English Court of Appeal: Governing Law Clauses of Underlying Agreement Do Not Necessarily Cover The Governing Law Of Arbitration Agreement, Exception To Sulamerica Principle

Court-of-Appeal-600x400

In Sulamerica v Enesa Engelharia [2012] EWCA Civ 638, the English Court of Appeal inter alia held that where the arbitration agreement forms part of the substantive contract an express choice of law to govern that substantive contract is “an important factor to be taken into account” and “likely…to lead to the conclusion that the parties intended the arbitration agreement to be governed by the same system of law as the substantive contract, unless there are other factors present which point to a different conclusion. Recently, in Kabab-JI S.A.L. (Lebanon) v Kout Food Group (Kuwait), [2020] EWCA Civ 6, the question before the Court of Appeal was whether the expression “unless there are other factors present which point to a different conclusion” include the law of seat of arbitration. In the facts of the case, the Court of Appeal, extending the principles enunciated in Sulamerica inter alia held that governing law clauses of the underlying agreement will not always necessarily cover the governing law of the arbitration agreement. Detailed case analysis given below:-

Factual Matrix

Kabab-JI S.A.L (KSAL) entered into franchise development agreement (FDA) with Al Homaizi Foodstuff Company (AHFC) as licensee. Later AHFC became subsidiary of KFG.

Picture1 (2)

A dispute arose under the FDA which KSAL referred to arbitration before the ICC in Paris pursuant to the FDA but that arbitration was only commenced against KFG, not AHFC. The question before the Arbitral Tribunal was whether KFG had become an additional party to the FDA. The Arbitral Tribunal in majority award held that the question of whether KFG was bound by the arbitration agreement contained in FDA was a matter of French law, but the issue of whether a transfer of substantive rights and obligations took place was governed by English law. It further concluded that, as a matter of English law, a ‘novation’ was to be inferred by the conduct of the parties adding KFG as the main franchisee. The majority thus concluded that, on the merits, KFG was in breach of the FDA.

Following the publication of the Award, KFG filed an annulment application before the French courts, Paris whereas KSAL issued proceedings in London for enforcement of the Award as a judgment which was allowed ex parte. Thereafter KFG applied for an order that recognition and enforcement of the Award as a judgment be refused and an order setting aside the enforcement order.

Findings of the Commercial Court

The question before the Commercial Court was to ascertain what is the law that governs the question of whether KFG became a party to the arbitration agreement. Applying section 103(2)(b) of the Arbitration Act 1996 (‘English Arbitration Act’), the Commercial Court inter alia relied on Moore-Bick LJ in Sulamerica, to the effect that where the arbitration agreement forms part of the substantive contract an express choice of law to govern that substantive contract is “an important factor to be taken into account” and “likely…to lead to the conclusion that the parties intended the arbitration agreement to be governed by the same system of law as the substantive contract, unless there are other factors present which point to a different conclusion”. In view thereof, the Commercial Court held concluded that there had been an express choice of English law as governing the arbitration agreement.

This view was premised on the interpretation of clauses in FDA wherein Article 15 provided for the laws of England as the governing law of the FDA. Article 14, the Settlement of Disputes clause, expressly stated by clause 14.3, that “the arbitrators shall apply the provisions contained in the agreement”, which is the FDA, and Article 1 provides that “This Agreement …shall be considered as a whole.”. Basis these clauses, the Commercial Court concluded that, on the clear construction of Article 14.3, the provisions which the Arbitrators were thus required to apply included the provisions as to law in Article 15 i.e. laws of England. Thus, the English law governs the validity of the arbitration clause and the issue of whether KFG ever became a party to it.

The ancillary question to this finding was, whether KFG become a party to the FDA. The Court held that at English law, KFG did not become a party to the FDA or the arbitration agreement of the FDA. Further, the No Oral Modification clauses in the FDA would mean that KFG was not a party to the FDA or the arbitration agreement unless KSAL could satisfy the conditions for estoppel or preclusion, which in Court’s view, KSAL could not. However, the Court then adjourned KSAL’s enforcement application and stayed the judgment with liberty to restore the matter for determination of any outstanding issues following the decision of the Cour d’appel de Paris which was seized of the annulment application filed by KFG.

Court of Appeal

Thus, the matter was in appeal before the English Court of Appeal on the ground that the Commercial Court failed to apply French law to the question of whether KFG was bound by the relevant arbitration agreements, and failed to find that KFG had become a party to the arbitration agreements as a result of its conduct and performance of the underlying contracts. Further, the Commercial Court, erroneously applying English law to find that KFG had not become a party to the arbitration agreements, or to the contracts, because the Commercial Court ruled that the contracts required an agreement in writing to add KFG. However, as per KSAL, on a proper and true construction of the relevant arbitration agreements and the contracts, there was no such requirement under the relevant contracts.

