FRENCH COURT OF APPEAL UPHOLDS AWARD THAT WAS DENIED ENFORCEMENT IN ENGLAND

In Kabab-Ji SAL (Lebanon) v Kout Food Group (Kuwait) [CA Paris, 23 June 2020, n°17/22943], the Paris Court of Appeal refused to set aside an arbitral award handed down by an ICC Tribunal seated in Paris, although the same award had been denied enforcement and recognition in England on the basis that the award was made against a non-party (our post on the English decision can be accessed here). The French court expressly rejected the argument that it was bound by the English decision.

This case is another illustration of the differences in approach between French and English courts with respect to (i) the identification of the law governing the arbitration clause and (ii) the extension of arbitration agreements to third parties.

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CIETAC tribunal applies UNIDROIT Principles where parties fail to present case under governing law

While commercial parties are generally free to select the law that governs their contracts, they must also ensure that they understand the law they selected, and can actually apply that law to the contract.  In a CIETAC arbitral award published by CIETAC in its publication “Selection of Arbitration Cases Involving the Belt and Road Countries”, a sole arbitrator came up with a creative solution in a situation where the parties failed to present their cases under the governing law of the contract.  The arbitrator applied the UNIDROIT Principles of International Commercial Contracts to determine the legal issues in dispute.  Despite this arbitrator’s willingness to “think outside of the box”, the case is a reminder that parties must consider the legal and practical implications of their contractual choices.

Background

On 24 September 2012, the Indonesian Respondent EPC contractor entered into an EPC Sub-Contract (Agreement) with the Mainland Chinese First Claimant and Indonesian Second Claimant to build a coal-fired power plant located in Indonesia.  The governing law of the Agreement was Singapore law and disputes were referred to arbitration at the China International Economic and Trade Arbitration Commission (CIETAC).

The Project was stayed at the preliminary design stage.  The Claimants contended that the Respondent had failed to provide permanent use of the road to access the Project’s site and failed to provide location details of the main entrance of the Project, which resulted in the Claimants’ delay in providing the preliminary design drawings to the Respondent.  The Respondent in return blamed the Claimants for their delay in submitting the preliminary design drawing within the time limits as provided under the Agreement; and called the advance payment bonds and performance bond just before the Claimants completed and submitted the preliminary design drawings.  After calling the bonds, the Respondent refused to pass the preliminary design drawing to the Employer for review and approval.  As a result, performance under the Agreement was suspended.

The Claimants commenced arbitration and sought a declaration that the Agreement was terminated due to the Respondent’s breach.  The Claimants also sought an order for the Respondent to return the called amounts of the performance bond; to return the difference between the amount of the advance payment bonds and advance payment to the Claimants; damages, and interest.

The governing law issue

The parties had expressly selected Singaporean law to govern the Agreement.   However, neither party engaged Singaporean counsel or legal experts when arguing their cases in the arbitration. The Claimants submitted their pleadings based on Chinese law.  Whilst the Respondent objected to the application of Chinese law, it merely submitted a Singaporean legal expert report with a few Singapore court cases in support, which was very limited in substance and did not touch upon the major issues in dispute.

Despite the sole arbitrator’s instructions, the parties failed to provide sufficient Singaporean legal authorities.  The sole arbitrator referred to Article 49 of the CIETAC Arbitration Rules, which provides: “[t]he arbitral tribunal shall independently and impartially render a fair and reasonable arbitral award based on the facts of the case and the terms of the contract, in accordance with the law, and with reference to international practices”, and proposed that the parties submit their cases under the UNIDROIT Principles.  If any party considered there was a conflict between Singaporean law and the UNIDROIT Principles, it could make submissions accordingly.   The parties accepted this solution and submitted pleadings based on the UNIDROIT Principles.

The sole arbitrator found that the Claimants had breached the Agreement by delaying the initial design drawings.  However, the sole arbitrator held that the Respondent’s response to the Claimants’ breach, by calling the bonds in full and refusing to submit the initial drawing to the Employer, had been disproportionate to the breach.  In the arbitrator’s view, the Respondent’s call on the bonds made it impossible for the Claimants to continue performing the Agreement.

