Under English law, recognition or enforcement of an international arbitration award can be refused where the arbitration agreement is not valid under the law to which the parties subjected it—or, failing any indication, under the law of the country in which the award was made.Where required to determine the governing law of an arbitration agreement, English courts will thus carry out the following inquiry: First, the court will examine whether there is an express choice. Should there be, the court need look no further. Absent an express choice, the court must determine whether there is an implied choice, which can be inferred either from the law of the arbitral seat or the law applicable to the underlying contract. Under English law, there is a rebuttable presumption of an implied choice in favor of the governing law of the underlying contract.Although—at least in principle—a choice-of-law clause found in the underlying contract will not automatically be extended to the arbitration agreement, in this case the English Court of Appeal concluded that the cumulative effect of the contract provisions amounted to an express choice of English law as the arbitration agreement’s governing law. There was, therefore, no need to proceed: The fact that the seat of the arbitral tribunal was in Paris made no difference.
Having established this, the English Court of Appeal looked at whether the arbitration agreement could be extended to KFG under English law. The court, affirming california-business-lawyer-corporate-lawyer the U.K. Supreme Court’s position laid down in 2018 in Rock Advertising, found this impossible due to the No Oral Modification clause. According to Rock Advertising, such clauses can be set aside only if an estoppel can be shown. Specifically, it must be established that a party has engaged in words or conduct which unequivocally led to the belief that modification of the contract, notwithstanding the informal nature of the modification, was valid; more than a mere informal promise is required. The Court of Appeal found that no such estoppel could be established and refused enforcement of the award.
While there’s little doubt that the court carried out an unwavering application of English law here—and the restrictive conditions regarding the extension of the arbitration agreement were not met—the essential question of whether English law even applied to this issue is much less clear-cut. It’s unclear, for example, to what extent the arbitral tribunal could have anticipated this, especially given that Paris was the seat of the arbitration, and analyzing the contract terms required complex interpretation.Before crossing the Channel to examine the French approach, it’s worth noting that the English courts took the time to fire a shot across their Gallic counterparts’ bow: “I would hope,” the judge stated, “that the firm opinion that I have expressed and am expressing as to the effect and impact of English law will not go unnoticed in the French courts, given that on any basis English law is central to the decision.”
True to form, the Paris Court of Appeal itseyerisadopted an entirely different interpretation from that of the English, one very much in line with its well-known transnational approach to international commercial arbitration. The French court’s judgment was also a retort to the English court’s caution, stating that its power would not “be limited by the existence of foreign decisions interpreting the Agreement and the arbitration clause and applying English law to them.”Concerning international arbitration, French courts consider the validity of the arbitration agreement by virtue of règles matérielles (substantive rules), which are applied independent of any national legal system. Unlike English courts, French courts do not inquire into the governing law per se, but instead simply look to the common intention of the parties.French law does allow parties to derogate from this rule by expressly choosing the governing law of the arbitration agreement. However, in this case the Paris Court of Appeal found that the various provisions of the agreement did not suffice to establish that the intention of the parties was to extend the English choice-of-law clause to the arbitration agreement. Moreover, the parties had expressly designated Paris as the seat of arbitration. The Paris court therefore held that the parties had made no express choice regarding the governing law of the arbitration agreement and rejected the application of English law.
Having established this, the French court considered the jurisdiction of the arbitral tribunal. In doing so, it applied another of its règles matérielles, according to which an arbitration agreement shall be extended to parties that are directly involved in the performance of a contract and any associated disputes, and are therefore aware of its existence and scope, notwithstanding the fact that they’re non-signatories. In light of KFG’s involvement in the performance and termination of the franchise distribution agreement, the court agreed with the arbitral tribunal’s decision and affirmed its jurisdiction.The Paris Court of Appeal also held that the No Oral Modification clause could not prevent the extension of the arbitration agreement to KFG, given that the franchise agreement stipulated that the arbitral tribunal was also required to apply all principles of law generally recognized in international transactions.As to the lack of a mechanism of “novation” under English law (the nonexistent principle on which the arbitral tribunal based its decision), it’s important to note that under French law an error of law is not grounds for challenging an arbitral award. The French court simply verified whether the arbitral tribunal had fulfilled its mission by applying the law designated by the parties, and refused to review the merits of the award.