Arizona Antelope Canyon

The High Court considers estoppel and NOM clauses

June 16, 2022

The High Court’s decision in Kodric & Anor v Bitstamp Holdings NV (Rev 1) [2022] EWHC 210 (Ch) demonstrates the application of different forms of estoppel and explores issues relating to the role of lawyers and ‘no oral modification’ (NOM) clauses.

 

Facts

Mr Kodric, the founder of the cryptocurrency exchange Bitstamp, had retained a stake in Bitstamp, which he had transferred to White Whale Capital SPF SA (White Whale). Bitstamp Holdings (Holdings) owned the majority share in Bitstamp. Mr Kodric commenced proceedings to challenge Holding’s exercise of a call option to buy him out of the business.

Holdings’ call option was only exercisable while Mr Kodric’s shares were owned by himself or a “Permitted Transferee”; to be a Permitted Transferee, the transferee had to be a “Family Trust”. Mr Kodric argued that the call option had expired because he had transferred his shares to White Whale, a Luxembourg corporate entity that Mr Kodric controlled but which could not be characterised as a Family Trust and was therefore not a Permitted Transferee.

Holdings argued that Mr Kodric was estopped from denying that White Whale was a Permitted Transferee. Holdings’ consent had been required for Mr Kodric to transfer his shares to White Whale. At the time of seeking Holdings’ consent for the transfer, Mr Kodric and his lawyers had represented to Holdings’ lawyers that White Whale was a Permitted Transferee and had provided documentation drafted on that basis.

 

The estoppel argument

The Court agreed with Holdings that Mr Kodric was estopped from denying that White Whale was a Permitted Transferee. The estoppel could operate as an estoppel by convention or an estoppel by representation.

For the purpose of estoppel by convention, the key factual elements were:

  • the communications of Mr Kodric’s lawyers “crossed the line” to Holdings’ lawyers to support a common assumption that White Whale was a Permitted Transferee;
  • the objective intention of Mr Kodric’s lawyers’ communications was to influence Holdings to accept and share an assumption about White Whale and so to approve the transfer of Mr Kodric’s shares to White Whale. This involved an assumption of responsibility for Holdings’ reliance on the communications where Holdings was unable to verify independently that White Whale was a Permitted Transferee;
  • Holdings relied on the communications from Mr Kodric’s lawyers in mutual dealings between the parties when Holdings approved the transfer of shares to White Whale; and
  • Holdings would suffer detriment if Mr Kodric were allowed to deny that White Whale was a Permitted Transferee through the loss of its call option.

For the purpose of estoppel by representation, Mr Kodric’s lawyers had made the factual representation that White Whale was a Permitted Transferee and this had been intended to encourage Holdings to approve the transfer to White Whale and had been relied upon by Holdings to its detriment.

 

The role of lawyers

Mr Kodric attempted to use the role of lawyers in his dealings with Holdings to undermine Holdings’ estoppel arguments. The Court’s dismissal of Mr Kodric’s arguments shows that the involvement of lawyers should not change the analysis of communications between parties to a lawyered transaction:

  • It was not unreasonable for Holdings’ lawyers to rely on Mr Kodric’s lawyers’ statements about White Whale. Holdings’ lawyers accepted representations from respectable lawyers on the other side of a non-contentious transaction where they could not independently check the status of White Whale. The issue here was not whether Holdings’ lawyers could have been more diligent, but rather that it was not unreasonable or unforeseeable that they would rely on the statements from Mr Kodric’s lawyers.
  • Holdings’ lawyers were its agents and the court inferred that Holdings relied on the statements to its agents. Mr Kodric argued that it was unfair that privilege prevented him from testing what Holdings’ lawyers advised Holdings about the statements from Mr Kodric’s lawyers. The Court rejected this and found it was able to make a common sense inference that certain advice was given. It was immaterial that Mr Kodric was unable to test the inference.

 

NOM clauses

The agreements between Mr Kodric and Holding included NOM clauses, which included a requirement that waivers be specific and in writing. Because of this, the Court considered Lord Sumption’s observations in Rock Advertising Ltd v MWB Business Exchange Centres Ltd [2018] UKSC 24 to the effect that estoppel should only be available in the face of a NOM clause where the parties understand they are modifying the contract despite the informality of their conduct.

The Court in Kodric found a way around Rock Advertising. Each case requires consideration of the terms of the NOM clause and the circumstances giving rise to the asserted estoppel. Mr Kodric’s representations about the status of White Whale involved a factual matter, as opposed to a modification of the call option or waiver of rights. The applicable NOM clauses were therefore not engaged, allowing Holdings’ estoppel arguments to succeed.

 

Takeaways

The fact that the representation was made by the lawyers to one of the parties was taken not to mean that there had not been a representation; how far this goes will depend on the particular circumstances of the case, but both lawyers and clients should be aware of the ramifications.

While NOM clauses can assist parties attempting to resist an estoppel, careful attention needs to be paid to their exact wording and whether it covers the circumstances of the case.