Consideration and Practical Benefit For an agreement to be enforceable at common law, it must be supported by consideration. This creates difficulties where parties have renegotiated a debt, agreeing that the debtor will pay less than the total debt owing, effectively the situation in Rock Advertising. However, the courts will sometimes infer a practical benefit from the variation, on the basis that the creditor receives an increased likelihood of payment. There are conflicting authorities on whether a practical benefit is valid consideration, and Rock Advertising provided an opportunity for the UK Supreme Court to consider the issue. However, the Court held that the no oral modification finding was enough to dispose of the appeal. Comment There is limited New Zealand authority on no oral modification contracts, and Rock Advertising is a welcome clarification that will likely be applied in New Zealand. Enforcing no oral modification clauses increases certainty in commercial contracts, as any variations must be reduced to writing. However, Rock Advertising represents a missed opportunity to clarify the practical benefit test, which has been applied in New Zealand (although the situation is not yet settled, see Teat v Willcox [2013] NZCA 162). The application of a practical benefit test to a contract variation can prevent smaller businesses being strong-armed into reducing payments owing. Alternatively, debtors have sometimes negotiated in good faith to reduce a debt, and may have managed their finances in reliance on the variation. Recognising the practical benefit of such an arrangement may avoid an injustice. But the practical benefit rule risks creating uncertainty in contract law, as the scope of what constitutes a practical benefit is unclear. Further guidance from the courts is needed.
ABOUT THE AUTHORS
Daniel is an experienced advisor and advocate for large commercial disputes – whether in mediation, arbitration or litigation proceedings – and leads Chapman Tripp’s international law team. Daniel has represented clients in a range of major industries, including mining, oil and gas, telecommunications, private equity, primary industries and the finance sector.
Tim specialises in commercial litigation and dispute resolution. Tim has considerable experience in advising and representing major clients across a wide range of commercial issues, with particular expertise in telecommunications law, competition law, and energy and natural resources litigation.