JHA | Making an effective agreement to reschedule debts: the Supreme Court in Rock Advertising Limited v MWB Business Exchange Centres [2018] 2 WLR 1603

Making an effective agreement to reschedule debts: the Supreme Court in Rock Advertising Limited v MWB Business Exchange Centres [2018] 2 WLR 1603

June 4, 2018

Author:


A. The Facts

MWB Business Exchange Centres (“MWB”) operated managed office space in central London. Rock Advertising Limited (“Rock”) provided marketing services. For some seven or eight years prior to the events giving rise to the proceedings, Rock occupied as licensee premises managed by MWB. Initially the premises consisted of a relatively small suite of offices which Rock could afford. In August 2011 it decided to expand its business, and entered into an agreement in writing for larger premises at an increased fee for a term of 12 months commencing on 1 November 2011. The licence fee to which it agreed was £3,500 per month (excluding VAT) for the first three months and then, from February 2012, £4,433.34 per month (again excluding VAT).

Clause 7.6 of the Agreement provided:

“This Licence sets out all of the terms as agreed between MWB and Licensee. No other representations or terms shall apply or form part of this Licence. All variations to this Licence must be agreed, set out in writing and signed on behalf of both parties before they take effect.”

Rock was unable to meet this financial commitment because its business did not develop as it had hoped, and by late February 2012, it had incurred arrears of licence fees and other charges of over £12,000. The company’s sole director proposed a revised schedule of payments to a credit controller employed by MWB. It was found by the County Court Judge at trial that on 27th February 2012, an oral agreement was made between MWB, acting by its credit controller, Ms Evans, who had ostensible authority, and Rock, acting by its sole director, Mr Idehen, to reschedule the licence fee payments due under the agreement over the period from February to October 2012, so that for the first few months Rock would pay less than the amount originally agreed but thereafter it would pay more with the result that, by the end of the year, the arrears would have been cleared. On the same day Rock paid £3,500 to MWB, this being the first instalment due in accordance with the revised payment schedule.

On 29th February 2012 Ms Evans sent an email sent an e-mail to Mr Idehen reporting that her finance director required payment terms giving less time for payment by Rock:

“Morning Christian, I had a debt review with my finance director last night. We have to have a minimum payment of £5,320 [this being the licence fee plus VAT] on account each month to cover the cost of the licence fee. He is not happy to allow you to accumulate anymore debt on the account and said £4,000 is not acceptable as you are not covering your contractual expectations. Please confirm that you will make payments for no less than £5,320·01 each calendar month. It is £1,320 more in March as per your schedule and £320 more for April and May as per your proposed payment schedules. Please confirm by return as I have to update the finance director at 4 pm today.”

On 30th March 2012 MWB purportedly exercised its right under the licence agreement to lock Rock out of the premises, and shortly afterwards, it gave notice purporting to terminate that agreement with effect from 4th May 2012. MWB then sued for the arrears. Rock counterclaimed damages for wrongful exclusion from the premises. The case turned on whether the variation agreement found by the County Court Judge was effective in law.

B. The Effect of a No Oral Modification Clause (“NOM”)

The County Court judge held (i) that the oral variation agreement was supported by consideration, because it brought practical advantages to MWB, in that the prospect of being paid eventually was enhanced; but (ii) that the variation was legally ineffective because it was not recorded in writing signed on behalf of both parties, as required by clause 7.6. of the Agreement; MWB were therefore entitled to claim the arrears without regard to it.

The Court of Appeal held, allowing the appeal, that: (1) The oral contract was effective notwithstanding clause 7.6; (2) There was consideration notwithstanding the decision of the House of Lords in Foakes v Beer (1884) 9 App Cas 605; and (3) If the variation had been ineffective because of clause 7.6 there was no estoppel precluding MWB from taking the point, based on that agreement made on 27th February, because MWB had made their position clear by email on 29 February 2012. It would not have been inequitable for MWB to assert and enforce its legal rights as it did.

The Court of Appeal referred to a well known passage in Beatty v Guggenheim Exploration Co (1919) 225 NY 380 with which Hiscock Ch J, Chase, Collin and Crane JJ concurred (Cuddeback and Hogan JJ dissenting), in which Cardozo J said, at pp. 387–388:

“Those who make a contract, may unmake it. The clause which forbids a change, may be changed like any other. The prohibition of oral waiver, may itself be waived … What is excluded by one act, is restored by another. You may put it out by the door, it is back through the window. Whenever two men contract, no limitation self-imposed can destroy their power to contract again …”

The Court of Appeal in Globe Motors Inc v TRW LucasVarity Electric Steering Ltd (2016) 168 Con LR 59 had agreed with it. So did the Court of Appeal in the present case.

