This protracted legal saga is a scathing example of how arbitration proceedings, and subsequent arbitral awards, can be derailed and gutted out of their substance and power, when elementary conditions and basic steps were not complied with and met, by the parties to such Kabab-Ji v Kout Food arbitration proceedings, at the outset. These cracks in the fragile ‟arbitration ecosystem” leave the door open to annulment proceedings and court requests to refuse recognition and enforcement of any arbitral award handed down under such circumstances. Therefore, what was supposed to be a confidential, quick and solid alternative dispute resolution process, became a seven years’ very publicised legal proceedings mess, involving two criss-crossed court proceedings in France and the United Kingdom, which escalated right to the top of the jurisdictional echelons, at the ‟cour de cassation” and supreme court levels. Yet, no pragmatic and tangible outcomes were achieved by the party who wanted the Kabab-Ji v Kout Food arbitral award to be enforced in the United Kingdom, while substantial financial and legal resources were deployed throughout … for, ultimately, nothing. How did the parties to this arbitration end up there? How could this sad state of affair have been avoided?
1. Kabab-Ji v Kout Food: facts
Lebanese company Kabab-Ji SAL (‟KJI”) developed a distinctive type of restaurant specialising in Lebanese and other Middle Eastern cuisines and owns trademarks and other rights underpinning this restaurant concept.
By a Franchise Development Agreement dated 16 July 2001 (the ‟FDA”), KJI, acting as Licensor, granted a licence to the Kuwaiti company Al Homaizi Foodstuff Company (‟AHFC”), acting as Licensee, to operate a franchise using its restaurant concept in Kuwait for a period of ten years. Under the FDA, KJI and AHFC subsequently entered into a total of ten Franchise Outlet Agreements (‟FOAs”, and, together with the FDA, the “Franchise agreements”) in respect of individual outlets opened in Kuwait.
The Franchise agreements were all expressly governed by English law, and each contained a separate arbitration clause providing for an International Chamber of Commerce (‟ICC”) arbitration seated in Paris.
In 2005, AHFC underwent a corporate restructuring. Subsequently, a new holding company called Kout Food Group (‟KFG”) was incorporated and AHFC became a subsidiary of KFG. AHFC’s parent company, KFG, never signed any one of the Franchise agreements.
On 16 July 2011, as no new agreement was entered into, the Franchise agreements expired.
On 27 March 2015, KJI started arbitration proceedings under the rules of ICC in Paris. KJI brought claims under the Franchise agreements, not against its Licensee, AHFC, but against the parent’s Licensee, KFG. KFG challenged the validity of the arbitration claim on the basis that it was neither a party to the Franchise agreements, nor, hence, a party to the arbitration agreement set out in the Franchise agreements.
The relevant clauses of the FDA were:
‟Article 3: Grant of rights
3.1. License… This grant is intended to be strictly personal in nature to the Licensee, and no rights hereunder whatsoever may be assigned or transferred by Licensee in whole or in part without the prior written approval of Licensor.
Article 14: Settlement of disputes
14.2…any dispute, controversy or claim between Licensor and Licensee, with respect to any issue, arising out of or relating to this Agreement, or the breach thereof … shall, failing amicable settlement, on request of Licensor or Licensee, be finally settled under the [ICC rules…].
14.3. The arbitrator(s) shall apply the provisions contained in the Agreement. The arbitrator(s) shall also apply principles of law generally recognised in international transactions… Under no circumstances shall the arbitrator(s) apply any rule(s) that contradict(s) the strict wording of the Agreement.
14.5. The arbitration shall be conducted in the English language, in Paris, France.
Article 15: Governing law
This Agreement shall be governed by and construed in accordance with the laws of England.
Article 19: Rights not transferable
The parties hereto agree that all rights granted to Licensee under this Agreement are personal in nature … Licensee’s interest under this Agreement is not transferable or assignable, under any circumstances whatsoever, voluntarily, by operation of law or otherwise, without the written consent of Licensor…”.
2. Kabab-Ji v Kout Food: procedure
By way of a Kabab-Ji v Kout Food final arbitral award, handed down on 11 September 2017, the three arbitrators (Bruno Leurent, president, Mohamed Abdel Wahab, arbitrator appointed by the claimant, KJI, and Klaus Reichert, arbitrator appointed by the defendant, KFG) decided, by a majority (Klaus Reichert, the only English law arbitrator, dissenting), that the issue of whether or not the arbitrators had jurisdiction against KFG was governed by French law. The arbitrators then applied French law to conclude that KFG had become a party to the Franchise agreements and was therefore liable to pay to KJI some unpaid licence fees, accrued between 2008 and 2011, as well as some damages for loss of earnings, for breach of the Franchise agreements.
