International contracting parties often turn to arbitration to avoid potentially biased national courts when disputes arise. However, even if they choose arbitration, disputants remain subject to the whims of domestic courts when they seek to enforce an arbitration award. In two recent cases arising from a single arbitration, the courts of England and France reached opposite results on what law governs the parties’ agreement to arbitrate. These two divergent views led to two significantly different outcomes highlighting the pitfalls of international arbitration: The UK Supreme Court denied enforcement of the arbitration award while the French court upheld it. This article explores the circumstances that led to this awkward outcome and the key takeaways.
Background. The case of ‘Kabab-Ji v. Kout Food Group (KFG)’ involves a Lebanese company, Kabab-Ji, that had entered into a series of franchise agreements (FAs) with a Kuwaiti company. Thereafter, the Kuwaiti counterpart underwent a corporate restructuring whereby it became a subsidiary of a new holding company, KFG. When a dispute arose under the FAs, Kabab-Ji initiated arbitration proceedings against KFG with the International Chamber of Commerce in Paris, in accordance with the FAs. However, KFG was not a party to any of the FAs and thus took part in the arbitration under protest. In deciding on KFG’s argument that it was not subject to the arbitration agreement since it wasn’t a party to the FAs, the Tribunal noted that the arbitration clause was silent as to the law governing the agreement to arbitrate. It rejected the argument that the law of the contract, namely English law, should therefore apply to the arbitration agreement. Instead, it concluded that the law of the seat of the arbitration, in this case French law, should apply to the procedural matters. Applying French law, the Tribunal determined that KFG was bound by the FAs and ultimately found that it was in breach of its contractual obligations. It thus issued an award in favor of Kabab-Ji.