In the arbitrator’s view, the Respondent’s call on the bonds therefore constituted a fundamental breach of the Agreement.  The arbitrator relied on the UNIDROIT Principles to uphold the Claimants’ claim that they were entitled to terminate the Agreement, and to determine the consequences of that termination.  The arbitrator reasoned that the UNIDROIT Principles reflect good practice and general principles in international commercial contracts.  Unless either party could demonstrate otherwise, the sole arbitrator held that he had no reason to believe there was any inconsistency between Singapore law and the UNIDROIT Principles.

Comment

In practice, many arbitrators would not proactively apply a non-binding codification of transnational legal principles to resolve a dispute where parties have explicitly chosen the governing law of the contract.  The published award does not elaborate on why the tribunal proposed applying the UNIDROIT Principles.  However, it does indicate that Chinese arbitrators may be increasingly open to applying international legal principles when dealing with foreign-related commercial disputes.

Nevertheless, this case appears to be a one-off, and it would be unwise for parties to rely on an arbitrator’s willingness to adopt creative solutions of this kind.  Parties who take advantage of the contractual freedom to select a neutral governing law must be prepared to argue their cases under that law, i.e. to instruct counsel or experts who are qualified to practice that law.  If parties do not apply the selected governing law in the arbitration, they must be prepared for the additional time and expense involved in determining which laws apply before the substantive claims can be heard, not to mention the risk of an unexpected outcome if the law applied produces an unfavourable decision.

[1] This award was published by CIETAC in the Selection of Arbitration Cases Involving the Belt and Road Countries, at pages 58 to 105.

Helen Tang
Helen Tang
Partner
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Jean Zhu
Jean Zhu
Counsel, Kewei
+86 10 6535 5041
Yingtong Chen
Yingtong Chen
Legal Assistant, Kewei
+86 10 6535 5133

ENGLISH COURT OF APPEAL ISSUES CLEAR GUIDANCE ON THE LAW GOVERNING ARBITRATION AGREEMENTS AND GRANTS ANTI-SUIT INJUNCTION RESTRAINING PARTY FROM PURSUING RUSSIAN COURT PROCEEDINGS

In Enka Insaat ve Sanayi AS v OOO Insurance Co Chubb [2020] EWCA Civ 574, the English Court of Appeal restrained Chubb Russia Investment Limited (“Chubb Russia”) from pursuing Russian court proceedings brought in breach of an arbitration agreement. In this important decision, the Court of Appeal set out how the court of the seat should handle applications for an anti-suit injunction, confirming that forum conveniens questions are irrelevant for this purpose. In addition, the Court of Appeal has sought “to impose some order and clarity” on how the governing law of the arbitration agreement should be determined (the “AA law”) under English law.

Background

Enka Insaat ve Sanayi AS (“Enka”) was a party to a contract under which it was to perform equipment installation works at a power plant (the “Contract”). The Contract contained an arbitration agreement, which provided for disputes to be resolved by London-seated arbitration under the ICC Rules (the “Arbitration Agreement”).

Following a fire at the power plant, Chubb Russia paid out US$400 million in respect of the resulting losses to its insured, the other party to the Contract. Chubb Russia argued that it was subrogated to the claims of the counterparty and sought to recover from Enka in the Russian courts in respect of the sums Chubb Russia had paid out (the “Russian Court Claim”).

Russian court proceedings

Chubb Russia filed the Russian Court Claim in May 2019. However, due to various deficiencies in the Claim, which were not eliminated until September 2019, the substantive hearings took place only in January and February 2020. In March 2020, the judge announced the operative part of the judgment (with the reasoning to follow) dismissing both (i) the Russian Court Claim on the merits; and (ii) Enka’s motion seeking dismissal without considering the merits, in reliance on the Arbitration Agreement.

English court proceedings

As discussed in one of our previous blog posts, Enka made an urgent ex parte application for interim relief to the English Commercial Court, seeking an order requiring the defendants to withdraw the Russian Court Claim, and seeking a stay of the Russian court proceedings. The Court found that the matter was not in a position to proceed, because it was insufficiently prepared to enable there to be a fair hearing. It then determined that there should be an expedited trial commencing in December 2019.