The Supreme Court through Lord Sumption, disagreed:

  1. Party autonomy operates up to the point when the contract is made, but thereafter only to the extent that the contract allows.
  2. No Oral Modification (NOM) clauses like clause 7.6 are very commonly included in written agreements, and the law should give effect to what the parties have agreed.
  3. A NOM clause prevents attempts to undermine written agreements by informal means, a possibility which is open to abuse, for example in raising defences to summary judgment.
  4. In circumstances where oral discussions can easily give rise to misunderstandings and crossed purposes, a NOM clause avoids disputes about whether a variation was intended and its terms.
  5. A measure of formality in recording variations makes it easier for corporations to police internal rules restricting the authority to agree them.
  6. Widely used codes are used by other countries which give effect to NOM clauses. The Vienna Convention on Contracts for the International Sale of Goods (1980) has been ratified by 89 states, not including the United Kingdom. It provides by article 11 that a contract of sale “need not be concluded in or evidenced by writing and is not subject to any other requirement as to form.” Article 29(2) provides:

“A contract in writing which contains a provision requiring any modification or termination by agreement to be in writing may not be otherwise modified or terminated by agreement. However, a party may be precluded by his conduct from asserting such a provision to the extent that the other party has relied on that conduct.”

Article 1.2 of the UNIDROIT Principles of International Commercial Contracts, 4th ed (2016), provides that “nothing in these Principles requires a contract, statement or any other act to be made in or evidenced by a particular form.” Yet article 2.1.18 provides that:

“A contract in writing which contains a clause requiring any modification or termination by agreement to be in a particular form may not be otherwise modified or terminated. However, a party may be precluded by its conduct from asserting such a clause to the extent that the other party has reasonably acted in reliance on that conduct.”

7. The Supreme Court pointed out that entire agreement clauses were effective to preclude reliance on any agreement outside the written agreement containing the clause. The judges said that a NOM clause similarly was intended to prevent oral variations which could give rise to disputes and uncertainty.

8. “The natural inference from the parties’ failure to observe the formal requirements of a No Oral Modification clause is not that they intended to dispense with it but that they overlooked it. If, on the other hand, they had it in mind, then they were courting invalidity with their eyes open.”

9. The enforcement of NOM clauses carries with it the risk that a party may act on the contract as varied, for example by performing it, and then find itself unable to enforce it. Both the Vienna Convention and the UNIDROIT model code qualify the principle that effect is given to No Oral Modification clauses, by stating that a party may be precluded by his conduct from relying on such a provision to the extent that the other party has relied (or reasonably relied) on that conduct. In England, the safeguard against injustice lies in the various doctrines of estoppel.

 

Subject to the doctrine of estoppel, these clauses denuding a subsequent agreement of legal effect unless there is compliance with the required formalities are valid and effective under English law.

C. Estoppel and the NOM

The Supreme Court held that courts below had held correctly that “the minimal steps taken by Rock Advertising” were not enough to support any estoppel defence. Lord Sumption speaking for the judges except Lord Briggs, considered that the scope of estoppel could not be so broad as to destroy the whole advantage of certainty for which the parties stipulated when they agreed the NOM clause. At the very least, (i) there would have to be some words or conduct unequivocally representing that the variation was valid notwithstanding its informality; and (ii) something more would be required for this purpose than the informal promise itself: see Actionstrength Ltd v International Glass Engineering In Gl En SpA [2003] 2 AC 541, at [9] (per Lord Bingham), and [51] (per Lord Walker).

Lord Briggs said that in his view a NOM clause, continues to bind until the parties have expressly (or by strictly necessary implication) agreed to do away with it.  He said that his view would probably leave only those cases where the subject matter of the variation was to be, and was, immediately implemented, where estoppel and release of the NOM clause by necessary implication are likely to go hand in hand; “While it might in theory also leave open the case where it is alleged that the parties did have the NOM clause in mind, and then agreed to do away with it orally, that seems to me to be so unlikely a story that a judge would usually have little difficulty in treating it as incredible (if denied), and therefore as presenting no obstacle to summary judgment on the contract in its unvaried form.”