In December 2017, KFG initiated annulment proceedings of the above-mentioned final arbitral award, before the Paris court of appeal, on grounds which included the contention that the arbitrators had no jurisdiction over KFG since it was not a party to, and therefore not bound by, the Franchise agreements and their respective arbitration clauses. KFG also claimed, to set aside the arbitral award, that the arbitration tribunal should have applied English law, as the law which the parties had expressly chosen to govern the entirety of the Franchise agreements, including the arbitration agreements contained therein.
Also in December 2017, KJI issued proceedings in the English commercial court in London, in order to enforce the arbitral award dated 11 September 2017 as a judgment. KFG made a cross application, in these proceedings, for an order that the recognition and enforcement of this arbitral award in England be refused, on the basis that it was not bound by the Franchise agreements and their arbitration clauses, relying on article V (1) of the New York Convention and section 103 of the Arbitration act 1996.
In the first judgment to be issued in these parallel proceedings (i.e. the high court judgment in KJI (Lebanon) v KFG (Kuwait) [2019] EWHC 899, dated 29 March 2019), the English commercial court ruled that English law, the law of the Franchise agreements, governed the validity of the arbitration agreements. The English court, however, adjourned a final decision on whether KFG was bound by the arbitration agreements. KJI appealed this decision to the English court of appeal, which delivered its judgment on 20 January 2020. The English court of appeal refused recognition and enforcement of the arbitral award dated 11 September 2017 in England and Wales, and KJI appealed this decision to the UK supreme court (‟UKSC”).
Meanwhile, the Paris court of appeal handed down its judgment on 23 June 2020, in the French annulment proceedings of the final arbitral award dated 11 September 2017, brought by KFG. The court of appeal rejected KFG’s claims on all grounds, deciding that the parties’ designation of English law as generally governing the Franchise agreements did not amount to establishing the requisite ‟common will of the parties” (sic) to also submit the arbitration agreements to English law. The Paris court of appeal also noted that generally recognised principles of law established that the substantive law of the place of the seat of arbitration should apply to determinations involving the arbitration clause. Accordingly, applying French law, the court of appeal found that the arbitration agreements could be extended to a non-signatory directly involved in the performance of the Franchise agreements and in any disputes arising out of these Franchise agreements. It therefore dismissed KFG’s annulment action. KFG lodged an appeal in cassation of this judgment issued by the Paris court of appeal, with the French supreme court, the ‟cour de cassation” (‟CC”).
In its judgment dated 27 October 2021, the UKSC reached the opposite conclusion from the one formed by the Paris court of appeals. The UKSC concluded that English law governed the question of whether KFG became a party to the arbitration agreements, because (i) the parties chose English law to govern the Franchise agreements and (ii) the parties expressly stated that English law would govern all provisions of the Franchise agreements (including the arbitration agreements). The UKSC was clear, in line with the earlier UKSC’s decision of Enka Insaat ve Sanayi AS v OOO ‟Insurance Company Chubb” [2020] UKSC 38, that ‟it seems difficult to resist the conclusion that a general choice of law clause in a written contract containing an arbitration clause will normally be a sufficient indication of the law to which the parties subjected the arbitration agreements”, and ‟we would endorse the conclusion of the judge, and the court of appeal, that the law governing the question of whether KFG became a party to the arbitration agreement is English law”, and ‟cl. 14.3 of the FDA does not detract from the choice of English law as the law which, under section 103 (2) (b) of the 1996 arbitration act, the English court must apply to determine whether KFG became a party to the arbitration agreement within the FDA”. In the result, the UKSC concluded in its judgment, by article 15 of the FDA, English law governs the whole of the FDA, including the arbitration clause. Applying English law, the UKSC confirmed that KFG was not bound by the arbitration agreements between AHFC and KJI, and unanimously dismissed KJI’s appeal. Therefore, to this day, the above-mentioned 2017 arbitral award is, and remains, unenforceable in the United Kingdom, by KJI, on KFG’s assets (and, of course, on AHFC’s assets).
