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

An arbitration agreement may be subject to an express choice of law where the contract, read as a whole, provides that all its terms are governed by that law. Separability preserves an arbitration agreement when the main contract is ineffective. It does not require the arbitration clause to be construed in isolation.

Clear no-oral-modification and written-consent provisions cannot be displaced by contractual good faith or international principles beyond the limits of estoppel. Estoppel requires unequivocal words or conduct that the informal variation is valid, and something more than the informal promise itself. Where an award creditor cannot satisfy that test, enforcement may be refused under the Arbitration Act 1996.

A Lebanese franchisor obtained an ICC award in Paris against a Kuwaiti company, KFG, although the franchise development agreement had originally been made with KFG’s subsidiary. The tribunal majority held that KFG had become an additional party by conduct. KFG challenged enforcement in England under the Arbitration Act 1996.

The Commercial Court held that English law governed the arbitration agreement and that KFG had not become a party, subject to a possible further examination of documents. It adjourned enforcement pending annulment proceedings in France. The franchisor appealed the governing-law and party issues. KFG cross-appealed against the failure to make a final determination.

1. Appeal dismissed; cross-appeal allowed. English law was expressly chosen as the law governing the arbitration agreement. Articles 1 and 15 provided that the whole agreement, including Article 14, was governed by English law. Article 14.3 reinforced that construction by requiring arbitrators to apply the agreement’s provisions, including its governing-law clause. An express choice need not state separately that the arbitration clause is governed by English law.

2. The Paris seat could not displace that express choice. Nor did the parties’ reference to good faith, internationally recognised principles, or potentially applicable mandatory provisions identify a different governing law. The court therefore did not need to decide the alternative implied-choice analysis.

3. Section 7 of the Arbitration Act 1996 did not assist the franchisor. Separability protects the agreed dispute-resolution process if the main agreement is invalid, non-existent or ineffective. It does not prevent an arbitration agreement from being construed with the main agreement, particularly where the contractual language requires the agreement to be read as a whole.

4. The agreement’s no-oral-modification and written-consent clauses prevented KFG becoming a party unless it was precluded by estoppel from relying on them. Applying [2018] UKSC 24, estoppel required unequivocal words or conduct representing that the informal variation was valid notwithstanding its informality, and something more than the informal promise. Good faith and the UNIDROIT principles could not override the strict contractual wording more broadly. The relied-on conduct did not satisfy that test.

5. KFG was therefore not a party to either the franchise agreement or its arbitration agreement, and the award was not enforceable against it under section 103(2). The judge should have finally refused enforcement rather than adjourning the matter. The French annulment proceedings were irrelevant to the English-law issue, and the franchisor identified no further evidence giving it a real prospect of satisfying the estoppel test. The ex parte enforcement order was set aside and recognition and enforcement were refused.

• Court of Appeal (Civil Division): In [2020] EWCA Civ 6, dismissed the franchisor’s appeal, allowed KFG’s cross-appeal, set aside the ex parte enforcement order, and finally refused recognition and enforcement of the award.

• High Court, Commercial Court: Sir Michael Burton held that English law governed the arbitration agreement and gave a conditional negative answer on whether KFG became a party, but adjourned enforcement pending the French annulment proceedings.