In which the Supreme Court dealt unsatisfactorily with two basic issues one would like to think were well and truly settled law before now, getting one wrong (in your humble correspondent’s unworthy opinion) and deciding therefore that it did not need to answer the other. The issues were:
Whether a contractual term that an agreement may only be amended in writing signed by the parties prevents parties effectively amending the contract orally, by morse code or by winking at each other[1];
Whether an amendment to substitute an obligation to pay a lot of money with an obligation to pay less money is supported by consideration.
Brand new nonsense from the learned souls in the Supreme Court. NOM, NOM, NOM.
This time, concerning no oral modification clauses — hitherto understood by all to be harmless fluff injected into the boilerplate by unthinking clerks, and understood by all (including the Court of Appeal) to carry no forensic content at all, wherein parties — and let’s be honest here, it’s really just their lawyers — vainly purport to require amendments to be documented in a written agreement. For who else would benefit from such a tiresome formal stricture?
Anyway, the Supreme Court went into Law Society shop steward mode:
Rock Advertising Ltd rented serviced office space from MWB. It struggled to make ends meet. It fell behind in its licence payments to MWB.
Rock proposed rescheduled licence payments which would mean it would pay less overall to MWB than it had agreed to agreed in the original contract. A credit officer at MWB agreed the reschedule over the phone, but subsequently her line manager rejected it. MWB terminated the lease, locked the Rock out and put its feet up.[2]
Rock sued, citing the binding amendment to the licence agreement. MWB defended citing a no oral modification clause in the licence agreement which, it contended, meant the the oral conversation between the credit officer and Rock was not an effective amendment because it was not in writing.
Anxious to avoid addressing the “difficult” question of whether a unilateral reduction in the net value of Rock’s payment obligations could be said to be accompanied by consideration, the court focused squarely on the no oral modification clause.
Could it really work? Surely, contracting merchants are sovereign: they must be free to vary their affairs in a way the common law. If the evidence is clear that they agree, and there is consideration, it doesn't matter how they agree. Could contracting parties really double-entrench themselves?
The Court of Appeal thought not. A fellow can agree whatever he chooses, however he chooses – in writing, orally or by conduct[3]. Following that general principle, a “no oral modification” clause (a “NOM” clause) would not prevent him later making a new oral contract to vary the original contract.
Good, that’s that all sorted and we can now all move on to more important issues of the d —
BUT WAIT. The Supreme Court thought differently. Lord Sumption dismissed this as “fallacious” reasoning: a chap’s autonomy operates until he has made his contract; thereafter he only has it so far as the original contract allows.
“The real offence against party autonomy is the suggestion that they cannot bind themselves as to the form of any variation, even if that is what they have agreed.”
But what if contracting parties have relied on an oralvariationin good faith and, by their conduct, abided by it for a good period? The sort of thing codified in America as a “course of dealing”? As have so many of his brother judges in the past, here Lord Sumption looked lovingly towards the courts of chancery in a clean-handed defendant’s aid. A wronged party might seek to argue an equitableestoppel. However, the scope of this estoppel will be limited:
“... at the very least, there would have to be 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.”
Look on one bright side: this should — but won’t — finally nail down the lid on the coffin of nervous risk people regarding the ISDA — which has a no oral modification clause — and wailing “but what if my failure to exercise my close out rights means I lose them altogether?” This is a fatuous question (under English law at any rate) at the best of times, but as long as Rock Advertising is good authority — and being a judgment of the Supreme Court, we should expect it will be for some time — it has a definitive answer: you cannot amend, or waive your rights under an ISDA Master Agreement except in writing, and signed by all parties.
Common sense has taken a bit of a battering, but this is all good news for we learned wordwrights who can now be prayed upon to paper otherwise unnecessary amendment agreements for merchants to vouchsafe their obvious commercial intent.
Lord Sumption ducked this one, by giving a bad decision on NOMs.
“That makes it unnecessary to deal with consideration. It is also, I think, undesirable to do so.The issue is a difficult one. The only consideration which MWB can be said to have been given for accepting a less advantageous schedule of payments was: (i) the prospect that the payments were more likely to be made if they were loaded onto the back end of the contract term, and (ii) the fact that MWB would be less likely to have the premises left vacant on its hands while it sought a new licensee. These were both expectations of practical value, but neither was a contractual entitlement.”
The real problem here is that a counterparty was trying to reduce its contractual obligations for free. To be sure the consequences for the other party of not doing so may have been catastrophic, rock advertising may have failed all together) but however you look at it avoiding that outcome — which, absent this amendment, would amount to a breach of contract, remember — by foregoing performance to which you are contractually entitled — is not consideration. It can’t be. The issue that isn’t “difficult”, but in getting it, the supreme court has wound up making a hash out of of an even more profound contractual concept.
