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Failure to comply with no oral modification provision prevented effective novation

Author
Pranay Lekhi

Legal Advisor

London

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08 November 2021

Re-iterating the power of so-called no oral modification provisions, the Supreme Court has said that an entity could not become a party to an agreement by novation unless it could show that the agreed contractual procedure for amendment to the agreement had been followed. 

Kabab-ji, a Lebanese company that had developed a distinctive type of restaurant specialising in Middle Eastern cuisine, entered into franchise agreements with a Kuwaiti company – Al Homaizi Foodstuff. Following a corporate restructuring, Al Homaizi became a subsidiary of a company called Kout Food Group.

Over time, a dispute arose under the franchise agreements and Kabab-ji started arbitration proceedings against Kout alone, and not against Al Homaizi (the original party). Kout participated in these proceedings under protest, maintaining that it was not a party to the franchise agreements or the arbitration agreements contained within them. 

The arbitral tribunal determined that, following a “novation by addition”, Kout became an additional party to the franchise agreements. The original contract with Al Homaizi had, it said, been terminated by agreement, and replaced by another agreement on the same terms between both Al Homaizi and Kout. 

Kout resisted enforcement of the subsequent arbitral award again saying it was not a party to the arbitration agreement. The Supreme Court agreed with Kout. 

The no oral modification clauses stated: that the franchise agreement was personal to Al Homaizi; that any waiver must be in writing and signed; that the rights licensed were not transferable without the consent of the licensor; that the agreement was the entire agreement; and, that the agreement may only be modified by a written document duly executed by authorised representatives of both parties. 

These provisions had not been complied with. The court held that they were a valid part of the legal bargain between the parties.

Following MWB v Rock Advertising, a party may, still, be estopped from relying on no oral modification clauses if (i) there are “some words or conduct unequivocally representing that the variation was valid notwithstanding its informality”; and (ii) there exists “something more … than the informal promise itself”. No evidence of any such representation by Al Homaizi had been identified, however, as the courts below found. 

[Ed.: as we’ve said before on this blog these types of provisions are extremely powerful. Great if you are seeking to rely on them, perhaps less so if you are not.]

Judgment: Kabab-ji SAL v Kout Food Group