In its judgment dated 28 September 2022, the CC upheld the decision of the Paris court of appeal. It held that, under French law, the law of the seat will govern an arbitration agreement, including its validity and effectiveness, except where the parties expressly submit the validity and effects of the arbitration agreement to a different choice of law. In reaching this conclusion, the CC rejected KFG’s argument that the Franchise agreements’ choice of law clause should apply to the entire agreement, including the arbitration clauses, because (i) the Franchise agreements stipulated that they should be interpreted as a single agreement, and (ii) the arbitration agreement itself explicitly instructed the arbitrators to apply the provisions of the Franchise agreements and prohibited the arbitrators from applying rules that would contradict the Franchise agreements. On the contrary, the CC held that, pursuant to a ‟substantive rule of international arbitration”, an arbitration agreement is legally independent from the underlying contract wherein it is contained. By virtue of French law, the existence and effectiveness of the arbitration agreement is determined by the ‟common will of the parties”. According to the CC, the parties’ choice of English law as the substantive law of the contracts did not evidence common will to designate English law as the law governing the arbitration agreement. Because the arbitration agreements referred to a Paris seat of arbitration, the substantive rules of the seat (i.e. the material rules of French law in the field of international arbitration) applied to the determination as to whether a non-signatory was bound by an arbitration agreement. Under French law, KFG was bound by the arbitration agreements. Therefore, to this day, the above-mentioned 2017 arbitral award is, and remains, enforceable in France, by KJI, on KFG’s assets, should KFG have any assets in France.
In view of all the above, and from a pragmatic standpoint, it is worth noting that KJI can enforce the 2017 arbitral award in France, but not in the United Kingdom, on KFG’s assets.
3. Key findings from the Kabab-Ji v Kout Food case
3.1. Always explicitly set out the law governing the arbitration agreement, in the arbitration clause
If the arbitration clause set out in the Franchise agreements had been explicit and clear, as to which law governed the arbitration agreement, none of this confusion, and no diverging court decisions, would have ensued.
If the parties do not specify the law governing an arbitration agreement, they run the risk of conflicting outcomes across jurisdictions – and potentially protracted court proceedings, as seen in this Kabab-Ji v Kout Food case – regarding the validity and enforceability of an arbitral award. This risk is particularly acute where the substantive law of the contract, and the law of the seat of the arbitration, differ, like in this matter.
Given that the CC left open that ‟common will of the parties”, if expressed, could be ‟sufficient to submit the effectiveness of the arbitration agreement” to another law than that of the French seat, it is obviously essential, when agreeing to an ICC Paris arbitration, to provide, in a clause equivalent to the above-mentioned article 15 of the FDA in this case, some express provision such as ‟This Agreement, including the arbitration provided for in article 14.2 above, shall be governed by, and construed in accordance with, the laws of England”.
The standard arbitration clauses provided by some arbitral institutions, such as the standard ICC arbitration clause, do not address the issue of the law of the arbitration agreement. To the extent that parties use such clauses, they should amend them in order to set out the law governing the arbitration agreement explicitly. And arbitration institutions, such as the ICC, should promptly amend their standard arbitration clauses, in order to add appropriate language for parties to explicitly set out the law governing their arbitration agreement.
3.2. Before filing a court claim, be mindful of the fact that two systems of law – French and English – will stay true to their legal traditions and principles, even if this brings to diverging results across countries, as far as the law applicable to the arbitration agreement is concerned
This Kabab-Ji v Kout Food case demonstrates the inconsistent approach of how the law applicable to the arbitration agreement may be determined:
- with the Paris appeal court, and then the CC, confirming the long-standing French position on the law applicable to an arbitration agreement, faced with an express choice of Paris as the seat of arbitration, that, even where the Franchise agreements are governed by English law, it is the substantive rules of French arbitration law which govern the validity of the arbitration clause, including who is a party to it, and
- with the London commercial court, the UK court of appeal and then the UKSC, confirming that the law governing the validity of the arbitration agreement was English law, in compliance with the above-mentioned precedent Enka Insaat ve Sanayi AS v OOO ‟Insurance Company Chubb” which sets out: ‟when an arbitration agreement is silent as to its governing law, the law expressly chosen by the parties to govern the contract as a whole is generally interpreted to govern the arbitration agreement”.
