Dallah Encore – The Need for an Adaptive Understanding of Consent in International Arbitration

Keywords: consent to arbitrate, non-signatories, jurisdiction, Kabab-ji, Dallah

The concept of consent to arbitrate is a fascinating one. Few legal concepts have simultaneously been compared to something as incontrovertible as a “dogma” [1] and something as elusive as a “consummated romance”. [2] In 2020, the two sides of the English Channel waved their respective flags – one might say, predictably – to the dogmatic and romantic ends of the spectrum of arbitral consent. In this era characterized by flag-waving, what makes this otherwise predictable occurrence worth commenting upon is that it came in two contrary decisions rendered in the same case within a span of six months, involving Kabab-ji SAL and Kout Food Group (“KFG”). One decision was rendered by the English Court of Appeal in enforcement proceedings in January 2020, [3] and the other by the Paris Cour d’appel in annulment proceedings in June 2020. [4]

These contrary decisions evoke nostalgia and trepidation in equal measures. I shall address these feelings in turn. 

Nostalgia: A Repeat Telecast of the Dallah Episode

Comparing the cultures on the two sides of the Channel is a favourite narrative in legal scholarship, including the issue of arbitral consent.  [5] This is unsurprising since the case of Kabab-ji is not the first instance when English and French courts arrived at diametrically opposed conclusions in the face of identical facts. 

One such instance arose in 2010-2011 in the oft-discussed case of Dallah v. Pakistan, which gave rise to post-award litigations – enforcement proceedings in England and annulment proceedings in France. The fundamental issue, in that case, pertained to the jurisdiction of an arbitral tribunal over a non-signatory to the contract containing the arbitration agreement, i.e., the Government of Pakistan. The contract was signed between Dallah and a trust set up by Pakistan, the Awami Hajj Trust. The arbitral tribunal upheld and exercised jurisdiction over Pakistan. [6]

Applying French law as the law of the seat of arbitration, [7] the English courts, starting with the High Court and going up to the Supreme Court, consistently denied Dallah’s request for enforcing the award, inter alia, on the ground that “there was no material sufficient to justify the tribunal’s conclusion that the Government’s behaviour showed and proved that the Government had always been, and considered itself to be, a true party to the [contract]” at issue. [8] A few months after the English Supreme Court’s judgment, the Paris Cour d’appel reached the opposite conclusion based on its application of French law in finding that the arbitration agreement in the contract between Dallah and the Awami Hajj Trust could be “extended” to the Government of Pakistan. [9]

A detailed critique of the Dallah saga is beyond the scope of this article. [10] Suffice it to say that the divergence between the approaches of the English and the French courts, in my opinion, was attributable to a fundamental conceptual chasm, slightly deeper than being “merely a different take on the facts” by different courts, which in the words of Prof. Stavros Brekoulakis, is a “reassuring” but an incomplete way of understanding the divergence. [11] It appears, especially from the opinion of Lord Collins, that the English Supreme Court intuitively dissociated the “structure” of the contract at issue [12] from the Government’s “behaviour” or conduct, and the latter was assessed, and dismissed, as potential “contra-indications” to the structure. [13] Distinctly, the Paris Cour d’appel approached the contract at issue as part of a holistic transaction between Dallah, the Government as well as the Trust, and accordingly traced the Government’s “continuous involvement” during the negotiation, performance and termination of the said contract. [14] These divergent approaches exemplify the conceptual clash between the common law notion of privity of contract and the French courts’ liberal attitude towards international transactions. The latter approach, in the words of Prof. Pierre Mayer, is “alien to the English way of reasoning”, [15] as also evidenced by the English judicial system’s rejection of the controversial “group of companies” doctrine. [16]

Ten years later, the Dallah saga has repeated itself in the Kabab-ji case, albeit with a twist in the tale concerning the applicable law. Unlike in the case of Dallah, the English and French courts applied different laws to the jurisdictional issue in question in Kabab-ji. [17] Although this twist in the tale is worthy of an independent critique, [18] it does not constitute the focus of the present analysis, which concentrates on the jurisdictional issue itself.