Parties Contentions

Before the Court of Appeal, KSAL submitted that the express choice of a governing law in the contract was no more than a starting assumption that the parties intended the whole of their relationship (including the arbitration agreement) to be governed by that system of law placing reliance on Moore-Bick LJ in Sulamerica and per Longmore LJ in C v D [2007] EWCA Civ 1282, who said it was not “automatic” that the answer to the enquiry was that the arbitration agreement was governed by the same system of law as the main agreement.

KSAL submitted that any implied choice of English law as the governing law of the arbitration agreement was negatived by the fact that the seat of the arbitration was Paris and the Commercial Court should have concluded either that the implied choice of law governing the arbitration agreement was French law or, in default of any such choice, French law applied as the law of the place where the Award was made.

In addition, in KSAL’s view, even if the Commercial Court was right that the governing law of the arbitration agreement was English law, the Court had erred in concluding that consent in writing was required for KFG to become an additional licensor under the FDA. The FDA itself was governed by English law supplemented by “principles of law generally recognised in international transactions” which included the UNIDROIT principles. Further, the UNIDROIT provisions taken together meant that the extensive conduct of KFG and unequivocal performance by KFG of the FDA were sufficient to override the formality of the No Oral Modification clauses and make KFG an additional party to the FDA.

Per contra, KFG contended that the combination of Articles 1 and 15 of the FDA was, as a matter of construction, an express choice of English law as the governing law of the entire FDA including the arbitration agreement. Article 1 made clear that “This Agreement” consisted of all the terms of agreement then set out (which must include Article 14) and each of the documents (including therefore the document containing those terms of agreement) was an integral part of “This Agreement”. Article 15 then made clear that “This Agreement” was governed by English law which must mean all of “This Agreement” including the arbitration agreement. These two Articles on their own established an express choice of English law as governing the arbitration agreement, but if there was any doubt it was removed by the first sentence of Article 14.3: “The arbitrator(s) shall apply the provisions contained  in the Agreement.” The “Agreement” must include Article 14 itself and Article 15, the governing law clause. Thus, in KFG’s view, the first sentence confirmed that, for all purposes, the Agreement included Articles 14 and 15 so that the governing law clause also governed the arbitration agreement.

In addition relying on Moore- Bick LJ in Sulamerica, KFG submitted that Section 7 of the English Arbitration Act confirms that the concept of separability is designed to protect an arbitration agreement where the main agreement is invalid etc. so as to ensure that any dispute as to such invalidity is determined by arbitration. It does not follow that the arbitration agreement is a separate agreement from the main other agreement for other purposes such as construction. Thus, if, contrary to KFG’s primary case, there was no express choice of governing law of the arbitration agreement, KFG submitted that there was an implied choice of English law by virtue of the FDA being expressly governed by English law relying upon the analysis of Moore-Bick LJ in Sulamerica.

Further, the fact that the seat of the arbitration is in a different country to that whose law expressly governs the main agreement will not, without more, displace the strong indication that there is an implied choice of English law to govern the arbitration agreement by virtue of the FDA being expressly governed by English law. This conclusion by KFG was supported by the judgment of Andrew Smith J in Arsanovia v Cruz City 1 Mauritius Holdings [2012] EWHC 3702 (Comm). It was also supported by the summary of the principles to be derived from the authorities, culminating in Sulamerica and Arsanovia, in the judgment of Hamblen J (as he then was) in Habas Sinai v VSC Steel Company Limited [2013] EWHC 4071 (Comm).

In relation to the second part of the appeal which proceeded on the basis that the governing law of the arbitration agreement is English law, KFG submitted that the FDA contained a “double lock”: the requirement for (i) a written document executed by duly authorised representatives of both parties to the FDA for any amendment to it to be effective (Article 26) and a written document signed by both parties for any consent to be effective (Article 24); and (ii) that any waiver of the first set of locks requires the written signed consent of both parties (Article 17). On any view the addition of KFG to the FDA for which KSAL contends is a “change” within Article 24 and an “amendment” within Article 26. The UNIDROIT principles could not be relied upon to establish some amendment or change to the FDA by reason of the conduct of KFG since this would contradict the double lock in the No Oral Modification clauses in the FDA. Thus, conduct alone could not be sufficient to effect a change or variation such as the addition of a party to the FDA and something more was required.

In view thereof, in cross appeal, KFG contended that Commercial Court should have made a final determination refusing recognition and enforcement and not given the KSAL last chance.

