No oral amendment

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No oral modification” is a self-contradictory stricture on an amendment agreement, until 2018 understood by all to be silly fluff put in a contract to appease the lawyers and guarantee them an annuity of tedious work. But as of 2018 it is no longer, as it ought to be, a vacuous piece of legal flannel — thanks to what we impolitely consider to be an equally vacuous piece of legal reasoning by no less an eminence than Lord Sumption of the Supreme Court in Rock Advertising Limited v MWB Business Exchange Centres Limited if one says one cannot amend a contract except in writing then one will be held to that — even if on the clear evidence the parties to the contract later agreed otherwise.

This is rather like sober me being obliged to act on promises that drunk me made to a handsome rechtsanwältin during a argument about theoretical physics in a nasty bar in Hammersmith after the end-of-year do, which that elegant German attorney can not even remember me making, let alone wishing to see performed.[1] Hold my beer.

The Rock Advertising case

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.

Regulations: more unintended consequences

The JC’s friends, relations, countrypersons and LinkedIn combatants don’t all agree that no oral modification clauses are potty as he does — but that’s what being a contrarian is all about.

See also

  1. I know this sounds oddly, verisimilitudinally specific, but it actually isn’t. I really did just make it up.
  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.