After the trial the Court refused, on forum non conveniens grounds, to grant an anti-suit injunction restraining Chubb from pursuing the Russian Court Claim. The Court also noted that the scope and the governing law of the Arbitration Agreement should be determined by the Russian court. It held, in the alternative, that the anti-suit injunction should be refused due to Enka’s (i) delay in bringing proceedings in the English courts; (ii) degree of participation in the Russian Court Claim; and (iii) failure to commence arbitration proceedings. Enka appealed, arguing, in particular, that the Court’s approach to deciding the case on forum non conveniens grounds was wrong in principle.

The Court of Appeal decision

The Court of Appeal agreed with Enka, allowing the appeal. It concluded that: (i) the English court as the court of the seat was necessarily an appropriate court to grant an anti-suit injunction and questions of forum conveniens did not arise; (ii) the Arbitration Agreement was governed by English law; and (iii) there were no other reasons to refuse relief.

Forum conveniens questions irrelevant

The Court of Appeal explained that forum conveniens questions were irrelevant when a court of the seat decided whether to grant an anti-suit injunction. The choice of the seat is an agreement of the parties to submit to the jurisdiction of the courts of that seat in respect of such powers as the seat confers. The grant of an anti-suit injunction to restrain a (threatened) breach of the arbitration agreement is an exercise of such powers. If a court of the seat were to defer on forum conveniens grounds to the non-curial court, this would defeat the considerations of certainty and party autonomy.

The Court of Appeal further noted that, when faced with the question of whether to grant an anti-suit injunction, the English court must address the following two questions: (i) whether the foreign proceedings are a breach of the arbitration agreement (under the AA law); and (ii) if so, whether relief should be granted as a matter of discretion. Therefore, the Court of Appeal concluded that the Court was wrong not to decide whether the Russian Court Claim was a breach of the Arbitration Agreement.

Governing law of the Arbitration Agreement

The Court of Appeal noted that “the time [had] come to seek to impose some order and clarity” on the significance of the main contract law and the law of the seat for the purpose of determining the AA law, setting out the following principles:

Applying the above principles, the Court of Appeal concluded that the Arbitration Agreement was governed by English law. The term “Applicable Law” was defined in an attachment to the Contract so as to cover Russian law, with a particular focus on relevant regulatory legislation. The Contract did not have a clause which provided that it was governed by the Applicable Law, but merely provided that the terms used in the Contract would have the definitions set forth in the attachment.

Therefore, there was nothing to suggest an express choice of Russian law as the governing law of the Contract and/or the Arbitration Agreement. Accordingly, in the absence of any countervailing factors which would point to a different system of law, the parties had impliedly chosen that the Arbitration Agreement was governed by the law of the seat, i.e. English law.

The Court of Appeal then noted that the parties to the Contract would expect all aspects of the dispute, whatever their legal basis, to be covered by the Arbitration Agreement, concluding that the Russian Court Claim was brought in breach of the Arbitration Agreement.

No other reasons to refuse relief

According to the Court of Appeal, Enka’s failure to commence arbitration proceedings was not a relevant factor. As confirmed in AES Ust-Kamenogorsk (discussed in one of our previous blog posts) an arbitration agreement contains an independent negative promise not to commence proceedings anywhere in the world. Likewise, Enka’s degree of participation in the Russian Court Claim could not be a matter for legitimate criticism.

The Court of Appeal referred to Ecobank Transnational Inc v Tanoh (discussed in one of our previous blog posts) to confirm that Enka’s delay in bringing proceedings in the English courts could, in principle, justify a refusal to grant relief. However, it concluded that Enka could not be criticised for not seeking relief until it became clear that the Russian Court Claim would be accepted by the Russian courts in September 2019, and Enka sought injunctive relief only 12 days later. As for the Court’s reproach regarding Enka’s handling of the interim application, this did not result in any delay in obtaining injunctive relief. Therefore the Court of Appeal held that there were no other reasons to refuse relief.

