A new lease of life for No Oral Modification clauses

A No Oral Modification clause is often included in a commercial contract to prevent informal changes being agreed once the contract is in operation. This can have a major impact in ongoing commercial relationships like IT development or construction projects, where the parties are in regular contact and changes arise along the way.  Before the decision of the Supreme Court in Rock Advertising v MWB, No Oral Modification clauses were doubtful, although they were often included as standard wording in contracts anyway.

A dispute over a Franchise Development Agreement (Kabab-ji v Kout Food Group) shows how No Oral Modification clauses are being treated after the Supreme Court's overhaul. It also shows how the English law approach fits together with the UNIDROIT Principles of International Commercial Contracts 2016.

In 2001, a Franchise Development Agreement was entered into between Kabab-ji and an entity (AHFC) which later became a subsidiary of Kout Food Group.  The agreement included a No Oral Modification clause:

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

A dispute arose, and Kabab-ji started arbitration proceedings – but only against Kout Food Group and not AHFC. For Kabab-ji to succeed, Kout Food Group must have become an additional party to the Franchise Development Agreement and the arbitration agreement contained within it. Kabab-ji argued that it had because of conduct with the express or implied consent of the existing parties.

So had Kout Food Group become an additional party, in spite of the No Oral Modification clause?

The court said it had not - Kout Food Group was not a party to either agreement as the requirement for an amendment in writing had not been followed. The No Oral Modification clause was effective in preventing the parties from being bound by variations unless all contractual formalities were complied with. Neither the UNIDROIT principles nor good faith (both of which were included in the contract) had the effect of altering the written notice requirement.

As a result, the Court of Appeal refused to enforce the arbitration award against Kout Food Group.

As well as showing the new power of No Oral Modification clauses, the case underlines the importance of clear governing law wording. The parties disagreed over whether English governing law, expressly selected in the Franchise Development Agreement, also applied to the arbitration. Choice of law in the main agreement, the court concluded, will generally also apply to the arbitration clause unless there is express provision otherwise.