Data

Date:: 20-01-2020
Country:: United Kingdom
Number:: [2020] EWCA Civ 6
Court:: Court of Appeal
Parties:: Kabab-Ji S.A.L. v. Kout Food Group

Keywords

LONG-TERM CONTRACTS - FRANCHISE DEVELOPMENT AGREEMENT - BETWEEN A LEBANESE COMPANY AND A KUWAITI COMPANY - ARBITRATION CLAUSE REFERRING TO "PRINCIPLES OF LAW GENERALLY RECOGNIZED IN INTERNATIONAL TRANSACTIONS" - CHOICE OF LAW CLAUSE IN FAVOUR OF ENGLISH LAW - APPLICATION BY ARBITRAL TRIBUNAL OF THE UNIDROIT PRINCIPLES CONSIDERED AS AN EXPRESSION OF THESE PRINCIPLES - USE OF THE UNIDROIT PRINCIPLES FOR INTERPRETING APPLICABLE DOMESTIC LAW (ENGLISH LAW)

NO ORAL MODIFICATION CLAUSE IN WRITTEN CONTRACT - QUESTION AS TO WHETHER IT PREVENTS PARTIES FROM VALIDLY AGREEING ORALLY A MODIFICATION OF THE CONTRACT (I.E. ADDING ANOTHER PARTY TO A CONTRACT) - CONTROVERSIAL UNDER ENGLISH LAW - REFERENCE BY THE COURT TO ART. 2.1.18 UNIDROIT PRINCIPLES WHICH EXPRESSES A PRINCIPLE OF LAW SIMILAR TO THAT EXPRESSED BY ENGLISH LAW

NO ORAL MODIFICATION CLAUSE IN WRITTEN CONTRACT - REFERENCE TO ART. 2.1.18 OF THE UNIDROIT PRINCIPLES BY ONE OF THE PARTIES - CANNOT CONTRADICT THE EXPRESS PROVISION CONTAINED IN THE CONTRACT

Abstract

Claimant, a Lebanese company, entered into a Franchise Development Agreement for a period of 10 years with a Kuwaiti company. Few years later, following a corporate reorganisation, the latter became a subsidiary of the Respondent, another Kuwaiti company. A dispute arose under the contract, leading Claimant to commence an arbitration against Respondent (and not the company which concluded the agreement).

This raised a jurisdictional question as to whether Respondent had become an additional party to the development agreement, and therefore to the arbitration agreement. On the merits the Arbitral Tribunal had to decide whether there had been a breach of contract by Respondent.

The arbitration clause specified that Paris would be the seat of arbitration and that “the arbitrator(s) shall apply the provision contained in the Agreement and … principles of law generally recognized in international transactions”. The governing law clause stipulated that the contract would be “governed and construed in accordance with English law”. The contract contained also a “No Oral Modification” clause.

The Arbitral Tribunal determined that (i) whether Respondent was bound by the arbitration agreement was a matter of French law and (ii) that English law governed whether a transfer of substantive rights and obligations to Respondent took place.

By majority decision, two of the arbitrators concluded that Respondent became a counterparty to the development agreement and that, as a matter of English law and despite the “No Oral Modification” clause, a novation was to be inferred by the conduct of the parties. In doing so, the majority of the arbitrators referred to UNIDROIT Principles 2016 edition. Having found jurisdiction, the Arbitral Tribunal went on to determine that, on the merits, Respondent was in breach of the contract.

Respondent filed an application before the French courts to annul the award.

Separately, Claimant made an application for the enforcement of the award under the English Arbitration Act and Respondent objected.

The First Instance Judge determined that, irrespective of the approach of the arbitrators, English law governed the validity of the arbitration clause and the issue of whether Respondent ever became a party to it. The Court considered that Respondent did not become a party to the arbitration clause, since the contract required an agreement in writing to add a new contractual party, but declined to make a final determination on this point in case further evidence on this issue might emerge after the decision of the French court. The court accordingly refused enforcement and recognition of the award.

In his decision, the First Instance judge quoted a passage of Lord Sumption’s opinion in MWB Business Exchange Centres Ltd v Rock Advertising Ltd [2018] UKSC 24 (already in Unilex) according to which: “It will be recalled that both the Vienna Convention and the UNIDROIT model code qualify the principle that effect is given to No Oral Modification clauses, by stating that a party may be precluded by his conduct from relying on such a provision to the extent that the other party has relied (or reasonably relied) on that conduct. In some legal systems this result would follow from the concepts of contractual good faith or abuse of rights. In England, the safeguard against injustice lies in the various doctrines of estoppel. […] I would merely point out 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”.

Claimant appealed the first instance decision arguing that there was no express choice of English law as the governing law of the arbitration agreement and that the choice of “English law plus”, as contained in the contract, was in contrast with the common law requirement that the law applicable to an arbitration had to be the law of a country. In Claimant’s opinion, the judge should have concluded either that the implied choice of law governing the arbitration agreement was French law or, in default of any choice, that French law applied as the law of the seat of arbitration.

Respondent counterclaimed that there was an express choice of English law as the governing law of the contract, which must mean that the entire agreement, including the arbitration agreement, was governed by English law. The fact that the seat of the arbitration was in a different country was not at odds with that interpretation.

Claimant added that even if the First Instance Court was correct in assuming that the governing law of the arbitration agreement was English law, it had erred in concluding that consent in writing was required for Respondent to become an additional party to the contract. The good faith and fair dealing provisions contained in both the agreement and the UNIDROIT Principles overrode the “Non Oral Modification” clause and Respondent could therefore be a party to the arbitration agreement without written consent. Claimant relied in particular on Arts. 1.7, 1.8, 2.1.1 and 2.1.18 of the UNIDROIT Principles.

In response, Respondent argued that the UNIDROIT Principles could not be relied upon to establish an amendment that would contradict the express provision contained in the No Oral modification clause. The only way in which the No Oral Modification clauses could be overridden was if the test for an estoppel stated in Rock Advertising was satisfied (see Unilex).

On the first issue, the Appellate Court concluded that the contract provided for an express choice of English law to govern the arbitration agreement. The “English law plus” provisions did not point to some other system of law (specifically French law) governing the arbitration agreement and said nothing about the law governing the arbitration agreement. The fact that the arbitration clause itself did not expressly refer to English law did not matter, as the contract wording demonstrated a clear intention that the entire agreement would be governed by English law. It was therefore not necessary to consider whether there was an implied choice of law.

On the second issue, the Court of Appeal agreed with Respondent that, under English law, the No Oral Modification clauses could only be overridden if the test for an estoppel in Rock Advertising was satisfied.

In the opinion of the Court, the Illustration 2, given in the Comment of Art. 2.1.18 UNIDROIT Principles, is a classic example of what is required by way of estoppel. In other words, Lord Sumption in Rock Advertising was setting out how English law interpreted this principle laid down in the UNIDROIT Principles and is not saying anything different from the uniform law instrument. Moreover, even if, contrary to that conclusion, the UNIDROIT Principles are enunciating some broader test for preclusion than that laid down by Lord Sumption, they cannot be used to override the No Oral Modification clauses in the agreement.

The Appellate Court concluded that, given that the Claimant could not satisfy the Rock Advertising test, the first instance judge should have made a final determination that Respondent was not a party to the contract or the arbitration agreement, so that the award was not enforceable against Respondent.

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