Comment

This case has clarified the English law position in relation to the role of the court of the seat when granting anti-suit injunctions. The judgment confirms that forum non conveniens is not a relevant factor to consider when assessing whether anti-suit injunction relief should be granted and illustrates the English courts’ robust approach to breaches of arbitration agreements.

This Court of Appeal decision is also a welcome clarification of how the law of the arbitration agreement should be decided. The case is important in this respect and is likely to become a significant English law authority on the applicable principles. While the case has emphasised the importance of the law of the seat in ascertaining the governing law of the arbitration agreement, the starting point remains a consideration of any express choice of law. In some cases, the choice of law in the main contract will still be considered to be an express choice of law for the arbitration clause itself. The courts will also still assess the legal system with which the arbitration clause has the closest and most real connection. Some uncertainty is therefore likely to remain in relation to how the test will be applied in individual cases. The decision highlights once again the importance of including an express choice of law in the arbitration agreement itself.

For further information, please contact Craig Tevendale, Partner, Rebecca Warder, Professional Support Lawyer, Olga Dementyeva, Associate or your usual Herbert Smith Freehills contact

Craig Tevendale
Craig Tevendale
Partner
+44 20 7466 2445

Rebecca Warder
Rebecca Warder
Professional Support Lawyer
+44 20 7466 3418

Olga Dementyeva
Olga Dementyeva
Associate
+44 20 7466 7644

COURT OF APPEAL REFUSES TO ENFORCE AN ARBITRATION AWARD AGAINST A NON-PARTY

In Kabab-Ji SAL (Lebanon) v Kout Food Group (Kuwait) [2020] EWCA Civ 6, the English Court of Appeal refused the enforcement and recognition of an arbitral award handed down by an ICC Tribunal seated in Paris, on the basis that the award was made against a non-party. This case provides helpful guidance on two significant issues: (i) how to determine the governing law of an arbitration agreement as a matter of English law and (ii) the extent to which No Oral Modification (“NOM”) clauses will be upheld by the English courts.

Background

The case concerned a Franchise Development Agreement (“FDA”) entered into by Kabab-Ji SAL (Lebanon) (“KJS”) and Al Homaizi Foodstuff Company (“AHFC”). Following a corporate reorganisation, AHFC became a subsidiary of Kout Food Group (Kuwait) (“KFG”). A dispute arose under the FDA, leading KJS to commence an arbitration against KFG (and not AHFC).

This raised a jurisdictional question as to whether KFG had become an additional party to the FDA, and therefore to the arbitration agreement, and if so how.  In order to answer that question, it was necessary to decide (i) which law governed the question of whether KFG became a party to the arbitration agreement (ii) whether, under that law, KFG had become a party to the arbitration agreement.

The arbitration clause specified that Paris would be the seat of arbitration, and the governing law clause stipulated that the FDA would be governed and construed in accordance with English law. The contract contained NOM clauses.

An ICC Tribunal seated in Paris determined that (i) whether KFG was bound by the arbitration agreement was a matter of French law and (ii) that English law governed whether a transfer of substantive rights and obligations to KFG took place. The Court of Appeal judgment does not say expressly whether the Tribunal determined that the arbitration agreement was governed by French law, suggesting that the Tribunal followed the French courts’ approach of assessing the arbitration agreement without reference to a specific national law (i.e. treating it as “autonomous”).

By majority decision, two of the arbitrators (who were not English qualified) concluded that, as a matter of English law and despite the NOM clauses, a novation was to be inferred by the conduct of the parties. Having found jurisdiction, the tribunal went on to determine that, on the merits, KFG was in breach of the FDA.

KFG filed an application before the French courts to annul the award. The application has yet to be heard and is scheduled for February 2020. Separately, KJS made an application for the enforcement of the award under section 101 of the English Arbitration Act (the “Act“). The English court initially made an ex parte order for the Award to be enforced as a judgment, and KFG responded by seeking an order refusing recognition and enforcement of the award under section 103(2) of the Act.  The first instance court heard the s103 application and determined that English law governed the validity of the arbitration clause. The court considered that KFG did not become a party to the arbitration clause, but declined to make a final determination on this point in case further evidence on this issue might emerge after the decision of the French court. The court accordingly refused enforcement and recognition of the award.

