Fifth Circuit Upholds Enforcement of "No Oral Modification" Clause in Ship Owners Agreement

On April 27, 2011, the United States Court of Appeals for the Fifth Circuit ruled in Regions Equipment Finance Corporation v. AT 2400, that a "no oral modification" clause in a loan agreement that included several preferred ship mortgages is enforceable under general maritime law.

Regions Equipment Finance Corporation (REFCO) entered into a loan agreement with defendant ship owner, Accumarine, for some of its vessels. The agreement was amended three (3) times, with each of the subsequent agreements supported by a separate promissory note requiring monthly payments of equal amounts and a final balloon installment of principal and interest due in 2012. The loan agreement included an "entire agreement" clause stating that it may not be contradicted or varied by subsequent oral agreements or discussions of the parties. Accumarine defaulted under the agreement in June 2009.

Accumarine claims that REFCO promised that they would notify Accumarine before taking any action on Accumarine's loan and REFCO would not take action against Accumarine's debt to REFCO if a separate loan agreement between REFCO and the agreements guarantors was resolved first. Accumarine asserted that they relied on these oral promises from REFCO when it postponed efforts to find an investor to whom Accumarine could sell the preferred mortgage. Accumarine contended that REFCO was estopped from enforcing the preferred mortgage and collecting the notes under principles of promissory and equitable estoppel based on the alleged oral promises made by REFCO to Accumarine's guarantors.

The Fifth Circuit held that the "entire agreement" clause included a "no oral modification" clause and therefore it was the parties' intentions not to be bound by any future oral promises purporting to amend the agreement. Accordingly, the court held that the loan agreements "entire agreement" clause defeats Accumarine's defense of promissory and equitable estoppel and would enforce the "no oral modification" clause in a maritime contract.

Read a copy of the Fifth Circuit Court of Appeals Decision

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