One of the benefits of being a regular reader of the Lloyd’s Law Reports is keeping updated with English commercial law, perhaps the most sophisticated jurisdiction for commercial disputes worldwide.
The recent Supreme Court judgment of Kabaj-Ji SAL (Lebanon) vs Kout Food Group (Kuwait) is an interesting case worth commenting on this note. A dispute arose out of several franchise contracts and was arbitrated in Paris at the ICC. However, while the action to annul the Award before the Court of Appeal in Paris was not successful for the appellants, proceedings in London for the enforcement of the Award resulted in a most interesting judgment by the Supreme Court.
The summary of the case extracted from the Supreme Court judgment reads as follows:
The claimant (and appellant) is a Lebanese company which has developed a distinctive type of restaurant specialising in Lebanese and other Middle Eastern cuisines and owns trademarks and other rights underpinning this restaurant concept. By a Franchise Development Agreement dated 16 July 2001 (the “FDA”), the claimant granted a licence to a Kuwaiti company, Al Homaizi Foodstuff Company (“Al Homaizi”) to operate a franchise using its restaurant concept in Kuwait for a period of ten years. Under the FDA, the claimant and Al Homaizi subsequently entered into a total of ten Franchise Outlet Agreements (“FOAs”) in respect of individual outlets opened in Kuwait. We will refer to the FDA and FOAs collectively as the “Franchise Agreements”. The Franchise Agreements are all expressly governed by English law. In 2005 the Al Homaizi Group underwent a corporate restructuring. A new holding company called Kout Food Group (“KFG”) was established and Al Homaizi became a subsidiary of KFG. KFG is the defendant to the arbitration claim and the respondent to this appeal. A dispute arose under the Franchise Agreements which the claimant referred to arbitration under the rules of the International Chamber of Commerce (“ICC”) in Paris. That arbitration was commenced against KFG alone, and not against Al Homaizi. KFG took part in the arbitration under protest, maintaining that it was not a party to the Franchise Agreements or the arbitration agreements contained in them. A final hearing took place in Paris before a tribunal of three arbitrators, which made an award in favour of the claimant. The arbitral tribunal unanimously considered that it must apply French law, as the law of the seat of the arbitration, to determine whether KFG was bound by the arbitration agreements, but English law to decide whether KFG had acquired substantive rights and obligations under the Franchise Agreements. A majority of the tribunal (Professor Dr Mohamed Abdel Wahab and Mr Bruno Leurent) held that: (i) applying French law, KFG was a party to the arbitration agreements; (ii) applying English law, there had been a “novation by addition” (rather than substitution) whereby KFG became an additional party to the Franchise Agreements alongside Al Homaizi by reason of the parties’ conduct. They went on to conclude that KFG was in breach of the Franchise Agreements and awarded unpaid licence fees, damages and legal costs (with interest on the sums awarded) against KFG. The principal amount of the award is US$6,734,628.19. The third arbitrator, Mr Klaus Reichert SC, dissented on the basis that, applying English law, KFG never became a party to the FDA (or the FOAs), as any novation involving the replacement of Al Homaizi by KFG, or the addition of KFG as a party, was precluded by the strict wording of the agreement. Accordingly, KFG owed no substantive obligations to the claimant under the Franchise Agreements. Before the High Court, Sir Michael Burton, held the following:
(i) The law governing the validity of the arbitration agreement governs the question of whether KFG became a party to the arbitration agreement. (ii) The law governing the validity of the arbitration agreement is English law. (iii) At English law, (subject to a point left open in the court’s judgment) KFG did not become a party to the FDA or the arbitration agreement of the FDA, the two questions raising the same issue. Despite having, in his words, “taken to the brink” the third of the above issues, the judge did not finally decide it, as he thought it “just possible” that evidence might establish that “there was something approximating to a consent in writing by the parties” to the addition of KFG as a party to the FDA and the arbitration agreement within it: see  EWHC 899 (Comm), paras 64-65. Further, at the claimant’s request and against KFG’s opposition, the judge adjourned any further hearing until after the Paris Court of Appeal had decided KFG’s application to annul the award.
The Court of Appeal (Flaux LJ, with whom McCombe LJ and Sir Bernard Rix agreed) handed down judgment dismissing the claimant’s appeal and allowing KFG’s cross-appeal: see  EWCA Civ 6;  1 CLC 90. In summary, the Court of Appeal held that:(i) The terms of the FDA provided for the express choice of English law to govern the arbitration agreement in clause 14 of the FDA.(ii) As a matter of English law, in the absence of written consent as required by the terms of the FDA or any matters capable of giving rise to an estoppel, KFG could not have become a party to the FDA and hence the arbitration agreement. (iii) The judge should not have granted an adjournment and should have made a final determination that KFG was not a party to the FDA or the arbitration agreement, so that the award is not enforceable against KFG.
The Supreme Court agreed with the Court of Appeal and held that the result of the provisions contained in the License agreement was that it had not been transferred to the respondent given the terms of the No Oral Modification clauses. The Court stated that “the evidential burden was on the claimant to show a sufficiently arguable case that KFG had become a party to the FDA and hence to the arbitration agreement in compliance with the requirements set out in those clauses, or that KFG was estopped or otherwise precluded from relying on the failure to comply with those requirements. On the findings made by the judge and the evidence before the court, such a case was not and has not been made out. In particular, as the Court of Appeal observed at para 80 of its judgment, no evidence has been identified that goes beyond evidence of “the informal promise itself”. We are also satisfied that the Court of Appeal was entitled and correct to conclude that there was no realistic prospect of further evidence being put forward that might lead to a different conclusion. In this regard, it should be borne in mind that there had already been an ICC arbitration involving witness evidence and disclosure of documents in which this issue was contested, and so the identification of further relevant evidence, if there were any, should not have been problematic.”
The relevant clauses of the contract set out the following:
Article 19: Rights not Transferable
The parties hereto agree that all rights granted to LICENSEE under this Agreement are personal in nature and are granted in reliance upon various personal and financial qualifications and attributes of LICENSEE. LICENSEE’S interest under this agreement is not transferable or assignable, under any circumstances whatsoever, voluntarily, by operation of law or otherwise without the written consent of LICENSOR or purported transfer or assignment of all or any part of such interest shall immediately terminate this Agreement without further action of the parties and without liability to LICENSOR or its designee of any nature.
Article 24: Entire Agreement
… No interpretation, change, termination, or waiver of any provision hereof, and no consent or approval hereunder, shall be binding upon the other party or effective unless in writing signed by LICENSEE and by an authorized representative of LICENSOR or its designee.
Article 26: Amendment of Agreement
The Agreement may only be amended or modified by a written document executed by duly authorised representatives of both Parties.”
The outcome of this dispute shows the difficulties that a no oral modification clause may bring to the transferability of contracts, and the high degree of caution that parties to such agreements need to have where in a case like this a de facto transfer of the contract appears to have operated but from the legal stand point it did not.
Copies of the judgment are found here
Arizon Abogados SLP