The arbitration in the Kabab-ji case was seated in Paris and was initiated under a Franchise Development Agreement (“FDA”) entered into between Kabab-ji and Al Homaizi Foodstuff Company, which was KFG’s subsidiary. The jurisdictional issue in this case, like in Dallah, pertained to the arbitral tribunal’s jurisdiction over a non-signatory to the contract containing the arbitration agreement, i.e., KFG. The arbitral tribunal, by majority, upheld jurisdiction over KFG, applying French law to the issue. [19]

In January 2020, the English Court of Appeal rendered its judgment in enforcement proceedings launched by Kabab-ji, on appeal from the High Court’s decision rendered in 2019. Both the High Court and the Court of Appeal denied Kabab-ji’s request for enforcement. The High Court had framed the jurisdictional issue under discussion in the following terms: “has [KFG] become a party to (i) the FDA and (ii) if different, the arbitration agreement”. [20] Adopting the High Court’s framing and analysis of the issue, the Court of Appeal’s decision focussed on the effectiveness of the “No Oral Modification” clause contained in the FDA, in order to determine whether the FDA had been novated, such that KFG had become a party to it. [21] The Court of Appeal concluded that the “strict wording” of the “No Oral Modification” clause in the FDA “can only be overridden . . . to the extent that the test for an estoppel stated in Rock Advertising is satisfied”. [22] The test for estoppel laid down by the English Supreme Court in the Rock Advertising case in 2018, in the context of “No Oral Modification” clauses, required that “(i) there would have to be some words or conduct unequivocally representing that the variation was valid notwithstanding its informality; and (ii) something more would be required for this purpose than the informal promise itself”. [23] Finding that this test for estoppel was not satisfied, the English courts concluded that “KFG was not a party to the FDA or the arbitration agreement”, and consequently, the award could not be enforced in Kabab-ji’s favor. [24]

This was followed by the Paris Cour d’appel’s judgment rendered in June 2020 in annulment proceedings initiated by KFG. [25] The Paris Cour d’appel understood the jurisdictional issue as pertaining to the “possibility of extension of the arbitration clause” to a non-signatory, as opposed to requiring a novation of the FDA, and specifically stated that the strict language of the FDA, including its “No Oral Modifications” clause, does not negate this possibility. [26] Accordingly, as in Dallah, the Cour d’appel in Kabab-ji,  examined the relationship between Kabab-ji, Al Homaizi Foodstuff Company as well as KFG as holistic “transactions internationales”. In this process, it referred to the FDA as well as other agreements on the record between any of these three entities concerning the franchise at issue or other franchises that were negotiated between them. Thereafter, it relied on KFG’s conduct since its incorporation relating to the performance of these franchise agreements, their termination, and subsequent renegotiation, to conclude that the arbitration agreement in the FDA should be extended to KFG. [27] 

Trepidation: The Need for an Adaptive Understanding of Arbitral Consent

The allegiances of both sides of the Channel raise distinct concerns.

On the one hand, there is the English courts’ intransigent allegiance to the Rock Advertising case to derive the test of estoppel. The Rock Advertising case was not decided in the context of an arbitration agreement. Even as a decision on general contract law, the case constituted a path-breaking reversal of the “weight of authority”, which, until then, did not give effect to “No Oral Modifications” clauses. [28] While the doctrine of estoppel was already viewed with scepticism by English courts in the context of arbitration agreements prior to Kabab-ji, [29] by enforcing “No Oral Modifications” clauses in this manner, English courts appear to have narrowed the aperture of the doctrine of estoppel in England even further, such that binding non-signatories may now require an explicit contractual novation in the face of “No Oral Modifications” clauses. [30]

On the other hand, the French approach to non-signatories ultimately relies on their elusive allegiance to the parties’ “common intention”, whereunder “the existence and effectiveness of the arbitration agreement are to be assessed, subject to the mandatory rules of French law and international public policy, on the basis of the parties’ common intention, there being no need to refer to any national law”. [31]

Between the English courts’ narrowing of the estoppel doctrine and the French courts’ liberal reliance on “common intention” to justify arbitration, there is a need for a centred viewpoint of the notion of arbitral consent. Indeed, each of the respective lenses chosen by the English and the French courts to view the jurisdictional issue concerning non-signatories carries the potential to deepen the gap between the law and practical realities regarding contractual transactions. For instance, to require – as the English courts do [32] – a contractual novation in cases where the contract contains a “No Oral Modifications” clause, which is a fairly common contractual stipulation in practice, may raise the bar, almost prohibitively, for the exercise of jurisdiction over non-signatories. Whereas, to examine – as the French courts do [33] – whether an arbitration agreement “extends” to a non-signatory seems emblematic of the tendency to proactively design and depend upon legal fictions to fill the gap between law and practice. This tendency has been criticised in the past for being a breeding ground for inter-jurisdictional uncertainties [34] and for marginalising the importance of trade usages. [35]

