GOVERNING LAW OF THE ARBITRATION AGREEMENT – KABAB-JI REJECTED: COUR D’APPEL DE PARIS V. THE ENGLISH COURT OF APPEAL
*Abhinav Gupta The law governing the arbitration agreement has been immensely debated with courts frequently overruling previous judgments and decisions. On June 23, 2020, the Paris Court of Appeals delivered its judgment in Kout Food Group v. Kabab-ji SAL[1] overruling the holding of the English Court of Appeals. This confrontation arises due to the English Court’s refusal to stay the proceedings and wait for the decision of the French court which is the seat of the arbitration in the instant case. I. Background – The English Court of Appeal’s decision The English Court’s decision in Kabab-ji SAL v. Kout Food Group[2] focused on the first stage, which is the express choice stage, laid down in Sulamerica CIA Nacional De Segurous SA and others v. Enesa Engenharia SA and others.[3] In the present case of Kabab-ji,[4] English law was the governing law of the contract while French law was the law of the seat. The court interpreted the wording of the contract and observed that ‘This Agreement’ as stated in Article 1 of the contract includes all the subsequent articles. Further, Article 15 (governing law clause) stated that ‘This Agreement’ shall be governed by English law. Furthermore, the placement of the arbitration agreement (Article 14), within the main contract, led the court to conclude that the parties made an express choice to govern the entire contract, including the arbitration agreement, by English law. This conclusion was further fortified by the court’s interpretation of Article 14.3 of the Agreement. It stated that the tribunal shall ‘also’ apply principles of law generally recognised in international transactions. The court held that this provision demonstrated a clear intention that the entire agreement was to be governed by English law. Thus, the court never went into determining the implied choice (second stage) or the closest and most real connection test (third stage). The implied choice stage is applied when there is insufficient evidence to prove that the parties expressly and unequivocally chose a law to govern the arbitration agreement while the closes connection test is applied as the last resort to determine the law governing the arbitration agreement by taking into account the governing law, seat of arbitration, or the nationality of the parties. When faced with the question of separability of the arbitration clause from the main contract, the court relied on the decision of Sulamerica[5] and stated that the purpose of the doctrine of separability is to insure that the chosen dispute resolution mechanism by the parties survives even when the substantive contract is rendered ineffective. Thus, it observed that the purpose of the aforementioned doctrine is not to protect the arbitration agreement from the substantive provisions of the contract for other purposes such as interpretation of the intention of the parties. Thus, the English court concluded that the wordings of the substantive provisions of the contract showed that the parties had ‘expressly’ chosen to govern the arbitration agreement by the substantive law (English law) and not the law of the seat (French law). II. The Paris Court of Appeal’s decision The French court effectively dismissed the findings of the English court by concluding that according to the substantive rule of international arbitration law, the arbitration agreement is legally distinct from the underlying contract. Thus, it applied the doctrine of separability to interpret Article 14 of the Agreement distinctly from Article 15 and Article 1 of the Agreement. It observed that the validity and existence of the arbitration agreement are governed by the law of the seat unless there is a contrary intention by the parties. Thus, it applied the second stage (implied) test of Sulamerica[6] recently decided in the Enka Insaat Ve Sanayi A.S. v. OOO “Insurance Company Chubb” and others.[7] The court thus held that French law, that is the law of the seat, will apply to the arbitration agreement. It rejected the interpretation made by the English courts that there existed an express choice of law of the arbitration agreement between the parties. Conversely, it found that there existed nothing in the contract to indicate that the law of the seat will not be applied in the instant case. The Court of Appeal stated that choosing English law as the general law governing the contract and prohibiting the arbitrators from applying rules that contradict the Agreement as per Article 14.3 of the Agreement did not show the intention of parties to govern the arbitration clause by English law and is therefore insufficient to diverge from the substantive rules of international arbitration. The court further pointed out that the party Kout Food Group did not provide sufficient evidence to suggest that the parties had expressly and unequivocally agreed to subject the arbitration agreement to English law. The court acknowledged Article 14.3 of the contract which stated that “The arbitrator(s) shall also apply the 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.” It heavily relied on the former part of the aforementioned statement in supporting its view of applying the international principles. Therefore, the court concluded that the arbitrators were not wrong and did not apply any rule that contradicted the Agreement. Consequently, the court upheld the award. III. Comments The ruling by the Paris Court of Appeals creates yet another contradiction based on substantive law between the common and civil law countries. The approach by the French courts seems to reflect on the general approach in French law to treat an arbitration as distinct from national laws and apply international principles. While the English Court narrowly interpreted the doctrine of separability, the Paris court interpreted it in the widest possible sense. Such interpretation is argued to be an overstatement. As observed by the English courts in Kabab-ji[8] and Sulamerica,[9] the rationale of the doctrine of separability is to preserve the arbitration agreement in situations when the main contract is rendered ineffective. Utilisation of the doctrine to prevent interpretation of the wordings of the