Rare case where enforcement of award refused: you have to be a party to the arbitration agreement!

30 March 2020

The facts

In the recent case of Kabab-Ji SAL v Kout Food Group [2020] EWCA Civ 6 Kabab-Ji was a Lebanese business. It entered into a franchising agreement with Al Homaizi in July 2001. In 2005, Al Homaizi became a subsidiary of Kout Food Group. A dispute arose which went to arbitration in which Kabab-Ji made a claim against Kout. The hearing was held in Paris, France and Kabab-Ji was successful.

However, when it came to enforcement, the question was whether Kout was a party to the arbitration agreement contained in the original agreement. At the time when the agreement was executed, Kabab-Ji entered into a contract with Al Homaizi, not Kout.

After Al Homaizi had become a subsidiary of Kout, at least some of the dealings between the two businesses was actually between Kabab-Ji and Kout: for example, Kout had paid invoices addressed to it for some 30 months and there was some correspondence involving Kout on its headed notepaper. As so often in business dealings, the parties fail to notice which particular corporate entity is carrying out an obligation.

The contract

The contract between Kabab-Ji and Al Homaizi provided,

“The Agreement may only be amended or modified by a written document executed by duly authorised representatives of both Parties.”

It also provided that the parties should “act in accordance with good faith and fair dealing”. It called on the arbitrators to apply the provisions contained in the agreement and to apply “principles of law generally recognised in international transactions” but also provided that “under no circumstances shall the arbitrator(s) apply any rule(s) that contradict(s) the strict wording of the Agreement.”

Legal background

Much of this case centered on the recent decision of the Supreme Court in MWB Business Exchange Centres v Rock Advertising [2018] UKSC 24. In that case, Rock Advertising took space in MWB’s serviced office facilities but fell behind in paying their fees. The judge found as a fact that a representative of Rock Advertising orally agreed with MWB’s credit controller that it would have a “credit holiday”, paying back what it owed over a period of time until the end of the agreement. The agreement contained a clause preventing oral agreements being valid unless they were in writing.

The Supreme Court declined to follow a number of cases which had found that such clauses were, in effect, a dead letter: the upshot was that parties could make effective oral agreements if their doing so showed an intention to vary the non-variation clause. The Supreme Court rather confusingly referred to these provisions as “NOM” or “No Oral Modification” clauses though everyone else calls them “non-variation” clauses.

Be that as it may, the Supreme Court decided it was better to provide certainty to the parties by enforcing such clauses and making oral “agreements” invalid to vary the terms of contracts where there was a “NOM” or non-variation clause. In doing so, it noted that it was in line with international treaties such as the UNIDROIT Principles of International Commercial Contracts and the Vienna Convention on Contracts for the International Sale of Goods. In cases of possible injustice, the Supreme Court noted that English Law has developed the concept of estoppel which can, in appropriate cases, provide a defence to a party that has relied on what it thought was an “agreement” when in fact it was not a binding variation because it fell foul of a “NOM” or non-variation clause.

Decision

The Court of Appeal thought that the parties’ choice of law for their franchising agreement being English Law, this covered the arbitration agreement contained in the contract. Of course, this is not an inevitable conclusion and the decision of the Court of Appeal in Sulamérica v Enesa
Engelharia [2012] EWCA Civ 638 shows that a choice of seat (England) could mean that English Law was to be taken as being the law applicable to the arbitration agreement while the main agreement containing it was expressed to be subject to Brazilian Law.

The Court of Appeal in this case declined to move outside English Law and to adopt wider principles of law derived from the UNIDROIT principles. In a similar way, the fact that the agreement contained words to do with good faith and fair dealing did not mean that the court could circumvent the strict words of the agreement: there was no such thing as “interpretation in good faith” so as to re-write the straight meaning of the agreement.

That all being so, it was necessary to apply the decision in Rock Advertising. In fact, the agreement containing the arbitration clause was with Al Homaizi and not Kout. Kabab-Ji could only get around it by showing (using the words of Rock Advertising)

  • …some words or conduct unequivocally representing that the variation was valid notwithstanding its informality; and
  • something more would be required for this purpose than the informal promise itself

In the view of the Court of Appeal, Kabab-Ji could not come close to doing this. The result was that the NOM clause was enforceable and was effective to prevent Kout being treated as a party to the abitration agreement. The agreement was between Kabab-Ji and Al Homaizi and nothing short of a formal written variation could change that. The limited paying of invoices and correspondence was not enough to amount to a formal variation or even an estoppel.

The consequence was that the award achieved in Paris was declared unenforceable, notwithstanding that the French Courts (as the supervisory jurisdition) were still to determine the matter.

Richard Stephens 30 March 2020

Note: this is a general note and you should take professional advice before trying to apply any principles contained in it to a specific situation.