The first instance decision was appealed by KJS to the Court of Appeal.

The first issue on the law governing the arbitration agreement

KJS’s key arguments were:

  • There was no express choice of English law as the governing law of the arbitration agreement. The FDA was governed by English law supplemented by the obligation of good faith and fair dealing and by “principles of law generally recognised in international transactions” which included the UNIDROIT principles. The choice of “English law plus” was at odds with the common law requirement that the law applicable to an arbitration be the law of a country.
  • Alternatively, there was no implied choice of English law, as the seat of the arbitration was in a different country from the country whose law governed the main agreement. This was an important factor pointing away from English law being an implied choice of law governing the arbitration agreement. The judge should have concluded either that the implied choice of law governing the arbitration agreement was French law or, in default of any choice, that French law applied as the law of the place where the Award was made (the test for foreign arbitration awards under the New York Convention).

In contrast KFG argued that:

  • As a matter of construction, there was an express choice of English law as the governing law of the FDA. Article 1 provided:
    • This Agreement consists of the foregoing paragraphs, the terms of agreement set forth herein below, the documents stated in it, and any effective Exhibit(s), Schedule(s) or Amendment(s) to the Agreement or to its attachments which shall be signed later on by both Parties. It shall be construed as a whole and each of the documents mentioned is to be regarded as an integral part of this Agreement and shall be interpreted as complementing the others.
  • The governing law clause (Article 15) then made it clear that “This Agreement” was governed by English law, which must mean all the agreement, including the arbitration agreement.
  • The fact that the seat of the arbitration was in a different country should not displace the strong indication that there was an implied choice of English law to govern the arbitration agreement by virtue of the FDA being expressly governed by English law.

The Second Issue – had KFG become a party to the arbitration agreement?

The parties focused on the following contractual provisions of the FDA, known together as “No Oral Modification” clauses:

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 17: Waiver

17.1 Any waiver of any term or condition of the Agreement must be in writing and signed by the affected party…

Article 24: Entire Agreement

…No interpretation, change, termination, waiver of any provision hereof, and no consent or approval hereunder, shall be binding upon the other party or effective unless in writing signed…

Article 26: Amendment of Agreement

The Agreement may only be amended or modified by a written document executed by duly authorised representatives of both Parties

KJS argued that even if the first instance court was correct that the governing law of the arbitration agreement was English law, he had erred in concluding that consent in writing was required for KFG to become an additional party to the FDA. The good faith and fair dealing provisions contained in both the FDA and the UNIDROIT principles overrode the NOM clauses and KFG could therefore be a party to the arbitration agreement without written consent.

In response, KFG argued that the parties had sought to achieve a high level of business certainty in the drafting of the FDA. It contained a “double lock” owing to the combination of Articles 26 and 24 with Article 17. In other words, any amendment and consent to an amendment could only be effective in writing, and any consent to waive these requirements also had to be in writing. The UNIDROIT principles could not be relied upon to establish some amendment as this would contradict the double lock in the NOM clauses. The only way in which the NOM clauses could be overridden was to the extent that the test for an estoppel stated in Rock Advertising was satisfied (see our previous post on this topic here on our Litigation Blog).

The Court of Appeal’s decision

On the first issue, the Court concluded that Articles 1 and 15 of the FDA provided for an express choice of English law to govern the arbitration agreement. The “English law plus” provisions did not point to some other system of law (specifically French law) governing the arbitration agreement and said nothing about the law governing the arbitration agreement. The fact that the arbitration clause itself did not expressly refer to English law did not matter, as the wording in Articles 1 and 15 demonstrated a clear intention that the entire FDA would be governed by English law. It was therefore not necessary to consider whether there was an implied choice of law.

On the second issue, the Court of Appeal agreed with KFG that, under English law, the NOM clauses could only be overridden to the extent that the test for an estoppel in Rock Advertising was satisfied. Principles of good faith and fair dealing could not override the clear wording of the contract. The Rock Advertising test was therefore not satisfied. The Court also considered that the first instance judge should have made a final determination that KFG was not a party to the FDA or the arbitration agreement.

