England: Court Upholds Rock Solid Contract
Rock Advertising Limited v MWB Business Exchange Centres Limited [2018] UKSC 24
The Supreme Court has held that a clause in a contract, which required modifications to that contract be in writing and signed by both parties, invalidated a subsequent oral agreement to vary the contract. Specifically, the issue before the court was whether the No Oral Modification (NOM) clause was legally effective.
Background
Rock Advertising entered into a licence with MWB to occupy office space for a fixed term of 12 months. The licence contained a clause requiring all variations to be set out in writing and signed on behalf of both parties.
However, it was later agreed that the payment schedule would be varied. Despite this, MWB treated the variation as merely a proposal and rejected the new schedule before excluding Rock Advertising from the premises for failing to pay the arrears. Ultimately, MWB terminated the licence.
At first instance, the County Court found that the oral agreement did not satisfy the formal requirements of the NOM Clause. The Court of Appeal subsequently reversed the decision, holding that the oral variation amounted to an agreement to dispense with the NOM clause. MWB consequently brought proceedings to the Supreme Court.
The case focused on whether the agreement to vary the payment schedule was effective, despite being in breach of the requirements of the NOM clause.
Decision
The Supreme Court overturned the Court of Appeal’s decision, unanimously holding that the absence of the writing and signatures required by the NOM clause rendered the oral agreement to vary the contract invalid. In doing so, Lord Sumption found that the proper understanding of party autonomy is that parties may agree to bind their future conduct, however that agreement will be definitive. Consequently, as the contract stipulated that variations to the contract were to be in writing, the oral variation was deemed invalid.
In this instance, Rock Advertising argued that MWB acted on the agreement and that the doctrine of estoppel should therefore apply to prevent unfairness. Specifically, they contended that MWB should not be able to rely on the NOM clause to invalidate the oral variation. However, the court ruled that estoppel did not arise on the facts of this case.Rather, the court held that for estoppel to arise, there needed to be evidence of words or conduct which unequivocally represented the variation as valid, and that it needed to be something more than the informal promise itself.
Business Implications
This case serves as a timely reminder for businesses whose contracts are governed by English law, that they should seek to ensure all stakeholders are aware that informal and oral variations to contracts containing NOM clauses will not be enforceable. They should also note that the defence of estoppel may be difficult to establish and should be careful to follow the strict provisions of any NOM clause.
Ultimately, it provides that where a contract contains a NOM clause, the parties can be certain that the written contract represents the contract in entirety.
Federal Government to Introduce Harsher Penalties for White-Collar Crime
In the wake of the Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry, the Federal Government has announced it will crack down on penalties for corporate misconduct. In doing so, it has accepted the majority of recommendations made by the Senate Economics References Committee and the Australian Securities and Investments Commission (ASIC) Enforcement Review Taskforce reports, with harsher penalties to apply to both directors and corporations who have breached their duties.
Relevantly, ASIC infringement notices will also be expanded to cover a broader range of financial services and managed investments infringement.
The amendments will also introduce new maximum penalties.
For Individuals:
- the greater of 5,000 penalty units (currently $1.05 million);or
- three times the value of the benefits obtained or losses avoided; and
For Corporations:
- greater of 50,000 penalty units (currently $10.5 million); or
- three times the value of the benefits obtained; or
- Losses avoided, or 10% of annual turnover in the 12 months before the misconduct, up to a total of one million penalty units ($210 million).
The proposed changes signal a significant reform of current legislation, in which the maximum civil penalty for individuals is $200 000, and $1million for corporations.
Whilst individuals and corporations who are found to have breached their duties must be held accountable, in upholding the rule of law, it is equally important that individuals and corporations are made aware of the impending amendments.
Court Rules Against Setting-Off Unfair Preference Claim
In the recent case of Stone v Melrose Cranes & Rigging Pty Ltd, in the matter of Cardinal Project Services Pty Ltd (in liq) (No 2) the Federal Court was required to determine whether a set-off was available to Melrose Cranes, pursuant to s 553C of the Corporations Act 2001 (Cth).
Here, the liquidators of CPS submitted that $308 544.58 worth of payments made to Melrose Cranes constituted unfair preferences.
In defending the claim, Melrose Cranes unsuccessfully raised the defence of 'good faith', the doctrine of ultimate effect and the 'running account' defence, before asserting an entitlement to set off $80 774.23, pursuant to s553C of the Act. In supporting this claim, Melrose Cranes maintained that this figure represented the amount CPS was indebted to it at the date of the appointment of the administrators.
The liquidators urged the Court not to adopt this view, arguing that setting-off should not be available in the context of preference claims. In doing so, they contended that the application of existing case law including Re Parker was 'plainly wrong' in this context as it related to setting-off voidable transaction claims and not preference claims. Ultimately, they argued that applying such cases here would be contrary to the statutory purpose of the Act.
However, the court upheld the finding of Re Parker, contending that a set-off in section 553C applies to voidable transaction claims, including unfair preference claims.
The liquidators subsequently relied on s553C(2) to argue that setting-off is expressly prohibited where a person has notice of a company's insolvency, and thus was not available to Melrose Cranes. The Court agreed, concluding that Melrose Cranes had notice of the company's insolvency at the time it gave credit in respect of the outstanding indebtedness.
In reaching this conclusion, the court submitted that a person will have notice of a company's insolvency if, pursuant to s95, the person has actual notice of the facts that indicate the company lacks the ability to pay its debts when they fall due.
Accordingly, Markovic J rejected Melrose Cranes' application to have the proposed sum set-off on the basis that it was "clear that a reasonable person in Melrose Cranes' circumstances would have had grounds for suspecting insolvency at the time of each of the transactions."
Court Rejects Mossgreen's Art Collection Levy
White, in the matter of Mossgreen Pty Ltd (Administrators Appointed) v Robertson [2018] FCAFC 63
In December 2017 administrators were appointed to Mossgreen Pty Ltd, a well-known Australian auction house and gallery. The administrators sought to recover over $1 million in costs from consignors by charging $353.20 per lot for the return of goods. In some instances this meant that the total value of a consigners property was exceeded by the collection charge, and so many consigners opposed the directions.
Subsequently the administrators applied to the court in March this year, seeking approval for their nominated course of action. They argued that they held an equitable lien over the consigned items and were therefore entitled to recover costs by imposing a levy for the release of items.
At first instance, Perram J dismissed the directions sought, concluding the stocktake did not relate to Mossgreen's property and subsequently did not fall within the administration of their affairs.
On appeal, the court opposed this view, finding that it was within the statutory functions of the administrators to continue to perform the function of holding the consigned items, and as part of doing so, take steps to manage and return the items. It concluded that in certain circumstances, a lien could arise in favour of administrators for costs incurred dealing with claims for the return of items, even where there was no ownership claim by the company under administration.
Despite this, the court ultimately rejected the appeal, arguing that there was no basis for an equitable lien of the kind sought here because:
- Many of the costs incurred related to items which the administrators knew had been abandoned and were of little value;
- If a stocktake were needed, this need arose from a breach of Mossgreen's obligations as a bailee, being the failure to maintain an adequate inventory system for consigned items; and
- Much of the costs had been incurred for the benefit of the general body of creditors, including in relation to the sale of a part of Mossgreen's business. The owners of the consigned items had no interest in this, as they would not benefit from such a sale.
