Amendment

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The basic principles of contract

A Jolly Contrarian tiptoe through the tulips of consensus™

An amendment, yesterday.
A supplement, yesterday.


Formation: capacity and authority · representation · misrepresentation · offer · acceptance · consideration · intention to create legal relations · agreement to agree · privity of contract oral vs written contract · principal · agent
Interpretation and change: governing law · mistake · implied term · amendment · assignment · novation
Performance: force majeure · promise · waiver · warranty · covenant · sovereign immunity · illegality · severability · good faith · commercially reasonable manner · commercial imperative · indemnity · guarantee
Breach: breach · repudiation · causation · remoteness of damage · direct loss · consequential loss · foreseeability · damages · contractual negligence · process agent
Remedies: damages · adequacy of damages ·equitable remedies · injunction · specific performance · limited recourse · rescission · estoppel · concurrent liability
Not contracts: Restitutionquasi-contractquasi-agency

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Tort

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The art of changing the agreed terms of a contract.

It requires both parties to agree to the amendment. That’s more or less it. This will not stop those — in particular ISDA lawyers — being positively neurotic when composing amendment agreements.

Amend” versus “supplement” versus “modify

Is something missing from the notion “amend” that means it must, well, be supplemented or even modified, to capture all lexical contortions to which a negotiating party might subject it from time to time? For example, you will often see, “this agreement, as amended, supplemented or modified (as the case may be) from time to time...”.

Is this really necessary? So we lose something if we just say “as amended”?

In this old fool’s opinion, no.

Amendment

To “amend” is to “change”. So is to “modify”. These words are exact synonyms. A language lover might argue that, of those three synonyms, “change” is the simplest and, therefore, best.

Supplement

To “supplement” is not, quite, a synonym, but nearly: one might append something to the foot of an agreement — that is to say, supplement it — in a way that has no effect on the agreement itself, the same way one might “supplement” a Morris Minor with a caravan and head off to Wales. So loaded, your Morris might struggle over the Chilterns, but it is still the same, unamended vehicle. But an agreement so “supplemented” isn’t changed, so there is no harm in neglecting that kind of supplement from your catalogue of legal contingencies. If your supplement does change the terms of the existing agreement, as a physical conversion of a Morris Minor into a campervan might, then — well, it is an amendment, isn’t it? In that sense “supplementis an exact, and redundant, synonym for “amend”.

What definitely won’t change

Will this irrefutable logic now end the legal eagle’s fetish for adumbrating the different ways by which one might “alter, amend, truncate, supplement, modify, augment, diminish, expand, contract, extend, retract, deprecate, elaborate, embellish, distill or otherwise change” a legal compact?

Will it hell.

No oral modification clauses thrown a new lease of life

What of the Mobius loop thrown by the kind of clause that provides this agreement may not be amended except in writing[1], or this agreement may not be amended at all?

A recent Supreme Court case had a thing or two to say about that, all to the benefit of jobbing contract lawyers, but to the detriment their clients and the basic precepts of common sense.

Rock Advertising Limited v MWB Business Exchange Centres Limited concerned a non-oral modification clause.

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 oral variation in 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 equitable estoppel. 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.

Amending security interests

If you amend a document granting a security interest you risk the argument that you have terminated the old security interest and created a new one, thereby re-starting any voidable preference period, potentially invalidating any previously registered charge at Companies House, and of course relegating your interest behind those of anyone who has registered a security interest over the same assets in the mean time.

Some of these risks have been de-complicated by the financial collateral regulations (insofar as they've done away with registration requirements for financial collateral arrangements altogether), and while this is a bit of a mine-field, basic common sense should avoid anyone but the most headless chicken-licken standing on any landmines.

For one thing, to run any risk you have to actually be amending the security interest itself, rather than other related legal or economic terms. So, if you have — ooh, say a prime brokerage agreement which contains a charge but a lot of other stuff besides — you are (in the humble opinion of this bear of little brain) most likely to be amending other things and not the actual charge provision, which tends to be dull and workpersonlike. You may tweak rehypothecation limits, financing rates, transaction terms and so on — but the security package will remain intact.

In any case, the following magic words should help: “These amendments will not affect the effectiveness, time of original execution or priority of any security interests.”

See also

References

  1. And, if the great firm of is to gain traction, we will have to update our templates to say this agreement may not be amended except in writing, or pictorially
  2. A weak Lay-Z-Boy gag, I admit. This gag comes to you direct from our “here all week, folks!” store of corking one-liners.
  3. Or in pictures.