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Case Update: No Oral Modification Clauses

The judgement made by the Supreme Court in Rock Advertising Ltd v MWB Business Exchange Centres Ltdhas provided valuable clarification that will have a widespread impact for contracting parties with respect to oral variations.

Background

Rock Advertising Ltd, [“Rock”], were a licensee that occupied office space operated by MWB Business Exchange Centres Ltd, [“MWB”]. Rock accrued arrears. Under the terms of the agreement, MWB terminated the license and sued for arrears. Rock alleged that the license agreement had varied as a revised schedule of payments was orally agreed. Consequently, Rock counterclaimed damages for wrongful exclusion from the premises.

The Issue

MWB relied upon a ‘No Oral Variation’ clause or what Lord Sumption termed a ‘No Oral Modification’ [“NOM”] clause. The express terms of the agreement were clause 7.6:

‘This License sets out all of the terms as agreed between MWB and Licensee. No other representations or terms shall apply or form part of this License. All variations to this License must be agreed, set out in writing and signed on behalf of both parties before they take effect.’

The Central London County Court held that although the oral agreement had consideration due to the prospect of payment, the variation was not binding as it was not recorded in writing as required by clause 7.6.

The Court of Appeal agreed that the oral agreement had consideration though ultimately overturned the decision on the basis that the parties agreed to adopt a revised schedule of payments and they had, by conduct thereby, revised the conditions of clause 7.6 to suit. MWB appealed to the Supreme Court.

The Judgment

In its decision, the Court of Appeal referred to the judgment of Cardozo J from 1919 in the New York Court of Appeals in Beatty v Guggenheim Exploration Co2:

‘Those who make a contract, may unmake it. The clause which forbids a change, may be changed like any other. The prohibition of oral waiver, may itself be waived. ‘Every such agreement is ended by the new one which contradicts it’ (Westchester F Ins Co v Earle 33 Mich 143, 153). What is excluded by one act, is restored by another. You may put it out by the door; it is back through the window. Whenever two men contract, no limitation self-imposed can destroy their power to contract again …’

Lord Sumption acknowledged common law to have no formal requirement for the validity of a simple contract and reflected on the reasons for NOM clauses being rendered ineffective. The Supreme Court however found in favour of MWB’s appeal, where Lord Sumption stated:

‘In my opinion the law should and does give effect to a contractual provision requiring specified formalities to be observed for a variation.’

This decision was reasoned as follows:

  • To negate the effect of NOM clauses such as clause 7.6 would be to override the parties’ intentions. Lord Sumption regarded the Court of Appeal’s reasoning on party autonomy as a ‘fallacy’, explaining that:

‘Party autonomy operates up to the point when the contract is made, but thereafter only to the extent that the contract allows. Nearly all contracts bind the parties to some course of action, and to that extent restrict their autonomy.’

  • Lord Sumption reflected on the legitimate commercial reasons’ of NOM clauses. It was reasoned that the inclusion of NOM clauses reduces challenges made on the authority of written agreements by informal means. NOM clauses also work to avoid misunderstandings which are more prevalent with oral agreements. Lastly, NOM clauses formalise variations in line with commercial proceedings and interests.
  • The Vienna Convention on Contracts for the International Sale of Goods and the UNIDROIT Principles of International Commercial Contracts were employed as examples of legal systems which imposed no formal requirements for the validity of a commercial contract yet give effect to NOM clauses. Thereby the reasons advanced in the case law for disregarding them [NOM clauses] are entirely conceptual.’

Lord Sumption therefore found:

‘What the parties to such a clause have agreed is not that oral variations are forbidden, but that they will be invalid. The mere fact of agreeing to an oral variation is not therefore a contravention of the clause. It is simply the situation to which the clause applies. It is not difficult to record a variation in writing, except perhaps in cases where the variation is so complex that no sensible businessman would do anything else. The natural inference from the parties’ failure to observe the formal requirements of a No Oral Modification clause is not that they intended to dispense with it but that they overlooked it. If, on the other hand, they had it in mind, then they were courting invalidity with their eyes open.’

Comment

The judgment has provided clarity on the use of NOM clauses, namely that they apply without contravening the common law principle of autonomy in future contracting. This runs contrary to previous decisions, in Energy Venture Partners Ltd v Malabu Oil and Gas Ltd3 for example, where Lord Gloster remarked he was ‘inclined[d] to the view that such clauses were ineffective. Similarly, in Zvi Construction Co LLC v The University of Notre Dame4, a construction related dispute which also demonstrated that varying an agreement orally is permissible despite the inclusion of a NOM clause.

Parties to a construction contract (or any contract for that matter), where use of a NOM clause applies, will now need to acknowledge that only a written agreement can alter the terms of the original agreement. Written consent from both parties must therefore be attained for informal changes to be implemented. This clarified status of NOM clauses could be interpreted as placing contractual constraints on parties that some would argue inhibits flexibility that is necessary for so many engaged in commercial relationships.

However, the judgment gave significant substance to the role of commercial interests and delivers clear direction which will provide organisations with confidence to manage their contractual risks more effectively and gives clear definition in relation to how a contract can be altered. More informal oral means of negotiation, commonly associated with misunderstanding and/or misinterpretation, should have a reduced impact as a result of the judgment. Should a contract contain a NOM clause, parties must adopt the necessary management procedures to record variations in writing.

It should also be recognised that not all construction contracts have NOM clauses, and accordingly NOM clauses may not be relevant. However, it is advisable for all negotiations and agreements to be captured in writing, to promote transparency and understanding among the parties as well as to strengthen one’s evidential position.

Tudor Rose has been actively involved with numerous cases relevant to this issue. Should you wish to find out more about this, please do not hesitate to get in touch with us.

Whilst Tudor Rose has made every effort to ensure that the information contained within this article is correct at the date of publication, this article has been prepared as guidance only and does not constitute legal advice.

1 [2018] UKSC 24

2 (1919) 225 NY 380

3 [2013] EWHC 2118 (Comm)

4 [2016] EWHC 1924 (TCC)