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English Views on the Law of the Arbitration Clause: The Curious Case of Kabab-Ji

The general default rule in international law is that the lex arbitri—i.e., the law of the place where arbitration is to take place (the seat)—governs the arbitration and the arbitration clause, while the choice-of-law provision governs the substantive provisions of the contract. As the United States Supreme Court explained in Mastrobuono v. Shearson Lehman Hutton, Inc., “the choice-of-law provision covers the rights and duties of the parties, while the arbitration clause covers arbitration; neither sentence intrudes upon the other.”

The United Kingdom Supreme Court, however, has thrown this default rule into question. In Kabab-Ji SAL v. Kout Food Group, the UK Supreme Court determined that, while the arbitration was held in Paris, because the choice-of-law provision required application of English law, English law governed the arbitration clause. This mattered because the defendant in the case, Kout Food Group, was not a signatory to the original contract, but had informally taken over performance of the contract and functionally become a party to the agreement. The arbitrators accepted that this provided jurisdiction over the defendant, and the French Courts agreed, rejecting an application to set aside the award in France. But the plaintiff then attempted to enforce the award in England, and the English Courts determined that English law should apply and rejected enforcement, determining that because the defendant was not a strict signatory to the agreement, they were not subject to arbitration. The UK Supreme Court explained that its default rule is that the substantive law of the contract will govern the arbitration agreement as well.

In certain cases, this decision will have a significant impact, particularly on who may be a party in the arbitration and on how the arbitration may be conducted. Contract drafters in particular may want to take note, and make sure to specify which law they want to be applicable to the arbitration agreement, as the default rule seemingly no longer applies for enforcement actions in the UK.

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