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Don’t take their word for it - the No Oral Modification Effect

  • United Kingdom
  • Real estate dispute resolution
  • Real estate litigation

24-05-2018

The Supreme Court has handed down its judgment in the long-awaited appeal of Rock Advertising Limited v MWB Business Exchange Centres Limited [2018] UKSC 24, a case which the court describes as “exceptional” on the basis it concerns two fundamental issues in contract law.

The issues before the Supreme Court were: (i) whether a clause which provides that a contract may not be amended other than in writing is legally effective (no oral modification clause (NOM)); and (ii) whether an agreement for which the sole purpose is to vary a contract to pay money by substituting an obligation to pay less money or the same sum of money at a later date is supported by consideration.  The Supreme Court held that NOM clauses are effective.

The decision provides useful guidance on the enforceability of NOM clauses.  It also provides a reminder of other ways in which contractual terms can be varied by accident or design.

Background

Rock Advertising Limited (Rock Advertising) entered into a licence agreement (the Licence) for office space with MWB Business Exchanges Centres Ltd (MWB). Clause 7.6 of the Licence included a NOM clause which provided that “All variations to this Licence must be agreed, set out in writing and signed on behalf of both parties before they take effect”.

Rock Advertising fell into arrears and proposed a revised schedule of payments to part defer payments and to spread the accumulated arrears over the remainder of the licence term. This payment plan resulted in MWB accepting slightly less than the full amount it was owed.

Subsequently, there was a telephone discussion between a director of Rock Advertising and a credit controller employed by MWB.  Rock Advertising contended that, during this call, MWB had agreed to vary the terms of the Licence to incorporate the proposed revised payment schedule.  That contention was disputed by MWB.  When Rock Advertising failed to pay the arrears, MWB locked it out of the office space and commenced proceedings to recover arrears due under the Licence.  

The key issue before the County Court was whether the variation allegedly agreed during the telephone discussion was effective in law.

The County Court found that the parties had agreed to vary the Licence to incorporate Rock Advertising’s revised payment schedule. It also held that the variation agreement was supported by consideration because it brought practical advantages to MWB (in that it was more likely to receive payment).  However, the County Court concluded that the variation was ineffective because it did not comply with Clause 7.6 – the non-modification clause.  Rock Advertising appealed.  The case went directly to the Court of Appeal as a leapfrog appeal.

The Court of Appeal agreed with the trial judge that the variation was supported by consideration but disagreed that the oral variation was not effective unless it was recorded in writing and signed by the parties.  Instead, the Court of Appeal held that the oral agreement to revise the schedule of payments also amounted to an agreement to dispense with clause 7.6.  Further details of the Court of Appeal decision can be found in our previous article on the case at the following link: (https://www.eversheds-sutherland.com/global/en/what/articles/index.page?ArticleID=en/Commercial_dispute_resolution/Wave_Goodbye_to_your_Non-Waiver_Clause).

MWB appealed to the Supreme Court.

The Supreme Court Judgment

The Supreme Court unanimously overturned the Court of Appeal’s decision.  It restored the order of the trial judge that the variation between Rock Advertising and MWB was not effective because it did not comply with the NOM clause.

The Supreme Court’s reasoning was:

  1. the parties were free to reach an agreement on the terms that they saw fit, however, the Court of Appeal had taken this concept too far in concluding that the parties’ autonomy to contract exists before and after an agreement is reached. Instead the Supreme Court held that the concept of “party autonomy” could and should operate up to the point when the contract is made but thereafter, only to the extent that the contract allows; and
  2. there was no public policy reason as to why NOM clauses should not be legally binding.  Such clauses can: (i) help to circumvent attempts to undermine written agreements by informal means (a possibility which is open to abuse); (ii) avoid misunderstandings as to what the parties have agreed to vary by requiring such variation to be documented; and (iii) make it easier for large corporate structures to effectively police internal rules restricting the authority to agree variations to contracts.

There are however two main caveats to the Supreme Court’s judgment which are worth noting:

  1. a NOM clause will not prevent the parties from entering into collateral contracts where such contracts are genuinely an independent agreement (and not simply a modification of another agreement already in existence) and supported by consideration; and
  2. a NOM clause will not prevent a successful estoppel argument in the right circumstances, namely if it can be shown that a party ought to be precluded by his conduct from relying on a NOM clause and the other party has relied on such conduct to his detriment.  The Supreme Court judgment does confirm though that, for a party to be successful in arguing that the variation should be upheld under the principles of estoppel (notwithstanding a NOM clause), it would need to show: (i) words or conduct unequivocally representing that the variation was valid aside from its informality by the other party; and (ii) that something more would be required for this purpose than the informal promise itself.

Having decided that the variation was not effective because it fell foul of the NOM clause, the Supreme Court did not need to consider in any detail the second issue; whether adequate consideration had been given to the variation.  It did however indicate that where there was an expectation of commercial advantage, good consideration for an agreement could be established.  In this case, MWB might have derived such commercial advantage through being more likely to receive payment from Rock Advertising if a revised payment plan was agreed or reducing the risk that it would have vacant premises whilst it sought a new licensee.  The Supreme Court did however surmise that, whether or not commercial advantage is good consideration or not, is still debatable in law.  It acknowledged that there are conflicting judgments on the point so is an argument for another day. 

Impact

The case is as an important reminder that:

  1. care should be taken when administering contracts and the terms of important contracts should be reviewed to check whether they contain NOM clauses.  If they do, then those on the front line who manage the day-to-day operations of contracts with suppliers, distributors or customers should be made aware of the key terms.  Unless they are appropriately briefed there is a risk that they will make agreements which run counter to the provisions of the contract. Whilst this judgment provides comfort that such discussions may not be enforceable (even if one party has performed its end of the deal) where the contract includes a NOM clause, it will always be better to avoid the debate and potentially timely and costly litigation down the line. 
  2. care should always be taken before making any promises to commercial counterparties.  Such promises could potentially give rise to a collateral contract or mean that the promisor is estopped from relying on its contractual rights notwithstanding this judgment. 
  3. where discussions do take place as regards varying a contract, they should take place on a “without prejudice and subject to contract basis” to help ensure that discussions do not become binding and proper records should always be kept.

Comment

Whilst some may feel the judgment is restrictive on parties’ common law rights, others have welcomed the commercial sense and pragmatism which it appears to adopt.  Fundamentally it is much easier for parties (particularly larger corporate structures) to have certainty over what has been agreed and administer those terms where contractual provisions are written down. In short-term and one-off transactions the issue may be less acute but it is a key consideration in longer term arrangements.

It is important to note that the case does not say that NOM clauses are the ‘be all and end all’ – for example, they will not work in all scenarios: if an informal variation was clearly intended to vary or do away with the previously agreed contractual procedures for variations, or if one party behaves in a particular way following an informal variation, there remains the possibility that the informal variation will have effect or give rise to rights of one party to rely on it.  In such circumstances – it is important to record properly any such discussions in case they need to be relied on at a later date.

Finally, where businesses do want the freedom to vary contracts orally, for example to deal with fast paced sector changes, then the parties may want to consider including a provision to that effect in the contract to provide clarity.  Proper records should still be maintained in case of any dispute.

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