The parties entered into a contract which included a clause that all variations to the contract “must be agreed, set out in writing and signed on behalf of both parties before they take effect”. Such a clause is called a “No Oral Modification” clause. The issue in this case was whether the clause was effective. One of the parties argued that it was not because: “(i) a variation of an existing contract is itself a contract; (ii) precisely because the common law imposes no requirements of form on the making of contracts, the parties may agree informally to dispense with an existing clause which imposes requirements of form; and (iii) they must be taken to have intended to do this by the mere act of agreeing a variation informally when the principal agreement required writing”. Those arguments have been accepted in other countries, such as Australia, Canada and Germany and also found favour in the Court of Appeal in this case.
The Supreme Court (by a 4:1 majority) has allowed the appeal from that decision. Lord Sumption, giving the leading judgment said that “In my opinion the law should and does give effect to a contractual provision requiring specified formalities to be observed for a variation”. He commented that the reasons provided for disregarding No Oral Modification clauses “are entirely conceptual” and “there is no conceptual inconsistency between a general rule allowing contracts to be made informally and a specific rule that effect will be given to a contract requiring writing for a variation”.
The same principle also applied to entire agreement clauses: “Both are intended to achieve contractual certainty about the terms agreed, in the case of entire agreement clauses by nullifying prior collateral agreements relating to the same subject-matter”.
This Supreme Court decision provides certainty to contracting parties as it clarifies the law in relation to No Oral Modification clauses. A failure to comply with the requirements of such a clause when varying a contract will not necessarily invalidate the change, but if the required contractual variation procedure has not been followed, it will be difficult to prove the amendment effective. As Lord Sumption stated, it gives businesses more control over who has the authority to agree such amendments.
Commercial arrangements do require flexibility and this does not sit well with the judgment. However if parties wish to amend an agreement, the judgment highlights the value of checking and following the procedures set out in the contract to vary its terms.
The decision, while establishing that No Oral Modification clauses are effective, also recognises that the clauses carry the risk that a party may act in good faith on the contract as varied orally where the other party tries to avoid the agreed change. The Supreme Court acknowledged that the principle of estoppel may apply in such circumstances and it is possible that in a future case estoppel may be used by parties to argue that an oral amendment is still valid despite a No Oral Modification clause.