His reasoning founded on the position in Subject to Contract negotiations and what was required to enable them to give rise to a binding and enforceable contract.  “Subject to Contract” is a well known expression often used in correspondence negotiating a contract relating to land. Those using it will know of it because there has to be an express use of it in those negotiations. Solicitors, surveyors, property developers, and others who continue to negotiate subject to it  can be expected to know the consequences of its use in those negotiations.

A variation can be agreed in circumstances which factually have little or nothing to do with the circumstances in which “Subject to Contract” is commonly used. A NOM clause may be in boiler plate clauses in a lengthy main agreement or incorporated by reference in it to standard terms. That agreement may have been made some time ago. In the negotiations for the variation  there may be no reference at all to the existence of the NOM clause or its terms. The negotiations may be between individuals who were not involved in the original contract, and thought anything agreed would be binding and made that apparent to each other.  The doctrine of estoppel should be kept flexible, ready for use in different circumstances to prevent injustice.

D. Foakes v Beer (1884) 9 App Cas 605: Absence of consideration for the variation

Sir Edward Coke (1552-1634) was the great man of the common law; lawyer, advocate, Solicitor–General, Attorney–General, Serjeant at Law, Chief Justice of the Court of Common Pleas and then of the Court of King’s Bench , author of 13 volumes of the Reports, and of his treatises contained in the four  volumes of the Institutes of England . In Foakes v Beer the House of Lords held as being part of the common law what Sir Edward Coke had said was a rule laid down by the whole of the Court of Common Pleas in Pinnel’s Case (1602) 5 Co Rep 117a that “payment of a lesser sum on the day in satisfaction of a greater, cannot be any satisfaction for the whole”. In that case the plea was of payment and acceptance before the date in the conditional bond of a lesser amount than provided in the condition. The rule did not apply on the facts, and the case was decided on a pleading point.   It may be that the rule was no more than a dictum as stated by Lord Blackburn.  Coke’s writings do include certain factual errors and misinterpretations of legal precedent. However that may be, the rule was sufficiently established  by judicial statements, and its acceptance in Smith’s “Leading Cases”, to become the subject of binding precedent of the House of Lords over 130 years ago, which decided that it was a common law rule dating from 1602.

On 11 August 1875, Mrs Beer obtained a judgment in the High Court against Dr Foakes in the sum of £2,090 19s. Dr Foakes asked for time to pay. On 21 December 1876, a memorandum of agreement was signed by the parties. Dr Foakes made an immediate payment of £500 on signature as agreed, and promised to make payments of £150 thereafter every six months until the whole of the judgment debt “shall have been fully paid and satisfied”. The memorandum provided that on payment of all the instalments “…the said Julia Beer hereby undertakes and agrees that she, her executors, administrators or assigns, will not take any proceedings whatever on the said judgment.”

Some six years later, and after Dr Foakes had paid the whole sum of £2,090 19s in instalments, as he had agreed, Mrs Beer demanded and subsequently brought a claim for interest upon her judgment. No mention was made of “interest” in the memorandum. The Earl of Selborne L.C. and Lord Watson questioned whether the agreement was any more than an agreement to defer payment of the judgment debt, without giving up any claim to interest.

The Earl of Selborne L.C. said at p.611:

“The question, therefore, is nakedly raised by this appeal, whether your Lordships are now prepared, not only to overrule, as contrary to law, the doctrine stated by Sir Edward Coke to have been laid down by all the judges of the Common Pleas in Pinnel’s Case in 1602, and repeated in his note to Littleton, sect. 344, but to treat a prospective agreement, not under seal, for satisfaction of a debt, by a series of payments on account to a total amount less than the whole debt, as binding in law, provided those payments are regularly made; the case not being one of a composition with a common debtor, agreed to, inter se, by several creditors. …. The doctrine itself, as laid down by Sir Edward Coke, may have been criticised, as questionable in principle, by some persons whose opinions are entitled to respect, but it has never been judicially overruled; on the contrary I think it has always, since the sixteenth century, been accepted as law. If so, I cannot think that your Lordships would do right, if you were now to reverse, as erroneous, a judgment of the Court of Appeal, proceeding upon a doctrine which has been accepted as part of the law of England for 280 years.” 

