforceable against KFG under section 103(2) of the Arbitration Act 1996. I consider that in failing to make that final determination but adjourning the appellant’s application for enforcement for a possible further hearing after the determination of the issue of annulment by the Cour d’appel de Paris, the judge erred in principle and in law in two respects. First, he overlooked that the decision of the French Court was not relevant to the questions of English law and its application to the facts which were before the judge…. The second error the judge made is that he failed to make any assessment as to whether, in the event that the application was restored for further hearing after the determination by the French Court, the appellant had a real prospect of successfully establishing that KFG was a party to the FDA and the arbitration agreement and thus of enforcing the Award as a judgment in this jurisdiction under section 101 of the Arbitration Act 1996.”

 And [85-86]:

“In my judgment the judge should have concluded, in view of his conclusion that the prospect of a different decision being reached at a later hearing was remote, that an adjournment should not be granted and that he should have made a final determination refusing recognition and enforcement of the Award…. I consider that the correct outcome in this case should be that the appellant’s appeal is dismissed and the cross-appeal in the Respondent’s Notice is allowed. An order will be made setting aside the ex parte order of Popplewell J and refusing enforcement and recognition of the Award as a judgment.”

See also the following reviews of this case:

Herbert Smith Freehills conclude:

“This case raises important issues of construction and interpretation. It is a reminder that there is real merit in including an express governing law provision within an arbitration clause or by expressly referring to the arbitration clause within the main governing law provision of the contract. This will avoid wasting time and money arguing the issue at both the arbitration and enforcement stage. It also demonstrates the importance of the Supreme Court’s decision in Rock Advertising and its implications for the many contracts containing NOM clauses. These will generally be effective so as to prevent contracting parties being bound by a subsequent variation unless the formalities contained within the contract are complied with. In this instance, the inclusion of the clause ensured that KFG was not a party to the FDA or the arbitration agreement as the requirement for written notice had not been followed.”

Linklaters conclude:

“Disputes concerning the applicable law of an arbitration agreement arise most commonly where the law chosen to govern a contract and that of the chosen seat of arbitration do not “match.” It is well-known that, in such cases, disputes can be minimised at the contracting stage by giving due consideration to including a clear express choice over the matter. For disputes lawyers, however, there is a lesson which might be more easily overlooked. That is, in such cases, do not assume that an express choice does not exist simply because one has not, on first blush, been explicitly made (either by way of inclusion of a clause in the arbitration agreement itself or, as sometimes happens, explicit extension of the main governing law clause to the arbitration agreement) it may pay to look again closely elsewhere. Or, as a quote deployed by the Court put it: “express terms do not stipulate only what is absolutely and unambiguously explicit.” (And finally, a very technical postscript: the acceptance by the Court of Appeal that an implied choice is relevant in the context of Article V(1)(a) NYC means, in England, that in cases where that article is invoked and there is room for doubt as to the law to be applied, then, in the absence of an express choice, the next step will be to consider whether an implied choice has been made (of the law governing the contract or that of the seat). It will not be an application of the law of the seat on the basis of the “failing any indication thereon” limb).”

About Phillip Rompotis

Phillip practices as a barrister and arbitrator in Hong Kong. He has over 25 years’ litigation and arbitration experience in commercial disputes relating to construction & engineering, financial services, joint venture & shareholders agreements, technology, trusts, property and landlord & tenant. He is a Fellow of the Chartered Institute of Arbitrators, the Hong Kong Institute of Arbitrators, the Singapore Institute of Arbitrators, the Malaysian Institute of Arbitrators, and a member of various lists/panels of arbitrators.

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