diff --git a/CLAUDE.md b/CLAUDE.md
index 061b0ab..36c04ae 100644
--- a/CLAUDE.md
+++ b/CLAUDE.md
@@ -169,7 +169,7 @@ tmux attach -t <session-name>
 
 ### Running Tests
 ```bash
-# Run all tests (484 tests)
+# Run all tests (490 tests)
 npm test
 
 # Run specific test suites
@@ -214,7 +214,7 @@ CLAUDE_MIN_VERSION="2.0.76"           # Minimum Claude CLI version
 ```
 
 **CLI Options:**
-- `--output-format json|text` - Set Claude output format (default: json)
+- `--output-format json|text` - Set Claude output format (default: json). Note: `--live` mode requires JSON and will auto-switch from text to json.
 - `--allowed-tools "Write,Read,Bash(git *)"` - Restrict allowed tools
 - `--no-continue` - Disable session continuity, start fresh each loop
 
@@ -445,13 +445,13 @@ Ralph uses advanced error detection with two-stage filtering to eliminate false
 
 ## Test Suite
 
-### Test Files (484 tests total)
+### Test Files (490 tests total)
 
 | File | Tests | Description |
 |------|-------|-------------|
 | `test_circuit_breaker_recovery.bats` | 19 | Cooldown timer, auto-reset, parse_iso_to_epoch, CLI flag (Issue #160) |
 | `test_cli_parsing.bats` | 35 | CLI argument parsing for all flags + monitor parameter forwarding |
-| `test_cli_modern.bats` | 33 | Modern CLI commands (Phase 1.1) + build_claude_command fix |
+| `test_cli_modern.bats` | 39 | Modern CLI commands (Phase 1.1) + build_claude_command fix + live mode text format fix (#164) |
 | `test_json_parsing.bats` | 52 | JSON output format parsing + Claude CLI format + session management + array format |
 | `test_session_continuity.bats` | 44 | Session lifecycle management + expiration + circuit breaker integration + issue #91 fix |
 | `test_exit_detection.bats` | 53 | Exit signal detection + EXIT_SIGNAL-based completion indicators + progress detection |
diff --git a/ralph_loop.sh b/ralph_loop.sh
index 61059dc..c243052 100755
--- a/ralph_loop.sh
+++ b/ralph_loop.sh
@@ -1062,6 +1062,10 @@ execute_claude_code() {
         log_status "INFO" "Using modern CLI mode (${CLAUDE_OUTPUT_FORMAT} output)"
     else
         log_status "WARN" "Failed to build modern CLI command, falling back to legacy mode"
+        if [[ "$LIVE_OUTPUT" == "true" ]]; then
+            log_status "ERROR" "Live mode requires a built Claude command. Falling back to background mode."
+            LIVE_OUTPUT=false
+        fi
     fi
 
     # Execute Claude Code
@@ -1091,9 +1095,9 @@ execute_claude_code() {
     fi
 
     if [[ "$LIVE_OUTPUT" == "true" ]]; then
-        # Safety check: CLAUDE_CMD_ARGS must be populated for live mode
-        if [[ ${#CLAUDE_CMD_ARGS[@]} -eq 0 ]]; then
-            log_status "ERROR" "CLAUDE_CMD_ARGS is empty — cannot build live mode command. Falling back to background mode."
+        # Safety check: live mode requires a successfully built modern command
+        if [[ "$use_modern_cli" != "true" || ${#CLAUDE_CMD_ARGS[@]} -eq 0 ]]; then
+            log_status "ERROR" "Live mode requires a built Claude command. Falling back to background mode."
             LIVE_OUTPUT=false
         fi
     fi
diff --git a/tests/unit/test_cli_modern.bats b/tests/unit/test_cli_modern.bats
index ea5d8f1..6bdbfe7 100644
--- a/tests/unit/test_cli_modern.bats
+++ b/tests/unit/test_cli_modern.bats
@@ -740,10 +740,11 @@ EOF
 
 @test "safety check prevents live mode with empty CLAUDE_CMD_ARGS" {
     # Verify ralph_loop.sh has the safety check for empty CLAUDE_CMD_ARGS
-    run grep -A3 'CLAUDE_CMD_ARGS.*-eq 0' "${BATS_TEST_DIRNAME}/../../ralph_loop.sh"
+    # The check also verifies use_modern_cli is true (not just non-empty array)
+    run grep -A3 'use_modern_cli.*CLAUDE_CMD_ARGS.*-eq 0' "${BATS_TEST_DIRNAME}/../../ralph_loop.sh"
 
     # Should find safety check that falls back to background mode
-    [[ "$output" == *"LIVE_OUTPUT"* ]] || [[ "$output" == *"empty"* ]] || [[ "$output" == *"background"* ]]
+    [[ "$output" == *"LIVE_OUTPUT"* ]] || [[ "$output" == *"background"* ]]
 }
 
 @test "build_claude_command is called regardless of output format in ralph_loop.sh" {
@@ -757,7 +758,7 @@ EOF
 
     # The old pattern: "json" check immediately followed by build_claude_command
     # should no longer exist as a gate
-    run bash -c "sed -n '/# Build the Claude CLI command/,/execute Claude Code/p' '$script' | grep -c 'CLAUDE_OUTPUT_FORMAT.*json.*build_claude_command'"
+    run bash -c "sed -n '/# Build the Claude CLI command/,/# Execute Claude Code/p' '$script' | grep -c 'CLAUDE_OUTPUT_FORMAT.*json.*build_claude_command'"
 
     # Should find 0 matches (the gate has been removed)
     [[ "$output" == "0" ]]