Judgement of the Court of Appeal

The Court of Appeal held as under:-

Governing law clauses do not necessarily cover the arbitration agreement

(1)          Articles 1 and 15 of the FDA in themselves provide for the express choice of English law to govern the arbitration agreement in Article 14. The answer to the suggestion that, if this analysis were correct, there would be an express choice of governing law of the arbitration clause in every contract which contains a governing law clause is essentially that governing law clauses do not necessarily cover the arbitration agreement. This one does because of the correct construction of the terms of Articles 1 and 15 taken together.

(2)          The first sentence of Article 14.3 supports the conclusion that, on the true construction of the FDA as a whole, there is an express choice of English law to govern the arbitration agreement. That sentence provides: “The arbitrator(s) shall apply the provisions contained in the Agreement.” That means that the arbitrators must apply all the provisions, including the governing law clause in Article 15, not just to substantive disputes but to any dispute as to their own jurisdiction, so that English law governs the resolution of any dispute as to their jurisdiction and is thus the governing law of the arbitration agreement.

(3)          So far as the supplementation of English Law with “principles of law generally recognised in international transactions” in Article 14.3 are concerned, they do not assist KSAL’s argument on this part of the appeal, in the sense that they do not point to some different system of law (specifically French law) as governing the arbitration agreement than English law. More so because, the UNIDROIT principles, upon which KSAL placed so much reliance, are silent as to which system of law governs any agreement, let alone the arbitration clause in an agreement.

The purpose of concept of the separability is to give legal effect to parties intended agreed procedure for resolving disputes and not to insulate the arbitration agreement from the substantive contract for all purposes

(4)          The concept of the separability of an arbitration agreement now enshrined in section 7 of the English Arbitration Act does not preclude the arbitration agreement being construed with the remainder of the main agreement as a whole, a fortiori where the clear intention is that the main agreement should be construed as a whole and where, as here, there is nothing in the wording of the arbitration agreement which suggests that it is intended to be construed in isolation from the remainder of the main agreement; quite the contrary, as the first sentence of Article 14.3 demonstrates.

The choice of seat of arbitration being Paris will not be taken as an implied choice of governing law of arbitration as French law since the express terms of the underlying agreement stipulates that the governing law of the entire agreement including the arbitration agreement will be English Law

(5)          The express choice of English law as governing the entire FDA including the arbitration agreement is not affected by the fact that Article 14.5 provides that the seat of the arbitration is to be Paris. Whatever impact that provision might have on an implied choice of the governing law of the arbitration agreement, it cannot overcome the clear effect of the express terms of the FDA that Article 15 covers not only the FDA but the arbitration agreement.

(6)          Given that there was no question of the addition of KFG as a party having been agreed in writing or of any consent in writing to their addition, the No Oral Modification clauses in the FDA would mean that KFG did not become a party to the FDA or the arbitration agreement unless, there were “(i)…some words or conduct unequivocally representing that the variation was valid notwithstanding its informality; and (ii) something more would be required for this purpose than the informal promise itself.” (Rock Advertising test enunciated in MWB Business Exchange Centres Limited v Rock Advertising Limited). It is clear from the Commercial Court’s findings of fact, that KSAL cannot begin to satisfy the Rock Advertising test.

(7)          Thus, given that KSAL could not satisfy the Rock Advertising test, the Commercial Court should have made a final determination that KFG was not a party to the FDA or the arbitration agreement, so that the Award was not enforceable against KFG under section 103(2) of the English Arbitration Act. In failing to make that final determination but adjourning the KSAL’s application for enforcement for a possible further hearing after the determination of the issue of annulment by the Cour d’appel de Paris, the Commercial Court erred in principle and in law to the extent that KSAL was arguing for an adjournment until after the determination of the French Court, it was incumbent on KSAL to demonstrate that at a further hearing before the Commercial Court KSAL had a real prospect of successfully enforcing the Award. On the material before the Commercial Court, there was no such prospect given that KSAL could not begin to satisfy the Rock Advertising test.

(8)          The error in Commercial Court’s approach in nonetheless granting the adjournment is that it does not seem to have given any consideration to what additional material or evidence would, or even might, emerge during the proceedings before the French Court or otherwise before any further hearing before the Commercial Court, which would give the KSAL a real prospect of satisfying the Rock Advertising test and thus of being entitled to enforce the Award as a judgment.

Accordingly, the Court of Appeal held that the correct outcome in this case should be that KSAL’s appeal is dismissed and the cross-appeal in the KFG’s Notice is allowed.

Disclaimer: The views expressed on this post are mine and do not reflect the views of the organisation(s) I am engaged with

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out /  Change )

Google photo

You are commenting using your Google account. Log Out /  Change )

Twitter picture

You are commenting using your Twitter account. Log Out /  Change )

Facebook photo

You are commenting using your Facebook account. Log Out /  Change )

Connecting to %s