Getting the nuts and bolts of an arbitration agreement right is crucial. This is the case whether you are entering a standalone agreement to arbitrate or whether your arbitration agreement amounts to several clauses in an overarching commercial contract. As the case discussed below shows, care should be taken to be consistent about which country’s law govern the contract on the one hand and the location or ‘seat’ of any future arbitration on the other.
We’ve discussed the danger of unclear agreements before, and issues of uncertainty around arbitration agreements continue to exercise the courts in London and other international arbitration centres. In late 2022 for example, a decision from France was published which was at odds with a parallel decision of the UK Supreme Court (UKSC).
The French and UK decisions in Kabab-ji Sal v Al Homaizi Foodstuff Company dealt with a basic aspect of an arbitration agreement: Which country’s law should apply to arbitration proceedings arising out of a particular contract? The conflicting judgments illustrate yet again the need for great care when agreeing to arbitrate which highlights the importance of careful drafting of these agreements.
Given the international, cross border nature of many commercial agreements the twin questions of where arbitrations should be held if there’s a dispute, and what legal rules will decide any dispute should always be anticipated when drafting an arbitration agreement.
KABAB-JI SAL v AL HOMAIZI FOODSTUFF COMPANY (2022): WHAT HAPPENED?
This long running dispute came down to the question of which country’s laws should decide contested issues about an arbitration agreement. The case had its origins in a franchise agreement signed in 2001 between Kabab-JI SAL (KJS), a Lebanese company, and Al Homaizi Foodstuff Company (AHFC) from Kuwait. Following a restructure in 2005 another company (KFG) took over AHFC.
Crucially AHFC did not sign the franchise agreements.
The franchise agreements were expressly governed by English law but specified Paris as the seat of any future arbitration. There was no provision as to what law should be used to interpret the agreement to arbitrate.
When a dispute arose under the franchise agreements KJS brought proceedings against KFG – but not against AHFC. KFG argued that it was not bound by the arbitration clauses in the franchise agreement because it had never signed them.
The question then arose: Which country’s courts had the right to interpret the arbitration clauses? France – where, under the agreement any arbitration was to be located? Or England, whose laws were stated as governing the franchise agreements themselves?
Litigation ensued over several years in both Paris and London. Ultimately the UKSC found that the franchise agreement’s governing law clause clearly extended to the arbitration agreement. And under English law KFG had not become party to the franchise agreements so was not bound by the franchise agreements.
In contrast when the French Court of Cassation issued its decision in September 2022 it found the opposite. Under French law KFG was bound by the obligations in the arbitration agreements.
COMMENT
As we have said, in Kabab-ji Sal the French Court of Cassation and the UKSC arrived at diametrically opposed conclusions. The fact that the courts of two of the most high-profile international arbitration centres arrived at different answers to the same question is a warning to businesses signing up to arbitration agreements that they are clear on what law governs the arbitration agreement.
At Nath Solicitors we are regularly involved in commercial arbitration. We also draft bespoke arbitration agreements across a range of industry sectors. For us the Kabab-ji Sal v Al Homaizi case highlights the risk a business will run if it signs up to an arbitration agreement that purports to apply laws to the contract that are of a different jurisdiction (England for example) from the seat of the arbitration (France as in the case discussed).
The way around this is to specifically state what law the parties wish to apply specifically to the arbitration agreement.
CONTACT US
For advice on arbitration rules and procedures please contact Shubha Nath at Nath Solicitors on 44 (0) 203 983 8278 or get in touch with the firm online.
