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The perils of arbitration and variation clauses

The recent decision of the English Court of Appeal in Kabab-Ji SAL (Lebanon) v Kout Food Group (Kuwait) [2020] EWCA Civ6 highlights the significant difficulties that can arise when an arbitration clause is ambiguous, and when parties fail to document a change to their agreement.

The appellant, a Lebanese company (L), entered into a franchise agreement (FA) with a Kuwaiti company (K), which subsequently became a subsidiary of the respondent group of companies, Kout Food Group (KFG). The FA was expressed to be governed by English law, contained an arbitration clause providing for any arbitration to be seated in Paris and subject to ICC rules, and a ‘No Oral Modification’ clause providing that variations to the agreement would only be effective if in a written document signed by both parties. 

A dispute arose under the FA and L commenced arbitration proceedings against KFG alone, without naming K as a respondent. The arbitral tribunal (i) concluded that the arbitration clause was governed by French law, and applied French law to find that KFG was bound by the arbitration clause, but (ii) applied English law to reach the conclusion that KFG had become a party to the FA itself, and (iii) determined the substantive dispute in L’s favour. 

KFG sought to have the award annulled in the French courts, but in the meantime L sought recognition of the award in England and obtained an order for the enforcement of the award as a judgment of the English court. The issues of the governing law of the arbitration agreement and whether or not KFG had become a party to the FA were appealed to the English Court of Appeal.      

Although the arbitration tribunal reached its award by a majority decision, the English Court of Appeal unanimously disagreed with the approach taken by all three of the arbitrators. On its proper construction as a whole, the Court of Appeal held that the FA did contain an express choice of English law as the governing law of the arbitration clause as well as the wider agreement. It was therefore unnecessary to consider arguments for an implied term as to choice of law for the arbitration clause, along the lines of the well-known English case of Sulamerica v Enesa Engelharia [2012] EWCA Civ 638, or whether a term as to choice of law could be implied on the basis that it was necessary for business efficacy, following the English Supreme Court’s restatement of the law in relation to implied terms in Marks & Spencer v BNP Paribas Securities [2015] UKSC 72.

On the second issue, whether KFG had become a party to the FA or arbitration clause, the Court of Appeal applied the Supreme Court’s decision in MWB Business Exchange Centres v Rock Advertising [2018] UKSC 24, which held that ‘No Oral Modification’ clauses are valid and enforceable as a matter of English law, unless there were “some words or conduct unequivocally representing that the variation was valid notwithstanding its informality”. The Court of Appeal referred to the findings of fact on that issue in the court below, and said that it was clear that L could not begin to satisfy the test in Rock Advertising. As such, the ‘No Oral Modification’ clause in the FA was upheld, KFG did not become a party to the FA, L had sued the wrong party, and the arbitral award could not be recognised or enforced in England.

The approach taken by the Court of Appeal in this case is unsurprising, and would most likely be followed by the courts of Cayman and other British Overseas Territories. However, the case is a helpful reminder of the scope for disagreement, parallel proceedings and, ultimately, waste of time and money when arbitration clauses are not tightly drafted, or when parties fail to document changes to their agreements.

The perils of arbitration and variation clauses

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