Indeed, KJI wasted money in legal and court fees, by attempting to enforce the 2017 Kabab-Ji v Kout Food arbitral award in the United Kingdom, against KFG’s assets, while it was clear, from the outset, that UK courts would never agree with the rationale, and legal arguments, which underpinned that final arbitral award dated 11 September 2017. KJI may waste even more money if it was to file further court proceedings in any other Anglo-Saxon jurisdiction (such as the United States of America, Hong Kong, etc.) and would definitely lose if it was to file further court proceedings for enforcement and recognition of this 2017 arbitral award, in countries belonging to the Commonwealth (Antigua and Barbuda, Australia, The Bahamas, Belize, Canada, Grenada, Jamaica, New Zealand, Papua New Guinea, Saint Kitts and Nevis, Saint Lucia, Saint Vincent and the Grenadines, Solomon Islands, Tuvalu) and/or in the Channels Islands (Jersey and Guernsey). Indeed, via a combination of the application of the New York convention and the influence of the Judicial Committee of the Privy Council, there is no way than any one of these above-mentioned countries (many of them, tax havens where KFG may very well have stashed some bank accounts and reserves) would recognise and enforce the 2017 arbitral award on their soil.
3.3. Strict interpretation of the Franchise agreements, or piercing the corporate veil, that is the question
As seen in this Kabab-Ji v Kout Food case, English courts also stuck to their guns in relation to making a strict interpretation of the Franchise agreements, and in particular of the above-mentioned articles 3, 13, 14 and 19 of the FDA, emphasising that the Franchise agreements had solely been entered into by KJI, as Licensor, and AHFC, as Licensee, even after the 2005 restructuring, when KFG became AHFC’s parent company in 2005. The commercial court, court of appeal and UKSC absolutely refused to ‟pierce the corporate veil” (i.e. handing down a decision treating the rights or duties of a corporation as the rights or liabilities of its shareholders and/or parent company), in compliance with English law which was, after all, the governing law of the Franchise agreements. Their main argument was that, should the parties to the Franchise agreements had wanted to make KFG an additional party to these contracts, they would have amended such Franchise agreements accordingly, and/or obtained the prior written approval of KJI, the Licensor, between 2005 (the date of the corporate restructuring) and 16 July 2011 (i.e. the termination date of the Franchise agreements).
Yet, the ICC arbitral tribunal, seated in Paris, and then French courts, took a much more ‟Mediterranean” approach to the key questions as to whether KFG could be deemed to be a party to the Franchise agreements, and to the arbitration agreements set out in these Franchise agreements, for that matter, and therefore could be held responsible for the actions and liabilities of its subsidiary, AHFC. The answers to these three questions are ‟yes”, ‟yes” and ‟yes”, under French law, apparently, as this case illustrates. While there is no express legislation setting out that lifting the corporate veil is lawful, in France, well-established case law from the CC recognises that piercing the corporate veil is appropriate when a parent company takes part in business negotiations, and/or in the business activities, of its subsidiary. In this matter Kabab-Ji v Kout Food, the Paris court of appeal clearly sets out, in its judgment dated 23 June 2020, that several pieces of evidence prove that KFG was running and managing the various Kabab-Ji restaurants in Kuwait, while AHFC no longer ran the show. Therefore, according to the Paris court of appeal, and then the CC, it was appropriate to lift the corporate veil under these circumstances and pass on any liabilities and obligations of AHFC to its parent, KFG.
Parties to a commercial agreement which contains an arbitration clause must therefore be very cautious, when they select the law governing the arbitration agreement, as to whether it is in their best interest to choose:
- either a law which takes a rigid and strict approach, in relation to interpreting the clauses of the commercial agreement and respecting the corporate veil (such as English law), or
- a law and/or case law which is way more ‟fluid” and evidence-based, proceeding on a case-by-case basis, in relation to interpreting the clauses of the commercial agreement and lifting the corporate veil (such as French law).
If a party thinks that it may be the object of a merger or acquisition, during the execution of that commercial agreement, it may prefer to select English law, in order to compartiment its own personal liability, from the liability of any future acquiror, and therefore become a more attractive acquisition target. And if a party thinks that its counterparty to the commercial agreement may be the object of a merger or acquisition in the near future, it may prefer to select French law as the law of the arbitration agreement, in order to be able to go after the counterparty’s (more bankable and solvent) parent company, in case things go sour.
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