For a more effective and balanced bridging of the gap between law and practice, the time is ripe to adapt the traditional lenses through which issues of arbitral consent are understood, such that contractual transactions are viewed in a pragmatic light that is “more focused on an analysis of facts, . . . places more emphasis on commercial practice, economic reality [and] trade usages . . .”. As Prof. Bernard Hanotiau fittingly articulates, what needs to be identified in each case are the “real parties to the arbitration agreement”, [36] and not whether the contract containing the arbitration agreement has been novated or the arbitration agreement could be fictitiously extended to a non-signatory. Along these lines, Prof. Brekoulakis proposes to shift the theoretical basis for exercising jurisdiction over non-signatories from a strictly contractual understanding of consent to a broad-based focus on the underlying dispute. [37] Congruently, other jurisdictions, for instance, Brazil, [38] Switzerland, [39] and the United States, [40] have used the nuanced concepts of “intertwined” agreements or claims to ensure pragmatism while resolving jurisdictional issues concerning non-signatories.

To exemplify this adaptive understanding of arbitral consent, it is interesting to note that, in Kabab-ji, there were more contractual documents between the concerned entities, i.e., Kabab-ji, KFG and its subsidiary, than the solitary FDA, which constituted the focus of the English courts’ analysis. Amongst these were the independent franchise agreements created for each point-of-sale and a draft Memorandum of Understanding concerning Kabab-ji’s intention to grant KFG further franchises. While these additional documents were considered by the Paris Cour d’appel (albeit under its questionable approach regarding the “extension” of arbitration agreements), I am incapable of applauding the Paris court’s findings based on these documents without having seen them. [41] However, what I can confidently assert is that contractual relationships between sophisticated entities should be viewed in a more holistic manner instead of myopically focussing on a singular document that contains the arbitration agreement at issue, since such contractual relationships are often comprised of multiple documents. Indeed, the English Court of Appeal’s disregard of the facts that “KFG treat[ed] itself as if it were the licensee”,  [42] and that Kabab-ji “considered that [KFG] had become the [l]icensee”, [43] may, in part, be attributable to such a myopic viewpoint.

Curiously, the English Supreme Court’s judgment in Dallah was criticized by an otherwise ardent admirer thereof, Prof. Jan Kleinheisterkamp, for similarly disregarding a Memorandum of Understanding that existed between Dallah and the Government of Pakistan, in addition to the contract between Dallah and the Awami Hajj Trust. [44] In Prof. Kleinheisterkamp’s words, “the emphasis on legal certainty and self-responsibility of contracting parties . . . [came] at the expense of fairly reflecting the entire commercial reality of the case” in Dallah. [45]

It is premature to advance the same criticism on the English judiciary concerning Kabab-ji saga, especially since the Supreme Court has agreed to hear the appeal against the Court of Appeal judgment.[46] However, it is not premature to hope for a more centred approach to arbitral consent; one that lies in between the dogmatic and the romantic.

ENDNOTES

[1] Gabrielle Kaufmann-Kohler and Henry Peter, ‘Formula 1 Racing and Arbitration: The FIA Tailor-Made System for Fast Track Dispute Resolution’ [2001] 17(2) Arb Int’l 173.

[2] William Park, ‘An Arbitrator’s Dilemma: Consent, Corporate Veil and Non-Signatories’ in Permanent Court of Arbitration (ed), Multiple Party Actions in International Arbitration (OUP 2009) 3.

[3] Kabab-ji SAL v Kout Food Group, [2020] EWCA Civ 6 (hereinafter “Kabab-ji UK CoA”).

[4] Société Kout Food Group v. Société Kabab Ji SAL, Numéro d’inscription au répertoire général : N° RG 17/22943 – N° Portalis 35L7- V B7B B4VAV (hereinafter “Kabab-ji Paris CoA”).

[5] See Maxi Scherer, ‘A Cross-Channel Divide Over Unilateral Dispute Resolution Clauses’, in Bachir Georges Affaki and Horacio Alberto Grigera Naón (eds), Jurisdictional Choices in Times of Trouble (Dossiers of the ICC Institute of World Business Law, Volume 12, Kluwer 2015) 10; Jan Kleinheisterkamp, ‘Lord Mustill and the Courts of Tennis – Dallah v Pakistan in England, France and Utopia’[2012] 75(4) MLR 606–654 (hereafter “Kleinheisterkamp”); Pierre Mayer, ‘The Extension of the Arbitration Clause to Non-Signatories — The Irreconcilable Positions of French and English Courts’ [2012] 27(4) Am. U. Int’l. L. Rev. 831 (hereinafter “Mayer”).