Comment

This case raises important issues of construction and interpretation. It is a reminder that there is real merit in including an express governing law provision within an arbitration clause or by expressly referring to the arbitration clause within the main governing law provision of the contract. This will avoid wasting time and money arguing the issue at both the arbitration and enforcement stage.

It also demonstrates the importance of the Supreme Court’s decision in Rock Advertising and its implications for the many contracts containing NOM clauses. These will generally be effective so as to prevent contracting parties being bound by a subsequent variation unless the formalities contained within the contract are complied with. In this instance, the inclusion of the clause ensured that KFG was not a party to the FDA or the arbitration agreement as the requirement for written notice had not been followed.

For more information, please contact Craig Tevendale, Partner, Emily Fox, Of Counsel, Elizabeth Kantor, Senior Associate, Vanessa Naish, Professional Support Consultant, or your usual Herbert Smith Freehills contact.

Craig Tevendale
Craig Tevendale
Partner
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Emily Fox
Emily Fox
Of Counsel
+33 1 53 57 72 48
Elizabeth Kantor
Elizabeth Kantor
Senior Associate
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Vanessa Naish
Vanessa Naish
Professional Support Consultant
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India related commercial contracts: dispute resolution and governing law clauses

Herbert Smith Freehills has published a new edition of its well-regarded Guide on dispute resolution and governing law clauses in India-related commercial contracts. The Guide is intended to assist in-house counsel who handle India-related commercial contracts on behalf of non-Indian companies and who need to have a practical understanding of the nuances of drafting dispute resolution and governing law clauses in the Indian context. Continue reading

Applicable law of arbitration agreements: Singapore revisits the English case of Sulamérica

In the recent case of BCY v BCZ [2016] SGHC 249, the Singapore High Court considered whether there was a valid and binding arbitration agreement in the context of a negotiated but unsigned contract. The Court comprehensively summarised Singapore's position on determining the governing law of an arbitration agreement, holding that there is a strong presumption that this will be the governing law of the main contract unless this would negate the arbitration agreement.  The judgment provides clarity for clients negotiating contracts which provide for disputes to be resolved by Singapore seated arbitration.

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Indian Supreme Court Gives Further Reassurance on the Limits of its Jurisdiction in Cases of Arbitration Seated Outside India

In a welcome addition to the recent suite of pro-arbitration decisions emanating from India, in the case of Reliance Industries Limited & Anr v Union of India, the Supreme Court of India overturned the decision of the Delhi High Court and confirmed that in circumstances where an arbitration is seated outside of India and the parties have expressly chosen a foreign law to govern the arbitration agreement, notwithstanding the choice of Indian substantive law, the Indian courts do not have jurisdiction to set aside an arbitral award. The decision, which is relevant to all agreements from the pre-BALCO era, limits the circumstances when the Indian courts can intervene in the context of foreign seated arbitrations.

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Commercial Court reaffirms the importance of Sulamérica in determining the law of the arbitration agreement in circumstances where choice of seat was agreed without actual authority

In the recent decision of Habas Sinai Ve Tibbi Gazlar Istihsal Andustrisi AS and VSC Steel Company Ltd [2013] EWHC 4071 (Comm), the English Commercial Court summarised the guidance provided in Sulamérica Cia Nacional De Seguros S.A. and others v Enesa Engenharia S.A [2012] EWCA Civ 638 (Sulamérica) and Arsanovia Ltd v Cruz City 1 Mauritius Holdings [2013] 2 All ER 1 (Arsanovia) and applied those principles to determine the law of the arbitration agreement. It further added that the terms of the arbitration agreement may themselves indicate an implied choice of law of that arbitration agreement.

The Court rejected the argument that it should disregard the chosen seat included in the arbitration agreement when considering the law with which the agreement had its closest connection, on the basis that the Claimant’s agents exceeded their actual authority when agreeing to the arbitration agreement. For a number of reasons, the Court found that, even if it was the case that there was no actual authority to agree the London arbitration clause, the applicable law of the arbitration agreement would be English law.

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