Governing law of arbitration agreements: Enka v Chubb revisited

The facts

In 2001, Kabab-Ji SAL (“KJS”) entered into a Franchise Development Agreement with Al Homaizi Foodstuff Company (“AHFC”) to operate a franchise using its restaurant concept in Kuwait for a period of ten years. Following a corporate reorganisation, AHFC became a subsidiary of Kout Food Group (“KFG”). The Franchise Development Agreement contained an English governing law clause, had an ICC arbitration clause with the seat in Paris, and a No Oral Modification clause (“NOM clause”).

A dispute arose under the Franchise Development Agreement, leading KJS to commence an arbitration against KFG alone, and not AHFC, under the ICC rules in Paris.

This led to the jurisdictional question as to whether KFG had become an additional party to the Franchise Development Agreement, and consequently the arbitration agreement. It was then necessary to decide (i) the governing law to the question of whether KFG became a party to the arbitration agreement, and (ii) whether, under that law, KFG had become a party to the arbitration agreement.

A final hearing took place in Paris before a tribunal of three arbitrators, which made an award in favour of KJS. The arbitral tribunal considered French law, as the law of the seat of the arbitration, to determine whether KFG was bound by the arbitration agreements, but English law to decide whether KFG had acquired substantive rights and obligations under the Franchise Development Agreement.

Parallel French and English Proceedings

KFG applied for the award to be set aside before the Paris Court of Appeal on grounds which included that the arbitrators had no jurisdiction over KFG as it was not a party to (and not bound by) the arbitration agreement, arguing that the law governing the arbitration agreement was English law, and had the arbitration agreement been interpreted in accordance with English law, rather than French law, KFG would not be a party to the agreement. Meanwhile KJS applied for the enforcement of the award in England & Wales.

The French Court of Appeal upheld the award on the basis that French law applied and that KFG was a party to the arbitration agreement. The French Court of Appeal’s decision is appealed and still pending before the French Supreme Court. On the other hand, The English Court of Appeal refused the enforcement and recognition of the award on the basis that there was an express choice of English law as governing law, and that KFG had not become a party to the arbitration agreement according to English law.

The UK Supreme Court Decision

The UK Supreme Court considered the following questions:

(i) What law governs the validity of the arbitration agreement?

(ii) If English law governs, is there any real prospect that a court might find at a further hearing that KFG became a party to the arbitration agreement in the Franchise Development Agreement?

(iii) As a matter of procedure, was the Court of Appeal justified in giving summary judgment refusing recognition and enforcement of the award?

The UK Supreme Court unanimously dismissed the appeal by KJS, ruling in favour of KFG on all three questions.

Applying Enka v Chubb, the UK Supreme Court reaffirmed that a choice of law to govern a contract containing an arbitration clause will generally be a sufficient “indication of the law to which the parties subjected the arbitration agreement” for the purposes of Article V(1)(a) of the New York Arbitration Convention. The Supreme Court found the governing law clause to be clear – it provided that “this Agreement” shall be governed by English law, and held that this extended to the arbitration agreement. The Supreme Court therefore upheld the Court of Appeal’s conclusion that the law governing the question of whether KFG became a party to the arbitration agreement is English law.

On the second issue, the UK Supreme Court also found that in determining whether an agreement is valid, the relevant law one should look to in order to determine the question, is the law that would have applied if it was valid.  The Supreme Court considered that the NOM-clause in the Franchise Development Agreement was valid and enforceable. Given the terms of the No Oral Modification clauses, the evidential burden was on the KJS to show a sufficiently arguable case that KFG had become a party to the FDA and hence to the arbitration agreement in compliance with the requirements set out in those clauses, or that KFG was estopped or otherwise precluded from relying on the failure to comply with those requirements. No such evidence had been identified, and consequently, there was no real prospect that KFG might be found to be a party to the arbitration agreement under English law.

On the third issue, the Supreme Court ruled that the Court of Appeal was justified in giving summary judgment refusing recognition and enforcement of the award. The Supreme Court pointed out that the French decision would have no bearing on the outcome of the English proceedings, save for if it had decided to annul the award (as that would have provided a separate ground for refusing enforcement), as a different legal approach would have been taken.

Our remarks on the position under Norwegian law on international arbitration

The Supreme Court’s decision is consistent with the decision in Enka v Chubb, which brought clarity to the determination of the governing law of arbitration agreements under English law. The decision confirms the general principle that, unless there are strong indications to the contrary, the chosen governing law for a contract will also govern any arbitration agreement contained within it.

As we have highlighted before, the only hard and fast rule on the governing law of arbitration agreements under Norwegian law, and similar to the approach taken by the UK Supreme Court, is that an express choice of law provision in the arbitration agreement will be determinative and ensure certainty and predictability. This is why we consistently recommend including an express choice of law provision in arbitration clauses, in addition to the governing law to the main contract.

It is noteworthy that the UK Supreme Court recognised that there is little uniformity or consensus between jurisdictions in the interpretation and application of the rules for determining the validity of an arbitration agreement in Article V(1)(a) of the New York Convention.

Although Norwegian courts may look to the approach taken by the UK Supreme Court, they may also be expected to take a more civil law approach to the question, and look more broadly to the parties’ common intentions when assessing the governing law of an arbitration clause. However, between professional parties, a party who claims a different understanding to that of the objective wording of the agreement, must be able to clearly evidence that its understanding was the common intention of the parties when entering into the agreement. Although it is not possible to give a certain answer to how a NOM-clause shall be interpreted under Norwegian law, the clause will likely make it even more difficult to argue that the contract has been orally amended.

It will be interesting to see how the French Supreme Court approaches these issues, and it is not obvious that the outcome will be the same as in the English Supreme Court, which in itself emphasises the need for expressly regulating governing law in the arbitration clause.