[6] Interestingly, the arbitral tribunal comprised of, inter alia, Lord Michael Mustill, an English legal luminary, who together with another co-arbitrator, “join[ed] in this conclusion . . . with some hesitation, considering that the case lies very close to the line”. Dallah Real Estate and Tourism Holding Company v The Ministry of Religious Affairs, Government of Pakistan, [2010] UKSC 46 (hereinafter “Dallah UKSC”), ¶ 146. Based on this, Kleinheisterkamp argues that “[d]espite the facts being largely uncontroverted, the tension between the English and French courts over the outcome was already heralded by the arbitral tribunal’s award on jurisdiction” (see Kleinheisterkamp (n 5), 647).

[7] Dallah UKSC (n 6), ¶¶ 14-19.

[8] ibid ¶ 145.

[9] Gouvernement du Pakistan – Ministère des Affaires religieuses v Société Dallah Real Estate and Tourism Holding Company [2011] 1 Rev Arb 286 (hereinafter “Dallah Paris CoA”).

[10] For more on this, see, inter alia, Bernard Hanotiau, Complex Arbitrations: Multi-Party, Multi-Contract, Multi-Issue – A Comparative Study (2nd ed, Kluwer 2020) (hereinafter “Hanotiau 2020”) ¶¶ 347-354; Gary Born and Michael Jorek, ‘Dallah and the New York Convention’ (Kluwer Arbitration Blog, 7 April 2011). http://kluwerarbitrationblog.com/blog/2011/04/07/dallah-and-the-new-york-convention/ accessed 17 July 2020; see Kleinheisterkamp (n 5); Mayer (n 5).

[11] Stavros Brekoulakis, ‘Parties in International Arbitration: Consent v. Commercial Reality’ (Lecture on 30th Anniversary School of International Arbitration QMUL, 19-21 April 2015).

[12] Dallah UKSC (n 6), ¶¶ 43, 132-136.

[13] ibid ¶¶ 46-66,137-144.

[14] See Hanotiau 2020 (n 10), ¶ 354.

[15] Mayer (n 5), 836.

[16] See John P. Gaffney, ‘The Group of Companies Doctrine and the Law Applicable to the Arbitration Agreement’ [2004] 19(6) Mealey’s International Arbitration Report 47; Peterson Farms Inc. v. C&M Farming Ltd. [2004] EWHC 121 (Comm).

[17] Whereas the English courts disagreed with the tribunal’s application of French law and instead considered English law as being applicable to the arbitration agreement (see Kabab-ji UK CoA (n 3), ¶¶ 16-17, 62-70), the Paris Cour d’appel chose to apply French law to the jurisdictional issue.

[18] This is especially in light of the pending appeal before the English Supreme Court in Enka Insaat Ve Sanayi A.S. v OOO Insurance Company Chubb, UKSC 2020/0091, which the Court heard recently in July 2020. This appeal, inter alia, pertains to the question of the applicable law to the arbitration agreement (see https://www.supremecourt.uk/cases/uksc-2020-0091.html accessed 12 August 2020).

[19] Interestingly, the dissenting arbitrator, Mr. Klaus Reichert, had been counsel for Dallah before the English Supreme Court.

[20] Kabab-ji UK CoA (n 3), ¶ 7.

[21] ibid ¶ 72.

[22] ibid ¶¶ 76-79.

[23] MWB Business Exchange Centres Limited v Rock Advertising Limited, [2018] UKSC 24 (hereafter “Rock Advertising”), ¶ 16.

[24] Kabab-ji UK CoA (n 3), ¶ 81, see also ¶¶ 82-86.

[25] Kabab-ji Paris CoA (n 4).

[26] ibid 5. 

[27] ibid 2-6.

[28] Kabab-ji UK CoA (n 3), ¶ 72. Notably, the UK Supreme Court itself stated that the case raised “truly fundamental issues”; see Rock Advertising (n 23), ¶ 1.

[29] Audley Seppard, ‘Third Party Non-Signatories n English Arbitration Law’ in Stavros Brekoulakis and Julian D.M. Lew (eds), The Evolution and Future of International Arbitration (Kluwer 2016) ¶ 10.52.

