Kabab-Ji SAL (Lebanon) v Kout Food Group (Kuwait)

Factual and Procedural Background

The Appellant, a Lebanese company, entered into a Franchise Development Agreement ("FDA") dated 16 July 2001 with Company A, a Kuwaiti company, as Licensee. In 2005, Company A became a subsidiary of the Respondent following a corporate reorganisation. A dispute arose under the FDA which the Appellant referred to arbitration before the ICC in Paris pursuant to the arbitration clause in the FDA. The arbitration was commenced against the Respondent only, not Company A.

The arbitrators considered whether the Respondent had become a party to the FDA and the arbitration agreement, applying French law to the arbitration agreement's validity and English law to the transfer of substantive rights. The majority found that the Respondent was bound by the arbitration agreement through novation by conduct, and on the merits found breach of the FDA by the Respondent. The dissenting arbitrator disagreed, concluding the Respondent was not a party to the FDA under English law.

Following the Award, the Respondent filed an annulment application in the French courts, with a hearing scheduled for February 2020. The Appellant sought enforcement of the Award in the English Commercial Court under section 101 of the Arbitration Act 1996. An ex parte enforcement order was made, which the Respondent sought to set aside under section 103(2) of the Act, raising preliminary issues for trial.

The Commercial Court judge, Sir Michael Burton, heard the preliminary issues over three days in March 2019. The issues included the governing law of the arbitration agreement and whether the Respondent became a party to the FDA and arbitration agreement despite No Oral Modification provisions. The judge decided on the governing law and the application of English law to the question of party status but declined to make a final determination on whether the Respondent was a party, adjourning enforcement pending the French court's decision.

Legal Issues Presented

1. What is the governing law of the arbitration agreement contained within a main agreement expressly governed by English law but providing for arbitration in Paris?
2. Whether the Respondent became a party to the main agreement and/or arbitration agreement notwithstanding the No Oral Modification clauses in the main contract.
3. Whether the Commercial Court judge erred in adjourning enforcement proceedings rather than making a final determination on the Respondent's party status.

Arguments of the Parties

Appellant's Arguments

• The arbitration agreement is not governed by pure English law but by "English law plus," incorporating good faith, fair dealing, and UNIDROIT principles, thus excluding an express choice of English law.
• The arbitration clause's wording does not expressly select English law; it refers to principles of international transactions, allowing for French law as the seat of arbitration.
• The seat of arbitration in Paris is a strong factor negating an implied choice of English law to govern the arbitration agreement.
• The Respondent became a party to the FDA and arbitration agreement by conduct and performance, which should override the No Oral Modification clauses under the UNIDROIT principles and good faith obligations.
• There was inconsistent behaviour by the Respondent and acquiescence sufficient to bind it as a party despite the formal written consent requirement.
• The judge erred in not applying these principles and should have made a final determination allowing enforcement.
• The judge should have allowed the Appellant to adduce further evidence after the French proceedings.

Respondent's Arguments

• There is an express choice of English law governing the entire FDA including the arbitration agreement, based on Articles 1 and 15 read with Article 14.3.
• The concept of separability does not insulate the arbitration agreement from the governing law clause in the main agreement for construction purposes.
• No Oral Modification clauses require written consent for any amendment; conduct alone cannot override this.
• The UNIDROIT principles and good faith provisions do not override the strict No Oral Modification clauses.
• The Appellant failed to satisfy the estoppel test established in MWB Business Exchange Centres Ltd v Rock Advertising Ltd ("Rock Advertising").
• The judge was correct to find no written consent or unequivocal conduct amounting to estoppel.
• The judge erred in adjourning enforcement proceedings instead of making a final determination because the French court’s decision would not affect the English law issues.
• The Appellant had no real prospect of success and the enforcement should have been refused without further hearing.

Table of Precedents Cited

Court's Reasoning and Analysis

The Court began by affirming that the governing law of the arbitration agreement is the law to which the parties subjected it, which may be express or implied. The judge below correctly identified an express choice of English law governing the entire Franchise Development Agreement (FDA), including the arbitration agreement, based on Articles 1 and 15 read with Article 14.3. The arbitration clause's reference to application of the Agreement's provisions, including the governing law clause, supports this conclusion.

The Court rejected the Appellant's argument that the arbitration agreement was governed by a hybrid "English law plus" incorporating UNIDROIT principles or that the seat of arbitration in Paris displaced the express choice of English law. The Court noted that the UNIDROIT principles and good faith provisions do not override the express No Oral Modification clauses, which require written consent for amendments.

The Court analyzed the impact of the Supreme Court's decision in Rock Advertising, which clarified that No Oral Modification clauses are enforceable unless estoppel applies. Estoppel requires unequivocal words or conduct representing a valid variation and something more than an informal promise. The evidence relied upon by the Appellant fell short of this test, amounting at most to informal conduct insufficient to override the written consent requirement.

The Court found that the judge below erred in adjourning enforcement proceedings pending the French court's decision. The French court applies French law and a different test, so its decision is not relevant to the English law issues before the Commercial Court. Furthermore, the judge failed to apply the summary judgment standard to assess whether the Appellant had a real prospect of success on further evidence, which it did not.

Accordingly, the Court concluded that the Respondent did not become a party to the FDA or arbitration agreement under English law, and enforcement of the Award should be refused without further hearing.

Holding and Implications

DISMISSED the Appellant's appeal and ALLOWED the Respondent's cross-appeal.

The Court set aside the ex parte enforcement order and refused recognition and enforcement of the arbitration Award as a judgment in England. The direct effect is that the Award cannot be enforced against the Respondent in the English courts. No broader precedent was established beyond affirming the strict application of No Oral Modification clauses and the governing law principles in arbitration agreements embedded in host contracts.