Court of Appeal in Kout Food Group Case underlines importance of ‘No Oral Modification’ (NOM) Clauses in Contracts

The Court of Appeal judgment in Kabab-I SAL (Lebanon) v Kout Food Group (Kuwait) [2020] EWCA Civ 6 was handed down 20 January 2020.

In this instance, the Court of Appeal refused to enforce an arbitration award against a non-party.  A 'Franchise Development Agreement' (FDA) had been entered into between Kabab-ji SAL (Lebanon) (KJS) & Al Homaizi Foodstuff Co who, following corporate reorganisation, became Kout Food Group (Kuwait) (KFG).  There was a dispute and the question arose whether KFG had become an additional party to the FDA and therefore to the arbitration agreement.  It was held ‘No Oral Modification’ (NOM) clauses were effective in preventing contracting parties from being bound by variations unless all contractual formalities were complied with.  In the current case, it was found KFG was not a party to the FDA or the arbitration agreement as the requirement for written notice had not been followed.  The finding by the Court of Appeal also underlines the importance in including an express governing law provision within an arbitration clause otherwise this would (generally) follow the main contractual agreement. 

The key points of interest for food business groups and other group business operators were
(1.) on the application of the 'No Oral Modification' clause and
(2.) choice of law governing the arbitration agreement:

  • The strict wording of a No Oral Modification clause: UNIDROIT principles (principles of International Commercial Contracts) and good faith (both of which were contained in the contract in question) cannot be used to alter the strict wording of a contract – business certainty cannot be undermined by a choice of UNIDROIT principles or good faith.
  • The judgement "applies the recent Supreme Court’s decision in MWB Business Exchange Centres Ltd v Rock Advertising Ltd [2018] UKSC 24 [2019] AC 119 to give effect to a No Oral Modification Clause and rejects the jurisdictional case advanced by the Appellant that the Respondent could become party to the contract and arbitration agreement by alleged conduct under the contract. It also clarifies that on a proper reading of the Supreme Court’s decision the defence of estoppel to an No Oral Modification Clause is similar in scope to the defence provided for under the UNIDROIT principles.” (Ricky Diwan QC, Essex Court Chambers, appeared for Respondent, summary analysis here.)
  • Choice of law governing the arbitration agreement – generally this would follow the main contractual agreement unless there was express provision otherwise, this may vary if the substantive governing law is one law and the seat of the arbitration is in a different country, with no other factors tipping the balance one way or the other. This will require further consideration of the application of the test of business efficacy that did not arise on the facts because of the conclusion that there was an express choice of law.

For commercial contract queries please contact Simon Elsegood Tel: +44 (0) 1603 693449 (Ext 3449) Simon.Elsegood@Mills-Reeve.com

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