Court of Appeal upholds “no oral modification” clauses in the context of arbitration agreements

Introduction

Arbitration is a contractual process. In most commercial arbitration proceedings, an arbitral tribunal derives its power to arbitrate from the parties’ express agreement, which must be made or evidenced in writing. As a matter of broad principle, it will only have the power to preside over an arbitration between those parties.

It is also commonplace for commercial agreements to contain so-called “no oral modification” clauses. These require any amendments to the contract to be made in writing. The recent landmark Supreme Court decision in MWB Business Exchange Centres Ltd v Rock Advertising Ltd¹ confirms that a party bound by a contractual ‘no oral modification’ clause cannot argue that the contract (or the clause itself) has been varied orally or by conduct, unless it can demonstrate that the other party has unequivocally agreed that the variation was valid, despite not being made in writing (this would give rise to an estoppel).

A recent Court of Appeal case has addressed whether it is possible for an arbitration clause within a wider commercial agreement to be varied by conduct alone notwithstanding the existence of a “no oral modification clause” within the commercial agreement, such that a third party becomes a party to the arbitration clause.

The Court of Appeal confirmed that the principle established in Rock Advertising applies in the context of arbitration agreements

Factual background

In Kabab-I SAL (Lebanon) v Kout Food Group (Kuwait)², Kabab-I (Kabab) entered into a Franchise Development Agreement (the Contract) for a period of 10 years with Al Homaizi Foodstuff Company (AHFC), a Kuwaiti company. The Contract contained a “no oral modification” clause.

A dispute arose under the Contract which Kabab referred to arbitration in accordance with the arbitration agreement which provided for disputes to be resolved by arbitration conducted in accordance with the ICC Rules and seated in Paris. The only respondent to that claim was KFG. AHFC was not a respondent even though it, and not KFG, was the counterparty to the Contract.

Considering the issue of their own jurisdiction, the arbitral tribunal found that KFG had become a party to the Contract because (irrespective of the fact that it was not formally a party) it had been treated as the main franchisee under the Contract. The tribunal accordingly proceeded to address the substantive dispute between the parties, and found that, on the merits, KFG was in breach of the Contract. Kabab subsequently sought to enforce the award as a judgment in England. KFG resisted enforcement of the award on the basis that it could not properly be a party to the Contract (or the arbitration agreement) by reason of the “no oral modification” clause.

The Commercial Court applied Rock Advertising and held³ that although Kabab considered that KFG had become the new franchisee as a result of KFG’s conduct, that was not sufficient to cause KFG to be bound by the arbitration agreement in light of the “no oral modification” clause. For that to have occurred, AHFC would have had to have unequivocally represented by its words or conduct that the alleged transfer of rights to KFG was valid notwithstanding its informality. On the facts, there were no such words and no such conduct.

Kabab appealed, arguing amongst other things that:

• The UNIDROIT principles⁴, which provide that a party may be precluded by conduct from relying on a provision if the other party has relied on that conduct, superseded the wording of the no oral modification clause; and
• A clause in the Contract requiring the parties to act in accordance with good faith overrode the wording of the no oral modification clause.

Court of Appeal judgment

The Court of Appeal dismissed these arguments and the appeal. It upheld the strict wording of the ‘no oral modification’ clause and held that it could only be overridden if Kabab could demonstrate an estoppel precluding KFG from relying on it, which the judge at first instance had found it could not. It was unconvinced by the UNIDROIT arguments, finding that nothing in the Model Code either operated to make KFG a party to the Contract when it would not otherwise be under English law or overrode the express wording of the ‘no oral modification’ clause. Similarly, it found that an express principle of good faith could not be used to “rewrite” the Contract so as to “dilute the strict wording” of the clause.

Commercial implications

The decision is a salutary tale. Had KFG either replaced AHFC under the Contract by way of a novation or been added as a party by a written deed of amendment, it would have had limited jurisdictional grounds to object to an arbitration being commenced against it. It is therefore a stark reminder that parties should ensure that their contractual arrangements reflect the commercial reality, particularly where their agreements contain a “no oral modification” clause. Where a contractual dispute resolution clause provides for arbitration, it is crucial that all relevant entities are parties to the arbitration agreement (or have otherwise consented to be joined to subsequent arbitration proceedings) – a failure to ensure this may severely curtail the options and recourse available to a party.

¹[2018] UKSC 24 [2019] AC 119; See this DLA Piper article on the commercial implications of the Supreme Court’s judgment in Rock Advertising.
²[2020] EWCA Civ 6.
³Adjourning its ruling pending a related judgment of the Cour d’Appel in Paris.
⁴The UNIDROIT Principles of International Commercial Contracts 2016