The way in which a contract operates in practice can differ from the wording of the agreement and whilst one part of a corporate group may perform obligations entered into by another group company, that does not ordinarily alter the obligations owed under the contract. It is vitally important to address such changes during the course of the contract.

The power of “No Oral Modification clauses” under English law has been emphasised by the Supreme Court in last week’s judgment in Kabab-JI SAL (Lebanon) –v- Kout Food Group (Kuwait) [2021] UKSC 48. They are enforceable and present a formidable defence to claims of variation that do not comply with contractual formalities. That difficulty might be overcome if an estoppel could be established but even then, those same clauses might lead the performing party to conclude it was not contractually liable.

A party in the position of the Claimant would be well advised to consider taking action against the counterparty in addition to any other party it claimed was added to the contract by novation or otherwise to minimise the risk of problems later on.

Case summary

The Claimant had entered into a 10 year agreement with its counterparty granting rights to run a restaurant franchise in Kuwait. The agreement contained terms including provisions along the lines that:

• Disputes were to be resolved via ICC arbitration, seated in Paris.
• Various clauses described by the Supreme Court as “No Oral Modification clauses” such as: the grant of rights was intended to be personal; any waiver had to be in writing; no variation except in writing; rights were not transferable except by written agreement; entire agreement clause; and any amendment to the agreement must be in writing.

About half way through the agreement, there was a corporate re-organisation and the counterparty became a subsidiary of the Defendant.

The Appellant brought arbitral proceedings against Defendant which defended whilst reserving its position that it was not a party to the arbitration agreement (saying the counterparty was the correct party).  Following issue of an award of damages, the Claimant sought to enforce its award under the New York Convention in the English courts, eventually coming before the Supreme Court.

What law governed the question of whether Respondent was a party to the arbitration agreement? English law, the governing law of the agreement. French law governed the arbitral process, not the arbitral agreement.

Might the Defendant be able to establish it had become a party to the arbitration agreement? The agreement to arbitrate had to be in writing (see section 100(2)(a) Arbitration Act 1996 and Article II, 1 of the convention).  The Defendant argued it had become a party by “novation by addition”- which the arbitral tribunal had accepted.  The Supreme Court said there was no real prospect of it being able to do so as it could not show compliance with the No Oral Modification clauses or that an estoppel had arisen (so as to effectively excuse such non-compliance).