REUTERS | Mohamed Abd El Ghany

Nom nom nom: recent Court of Appeal decision gives food for thought on no oral modification (NOM) clause in arbitration dispute

In the recent decision of Kabab-Ji v Kout Food Group, the English Court of Appeal addressed the question of what law governs an arbitration agreement in the absence of an express provision. It went on to refuse the enforcement of an arbitral award on the basis that the party against whom the award was to be enforced was not a party to the underlying contract in the absence of a written agreement to that effect, due to the contract containing a no oral modification (NOM) clause.

NOM clauses

NOM clauses seek to prevent oral variations to an agreement by prescribing the form in which any variations to an agreement should be made. Typically, a NOM clause will require variations to be made in writing and signed by the authorised representatives of each party. NOM clauses are included in most standard form agreements, with the aim of providing contractual certainty between the parties. However, until the Supreme Court decision in Rock Advertising Limited v MWB Business Exchange Centres Limited, there had been uncertainty as to the validity of NOM clauses, with the majority of decisions finding NOM clauses not effective where an oral agreement to vary the contract existed.

Background

A franchise development agreement (FDA) was entered into between a Lebanese company, Kabab-Ji (Ji), and Al Homaizi Food Company (AHFC). Five years into the ten year FDA, AHFC became a subsidiary of a Kuwaiti company (KFG). The FDA was governed by English law and contained a NOM clause. The arbitration clause in the FDA provided for ICC arbitration in Paris (as the seat), but did not state what the governing law of the arbitration agreement would be. A dispute subsequently arose under the FDA and Ji commenced arbitration proceedings against KFG (but not AHFC).

The arbitrators had to consider whether KFG had become an additional party to the FDA and the arbitration agreement. The majority of the arbitration tribunal found that the question of whether KFG was bound by the arbitration agreement was a matter of French law, but the issue of whether a transfer of substantive rights and obligations took place was governed by English law. The tribunal concluded that, as a matter of English law, a “novation” had taken place and KFG had been added to the FDA. The tribunal then proceeded to make an award against KFG. KFG filed an application to annul the award before the French courts (this application is due to be heard in February 2020).

Meanwhile, Ji had applied to the English Commercial Court and obtained an order for the award to be recognised and enforced as a judgment of the English court (the order). KFG then applied to set aside the order and sought a determination from the English court, inter alia, as to:

  • Whether English law or French law was the governing law of the arbitration agreement.
  • Whether, under English law, KFG had become a party to the FDA and the arbitration agreement.

At first instance, the English court held that the applicable law governing the arbitration agreement was English law and not French law (as determined by the arbitrators). The judge (Sir Michael Burton) relied on the decision in Sulamerica v Enesa Engelharia and the provision in the FDA that the “Agreement [including all the terms of agreement] was to be construed as a whole” in coming to that finding. Having found that the arbitration agreement was to be governed by English law, the judge then held that KFG had not, applying the rationale in Rock Advertising, become a party to the FDA or the arbitration clause. The judge did not make a final determination on the question of enforceability of the award, but rather adjourned the enforcement application and stayed the judgment with liberty to restore the matter for determination of any outstanding issues following the decision of the French courts.

On appeal, the Court of Appeal agreed with the judge’s reasoning on both counts. Whilst noting that the governing law of the contract would not necessarily always apply to an arbitration agreement, in relation to the law governing the arbitration agreement in this instance, the provision in the FDA that “all the terms of agreement” were to be construed as a whole was persuasive. However, the Court of Appeal did query the judge’s rationale for not making a final determination on the question of enforcement, and held that the judge had erred in this respect.

The Court of Appeal then considered whether the FDA’s NOM clause was effective. Flaux LJ referred to the reasoning set out by Lord Sumption in Rock Advertising explaining that NOM clauses:

  • Prevent attempts to undermine written agreements by informal means.
  • Avoid disputes about whether a variation was intended and what the exact terms of a variation might be.
  • Restrict the ability to make variations to only those persons entitled to do so, therefore assisting corporations to police who has the power to amend an agreement.

The Court of Appeal also rejected Ji’s arguments that KFG was estopped from relying on the effectiveness of the NOM clause, and that the principles of estoppel should be broadened on the basis that the UNIDROIT Principles of International Commercial Contracts 2016 (which had been referred to by the arbitrators during the course of the Kabab-Ji arbitration) enunciate a broader test for preclusion than that laid down by Lord Sumption in Rock Advertising.

Commentary

This case raises two important points in relation to the drafting and performance of contracts.

First, from a drafting perspective, where a contract contains an arbitration clause, the judgment underscores the need to state expressly what the governing law of the arbitration clause will be, and not assume that the law of the seat of arbitration will automatically govern. As was demonstrated in Kabab-Ji, where the arbitration clause fails to specify the governing law, other provisions of the contract may come into play in the event of a dispute.

Second, and from a performance perspective where an English law governed contract contains a NOM clause, the parties should not assume that an established course of dealing or informal agreement will serve as an enforceable variation or modification of the terms.

Kabab-Ji concerned a transfer of one company to another company. Company transfers are not unusual or uncommon. The decision in Kabab-Ji demonstrates how a non-substantive or procedural business reorganisation could potentially limit the enforceability of a contract which is subject to a NOM clause, even where the parties to the contract may have proceeded on the basis that such reorganisation was valid. This is of particular relevance in today’s age of complicated and multifaceted corporate restructurings.

Dilly or Dallah? As a consequence of Kabab-Ji, and in light of the Supreme Court decision in Dallah, we find ourselves once again at the risk of parallel conflicting decisions between the English and French courts on the question of enforceability. An open question remains: which law will the French court determine to be the law governing the Kabab-Ji arbitration agreement? Will the French courts find a way to apply the Dow Chemical doctrine or will they agree with their English counterparts? The arbitration community will no doubt be following developments in February 2020 with bated breath.

Practical takeaways

  • To avoid jurisdictional disputes, ensure that an arbitration agreement specifies its governing law.
  • If the contract contains a NOM clause, ensure that any variations to the contract are made in accordance with the NOM clause.
  • Educate employees on the significance of NOM clauses and the importance of formalising oral agreements in writing.
  • Where a business has been subject to a company restructure or bought by a new company, assess whether any underlying contracts contain a NOM clause and ensure that any variations are properly documented and executed.

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