In a decision last week (16 May 2018), the Supreme Court held that a variation clause (also known as a no oral modification (NOM) clause) is legally effective, restoring the order of the County Court which had been overruled by the Court of Appeal.

Variation or NOM clauses are commonplace in contracts for various reasons and restrict variations of an agreement to those agreed in writing. There are no formal requirements for the validity of a contract at common law, and, by association, no formal requirements for varying a contract. This flexibility can give rise to uncertainty so, principally, NOM clauses add certainty to the mechanism by which contractual variations can be agreed. As well as adding certainty, NOM clauses also operate, in theory, to avert misunderstandings and disputes as to what was orally agreed, as well as the prospect of informal variations undermining written agreements.

In the case in question, Rock v MWB, MWB, as operator of offices in London, granted Rock a contractual licence to occupy office space for a term of 12 months. The licence contained a NOM clause stating: “All variations to this Licence must be agreed, set out in writing and signed on behalf of both parties before they take effect.” Rock had accumulated arrears of a few months’ worth of licence fees and proposed a revised payment schedule, deferring certain payments.

A dispute arose as to whether MWB had accepted Rock’s proposal orally, thereby effectively varying the payment terms under the licence. MWB considered the schedule simply as a proposal and locked Rock out of the premises for failure to pay the arrears. They then terminated the licence and sued for the arrears. Rock counterclaimed for damages for wrongful exclusion from the premises.

In the county court, the judge found that Rock and MWB had agreed orally to adopt the revised schedule, but as it was not in writing, it did not satisfy the variation requirements of the NOM clause. The judge ruled that MWB could claim the arrears.

Rock appealed to the Court of Appeal successfully. It was held that the oral variation had also amounted to an agreement to dispense with the NOM clause, meaning that MWB was bound by the oral variation.

MWB appealed to the Supreme Court where the appeal was unanimously allowed; the NOM clause precluded the agreed oral variation.

NOM clauses therefore operate to provide certainty to contracting parties. Where oral variations are arguably unclear and the interpretation of what was agreed by the individuals involved can be misunderstood, NOM clauses ensure that, by recording any variation, the parties can know exactly what the variation was intended to be. They stop the hinging of an intended variation, in the event of any future dispute, on the recollection of individuals, where mistakes can certainly be made.

Whilst the judgment could be perceived as limiting the freedom of contract, a NOM clause does not invalidate oral variations, it simply forbids them in accordance with the parties’ own intentions at the outset of their contractual relationship.

The judgment also spells good news for the courts insofar as avoiding unnecessarily escalating litigation costs by parties alleging oral variations, where a NOM clause exists, as a defence. Likewise grounds for summary judgments will rise in such circumstances, bringing down the length and costs of litigation.

Rock Advertising Ltd v MWB Business Exchange Centres Ltd [2018] UKSC 24 (Rock and MWB respectively) – appeal from [2016] EWCA Civ 553