Supreme Court comments on enforcement and recognition of an arbitral award

This case follows hot on the heels of the earlier judgment in Enka Insaat Ve Sanayi AS v OOO “Insurance Company Chubb” [2020] UKSC 38, where the issue of validity and applicable law arose before the arbitration took place. In Kabab-Ji the matter arose at the award enforcement stage. The case is a cautionary tale for all those involved in arbitration to check who is a party to the agreement.

In Kabab-Ji the Appellant (Kabab-Ji) entered into a Franchise Development Agreement (FDA) with Al Homaizi in respect of its chain of restaurants. Those Agreements were expressly governed by English law. In 2005 Al Homaizi was restructured and became a subsidiary of the Respondent (Kout Food Group). A dispute under the FDA and linked Franchise Agreements arose and the Appellant referred the matter for arbitration. The arbitration was brought against the Respondent alone, and not against Al Homaizi. The Respondent took part in those proceedings under duress. The arbitral tribunal awarded the Appellant a significant sum.

The Appellant brought proceedings to enforce the award in England. The Respondent resisted enforcement in England on the basis that the arbitration agreement was invalid. This relied upon article V(1)(a) of the New York Convention and s.103(2)(b) of the Arbitration Act 1996. In essence, the Respondent said it was not a party to the arbitration agreement.

To determine this issue, the Supreme Court had to decide (1) the law applicable to determining the validity of the agreement; (2) whether the Respondent was a party to the agreement; and (3) whether to allow summary judgment against enforcement of the award. It is the first two points that this blog post focuses on.

What was the law of the validity of the agreement?

The Court first set out two uniform international conflict of laws rules arising out of the New York Convention. The primary rule is that validity of the arbitration agreement is governed by “the law to which the parties subjected it”. The second, default rule, applying when no choice was indicated, is that the applicable law is “the country where the award was made”. Where a seat is chosen, that will be the law of the seat. Importantly, per Enka, a general choice of law clause in a contract containing an arbitration clause should normally be sufficient to satisfy the primary rule. Indeed, the text of the Convention only requires an “indication”. This principle from Enka logically applies to the question of validity raised at the enforcement stage. As the FDA contained a choice of law clause identifying English Law, the Court held this sufficient to apply the primary rule and find that that law applied to the arbitration clause.

The Appellant sought to resist this in two ways. First, it said that the dispute resolution clause itself provided that the arbitrators shall also apply the UNIDROIT Principles of International Commercial Contracts. In essence, the Appellants said no “law” applied under the contract at all because what applied was a combination of national law and UNIDROIT principles. Thus, the default rule applied. The Supreme Court rejected this. It was noted that the odd result of this reasoning would be that the agreement of the parties to use national law supplemented by the UNIDROIT principles would lead to a law that they did not choose applying. It was thought this was illogical and inconsistent. On the face of the contract, it was the arbitrators that were to apply this combination of law; the validity question is simply a question of the law governing the dispute. Further there is no reason to assume that the decision to also apply the UNIDROIT principles would annul the selection of English law. The fact that effect cannot be given to the parties’ wish to supplement the national law with further non-binding principles provides no reason to nullify the choice of governing law itself.

Alternatively, the Appellant relied upon the “validation principle” that contractual provisions should be interpreted to give effect to, and not defeat, the presumed intention of the parties that an arbitration agreement would be valid and effective. So, if applying English law to the FDA would lead to there being no valid arbitration agreement, then it should be inferred that English law did not apply. The Supreme Court held that this extended the validation principle beyond its proper scope. The principle presupposes that an agreement has been made which may or may not be valid. It is not a principle relating to formation of contracts to create an agreement which would not otherwise exist. There is no reason to approach the question of whether parties to a dispute have made an agreement with a presumption that they did so.

Thus the Supreme Court found that the law of the arbitration agreement, and the question of whether the Respondent was a party to the proceedings, was English law.

Was the Respondent a party to the agreement?

The Appellant was then faced with demonstrating how the Respondent had become a party to the arbitration agreement. The FDA was subject to a “no oral modification clause” that only allowed amendment of the contract by writing. The Appellant said that there had been a novation of the FDA by reason of the parties’ conduct. However, it had been noted in the arbitration that Al Homaizi’s continued involvement in various contractual matters, so to avoid this problem the idea of “novation by addition” was offered to, and accepted by, a majority of the arbitral tribunal. It was unclear what such “novation by addition” was, but in any event the Court recognised that any novation was required to be done in signed writing. Insofar as it was said an estoppel arose, this could normally only assist to stop reliance on the no oral modification clause between parties to the contract (the Appellant and Al Homaizi).

The Appellant sought to avoid this by relying on various UNIDROIT Principles. However, as had already been held, these principles were for the arbitrators to apply and not to the logically prior question of whether an agreement existed. In any event, even if they did apply, the UNIDROIT Principles can only interpret or supplement English law, they cannot contradict it. The contract provided that the arbitrators shall under no circumstances apply rules that contradicted the strict wording of the FDA.

In the alternative, the Appellant sought to rely on a clause in the FDA requiring the parties to act in good faith and with fair dealing. This was again rejected by the Court as reliance on this clause necessarily required the Respondent to have already been found to be a party to the contract. In any event, it was not contrary to good faith to interpret the FDA in accordance with its express wording. On the facts the Supreme Court held that there as no real prospect that a court might find that the Respondent became party to the arbitration agreement in the FDA.

The Supreme Court went on to consider whether, as a matter or procedure, summary judgment to refuse recognition and enforcement of the award should be given. It found that it should be.

Comment

This case is a cautionary tale for all on identifying the parties to an agreement, particularly when the agreement is subject to a no oral modification clause. It is all too easy to assume that rights and obligations flow through a corporate restructuring or follow from the identity of the person performing the obligations under the contract. Care must be taken in this regard. It is also useful to see the Supreme Court comment further on Enka, and demonstrate how the principles commented upon in that case extend to the enforcement situation.