[30] Nick Cooper and Edward Taylor, ‘Case Review of Rock Advertising’ in International Corporate Rescue (2019). https://www.freshfields.com/49a1ea/globalassets/services-page/financing-and-capital-raising/case-review—rock-advertising-limited-v-mwb-business-exchange-centres-limited-2018-uksc-24.pdf accessed 31 July 2020 accessed 30 July 2020. Notably, the Supreme Court stated that “the scope of estoppel cannot be so broad as to destroy the whole advantage of certainty for which the parties stipulated when they agreed upon terms including the No Oral Modification clause”; see Rock Advertising (n 23), ¶ 16.

[31] See, inter alia, Municipalite de Khoms El Mergeb v. Soc. Dalico, 20 December 1993, 1994 Rev Arb 116; translation in Bernard Hanotiau, ‘Consent to Arbitration: Do We Share a Common Vision?’ [2011] 27(4) Arb Int’l 539, 545 (hereinafter “Hanotiau 2011”).

[32] Kabab-ji UK CoA (n 3), ¶ 7.

[33] Kabab-ji Paris CoA (n 4), 5.

[34] For instance, the current confusion about the liberal versus restrictive application of estoppel in the United States (GE Energy Power Conversion France SAS, Corp., FKA Converteam SAS v. Outokumpu Stainless Usa, LLC, et al., 590 US 2020), and England (Kabab-ji UK CoA (n 3)), respectively; or the presumptive application of the “group of companies” doctrine to automatically bind companies that form part of the same group (see Hanotiau 2020 (n 10), ¶ 198).

[35] Stavros Brekoulakis, ‘Rethinking Consent in International Commercial Arbitration: A General Theory for Non-signatories’[2017] 8 JIDS 610 (hereinafter “Brekoulakis”).

[36] Hanotiau 2011 (n 31), 554.

[37] Brekoulakis (n 35).

[38] See Chaval v Liebherr, Recurso Especial No. 653.733-RJ 2004/0102276-0, Judgment of 3 August 2006.

[39] See Swiss Federal Tribunal (Decision of 5 December 2008, 4A_376/2008).

[40] See, for instance, Sunkist Soft Drinks, Inc. v Sunkist Growers, Inc., 10 F.3d 757 (11th Cir., 1993); Thomson-CSF, SA v Am. Arbitration Ass’n, 64 F.3d 779 (2d Cir., 1995); Int’l Paper Co. v Schwabedissen Maschinen & Anlagen GmbH, 206 F.3d 411 (4th Cir. 2000).

[41] This is especially since the English High Court had found that the Memorandum of Understanding concerning Kabab-ji’s intention to grant KFG further franchises was “unsigned”; see Kabab-Ji UK CoA (n 3) ¶ 23.

[42] ibid ¶ 80.

[43] ibid ¶ 22.

[44] Kleinheisterkamp (n 5), 651-654.

[45] ibid 651.

[46] Jack Ballantyne, ‘UK Supreme Court to hear Kabab-Ji v Kout appeal’, 10 July 2020. https://globalarbitrationreview.com/article/1228739/uk-supreme-court-to-hear-kabab-ji-v-kout-appeal?utm_source=07%2f10%2f20-20%3a09%3a52-433+-+Virtual+awards+ceremony+draws+global+audience&utm_medium=email&utm_campaign=07%2f10%2f20-20%3a09%3a52-433+-+Virtual+awards+ceremony+draws+global+audience&utm_term=Virtual+awards+ceremony+draws+global+audience&utm_content=57028&gator_td=cOB7wDbGn4J4B4j1mkBFU%2byE0vAqMxHaahoqFl2tVQ60da2E4%2fHs3jS98GxWDPiZIywI0H3eX95yYZhc%2fx7H%2fzg626yjJ90MWVxm1QaMVC58aao%2bVDIAarrqcs8SVliCFQzWZVUbAnCHMVABM6F5L1n79RPSbT%2fYGWRISDtA6%2f89RmLFoDQljl16kygEk3tP%2bN9nQ45M5Mc6%2fNJt55aUyHEBN1QJuo9%2bTNxvq14R9OQmGdDMvxcnH5KWqaAfHEwG accessed 12 August 2020.

Pratyush Panjwani is an associate at Hanotiau & van den Berg and holds an LLM from MIDS, Geneva. The author may be contacted at pratyush.panjwani@hvdb.com in case of any queries.

The views and opinions expressed in the article are those of the author(s) solely and do not reflect the of official position of the institution(s) with which the author(s) is /are affiliated. Further, the statements of the author(s) produced herein should not be construed as legal advice.