Lord Blackburn, considered that Coke had made a mistake in treating what was only a dictum of the Court of Common Pleas as a decision on the point. He said at pp 622–623:

“What principally weighs with me in thinking that Lord Coke made a mistake of fact is my conviction that all men of business, whether merchants or tradesmen, do every day recognise and act on the ground that prompt payment of a part of their demand may be more beneficial to them than it would be to insist on their rights and enforce payment of the whole. Even where the debtor is perfectly solvent, and sure to pay at last, this often is so. Where the credit of the debtor is doubtful it must be more so. I had persuaded myself that there was no such long-continued action on this dictum as to render it improper in this House to reconsider the question. I had written my reasons for so thinking; but as they were not satisfactory to the other noble and learned Lords who heard the case, I do not now repeat them nor persist in them.”

The House of Lords unanimously upheld the decision of the Court of Appeal that Mrs Beer was entitled to judgment for the interest and her costs, on the ground that Dr Foakes was under an antecedent obligation to pay the whole judgment debt, and payment of that due debt through the immediate payment of £500 and agreement to pay the remainder on the agreed dates did not amount to consideration for the undertaking which was therefore not contractually binding. This was because as a matter of law, payment of part of a sum which is owed, even though the debtor might otherwise not pay it or possibly become insolvent, cannot, of itself, amount to good consideration. The debtor did not incur any additional detriment by promising to pay what he had already a legal obligation to pay, nor did the creditor obtain any  benefit in addition to what he was already entitled under the debt. There was no agreement by other creditors to forebear or acceptance of something other than money.

In 1937, the Law Revision Committee (chaired by Lord Wright MR) expressed the opinion that Lord Blackburn’s view remained as valid as it was some 50 years earlier and recommended that legislation should be passed to give effect to it. That recommendation was not implemented. Foakes v Beer (1884) 9 App Cas 605 has been followed including in three decisions of the Court of Appeal  in Vanbergen v St Edmunds Properties Ltd [1933] 2 KB 223, D & C Builders Ltd v Rees [1966] 2 QB 617 and In re Selectmove Ltd [1995] 1 WLR 474.  An estoppel defence was not argued in Foakes v Beer. Since then the law on estoppel has not stood still. In Central London Property Trust Limited v High Trees House Limited [1947] K.B. 130, Denning J considered that notwithstanding the absence of consideration, there may be cases where the creditor is precluded from enforcing his strict legal rights because of a promissory estoppel.

In Williams v Roffey Bros & Nicholls (Contractors) Ltd [1991] 1 Q.B. 1 there was a promise by building contractors to make bonus payments to Williams, a carpenter, to provide carpentry work which he had already agreed to do, when it became apparent that the financial difficulties of Williams would make it unlikely that the work would be completed in time and therefore the Respondent building contractors would be penalised under the main contract. It was held that the promise to pay the bonus was enforceable by Williams because the building contractors had obtained a benefit or avoided a liability under the building contract with the Shepherds Bush Housing Association Ltd to refurbish the block of flats. The decision is controversial because it is inconsistent with a rule that performing or promising to perform an existing obligation does not provide good consideration for a promised variation. The case concerned an agreement to pay extra for continued services which were covered by an existing contract, “increasing pacts”.  The rule in Pinnel’s case concerned paying less in satisfaction of a debt. So did Foakes v Beer (1884) 9 App Cas 605. Neither were cited.

In Re Selectmove [1995] 1 W.L.R. 474 at 481, Peter Gibson L.J. said:

Foakes v Beer was not even referred to in Williams v Roffey and it is in my judgement impossible, consistent with the doctrine of precedent, for this court to extend the principle of Williams’s case to any circumstance governed by the principle in Foakes v Beer. If that extension is to be granted, it must be by the House of Lords or, perhaps even more appropriately, by Parliament after consideration by the Law Commission.”  In contrast with this, Williams v Roffey Bros & Nicholls (Contractors) Ltd  was followed by the Court of Appeal in the present case, one of satisfaction of a debt,  and Foakes v Beer distinguished on the ground that MWB obtained practical benefits from the variation agreement because it enhanced the prospects of being paid the arrears.

The Supreme Court did not have to, and did not, go on to consider the point on consideration. Departure from Foakes v Beer would require consideration by an enlarged panel. It was pointed out by Lord Sumption that practical benefits obtained by a creditor from agreeing to deferred payments were specifically mentioned by Lord Blackburn in Foakes v Beer; this point was before the House of Lords in that case.

If it is to be departed from it is because the rule gives rise to results which are unfair because parties can make an agreement to defer payment and find out subsequently it is unenforceable, and because it fails to reflect the reality that a creditor who agrees deferment has a better prospect of being paid and this is a benefit.

It is open to doubt whether the Supreme Court in an expanded bench would be willing to depart from Sir Edward Coke’s statement of the rule in Pinnel’s case and Foakes v Beer which the House of Lords had unanimously decided in 1884. Williams v Roffey Bros & Nicholls (Contractors) Ltd, was a case of paying more than had been agreed for services when the carpenter had quoted too low and had not supervised the work properly. It is not logical that agreements to give more for services already contracted for, are subject to a different rule.

The law on consideration only requires some consideration, however small. Sir Edward Coke  stated in Coke, Littleton 212 b  “the gift of a horse, hawk or robe, etc in satisfaction is good. For it shall be intended that a horse, hawk, or robe, etc might be more beneficial to the plaintiff than the money”. In Foakes v Beer, Dr Foakes had given none. The requirement for some consideration can be satisfied by adding something of little value, an extra £1 on the debt or a postage stamp, or a voucher from a third party retailer.

E. Avoiding unfair consequences

(i)“All variations ….must be ….signed on behalf of both parties”

Clause 7.6 required “All variations to this Licence must be agreed, set out in writing and signed on behalf of both parties before they take effect”.  What would comply  and what would not is a matter of interpretation of the particular contract.  Does it require signatures of both parties on the same, single document? If so an exchange of documents agreeing a specific variation and setting it out, even with a signature of one party on each would not be sufficient. The parties would either have to meet or sign sequentially with the single document passing between them, for example by post or courier. What is required by the word “signed”? Is what is required is an original signature in manuscript? Would a rubber stamped signature suffice, or an electronic image of a signature, or a name typed at the end of a document? Could one individual sign for each party as agent?

(ii) Consumers

The Supreme Court did not mention consumers. They are often made to telephone and agree what is to be done on the telephone because the commercial entity does not correspond by email. A consumer might well not have in mind standard terms in a consumer contract. These can be very lengthy, not readily available without searching through records or obtaining another copy, and are not invariably read, or even expected to be read prior to a consumer dispute arising.

(iii) Avoiding application of Foakes v Beer

In future it would be well for those dealing with credit controllers or customer services to bear this case in mind, lest they end up like Rock with an oral agreement but no binding contract to reschedule.  Foakes v Beer is a  default rule which applies in the absence of contrary agreement. There is a risk of unfairness if parties intended and agreed a binding variation, only for the expectation to be defeated because of the rule. An offer email might in the future usefully include specific words providing consideration to the creditor in the form of a new item of some small value such as £1 or an Amazon voucher.

(iv) Avoiding the NOM rule

There is the risk of unfairness when there are facts when it is to be expected that a party may not know of or remember the clause, for example because it was tucked away in boiler plate standards terms incorporated by reference into the original contract, or the original contract was made some considerable time previously, or by a different agent then acting for the principal.

Entire agreement clauses govern the consequences from the time of conclusion of a contract of what has happened between the parties in or during those particular negotiations. In contrast a NOM is in the past, governing future negotiations and the effect of conclusion of a new agreement.

The NOM rule allows freedom of contract in the original contract, but creates a barrier before any variation can be effective. A NOM clause can be expected to be drafted so as to apply to variations of it. Clause 7.6 applied to “All variations to this Licence …” . Clause 7.6  appears to have contemplated that there would  need to be a single document signed in manuscript on behalf of each party by its authorised agent,  expressed to be a binding contract, overriding and paramount to the previous terms. What formalities are required, and how in the circumstances these can be met, depends upon its particular wording. If it requires a face to face meeting between named individuals or certain officers of companies, or a board resolution, that will have to be arranged. There is no single, certain cure without first locating the clause and considering its wording. What may look reasonable without looking at the wording may not be sufficient, and then a party arguing a variation is effective, is thrown back on the uncertainties of litigation about the facts and estoppel.

This case lays down a rule of wide application. It does not cater on a case by case basis. One size fits all.  The decision requires commercial men and the public to be vigilant, diligent in finding the NOM, and meticulous in designing, agreeing and implementing a solution which complies with its wording, if their legitimate expectations are to be achieved.

 

 

 

SHARE