UKSC 24
In Issues 192 and 193 of Dispatch we discussed the cases of Globe Motors v TRW Lucas and MWB Business Exchange Centres Ltd v Rock Advertising Ltd both of which dealt with the question as to whether a clause requiring that amendments to the contract be in writing, can be over-ridden by conduct. In the MWB case, the dispute related to a claim against Rock for arrears of licence fees and other charges. Rock had issued a counterclaim relying upon an oral agreement. The Judge at first instance agreed that there was an oral agreement and that the individual who made that agreement had at least ostensible authority to commit MWB to such an agreement of this kind. However, MWB relied upon the express terms of the original written agreement. Clause 7.6 provided:
“This licence sets out all of the terms as agreed ... No other representations or terms shall apply or form part of this licence. All variations to this licence must be agreed, set out in writing and signed on behalf of both parties before they take effect.”
The question for the Court was whether or not clause 7.6 precluded any variation of the contract other than one in writing in accordance with its terms. Rock said that it was open to the parties to vary the contract as a whole, including clause 7.6, orally or in any other way they chose. The CA agreed with Rock and LJ Kitchen went on to refer to the words of Cardozo J nearly 100 years ago in the New York Court of Appeals in Alfred C Beatty v Guggenheim Exploration Company (1919) 225 NY 380 where he said that:
“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 … 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…”
MWB appealed. Lord Sumption had to decide whether a contractual term prescribing that an agreement may not be amended save in writing signed on behalf of the parties (commonly called a “No Oral Variation” clause, although the Supreme Court used the alternative expression: the “No Oral Modification” (NOM)clause) was legally effective. He noted that at common law there were no formal requirements for the validity of a simple contract. The reasons that are usually given for treating No Oral Modification clauses as ineffective are (i) that a variation of an existing contract is itself a contract; (ii) that 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.
However, Lord Sumption disagreed with the CA and Cardozo J, saying that:
“In my opinion the law should and does give effect to a contractual provision requiring specified formalities to be observed for a variation.”
Lord Sumption said 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. To Lord Sumption, the real offence against party autonomy was the suggestion that the parties cannot bind themselves as to the form of any variation, even if that is what they have agreed.
There are at least three reasons for including No Oral Modification clauses. The first is that it prevents attempts to undermine written agreements by informal means. Second, in circumstances where oral discussions can easily give rise to disagreement, it avoids disputes not just about whether a variation was intended but also about its exact terms. Third, a measure of formality in recording variations makes it easier for companies to police internal rules restricting the authority to agree them. To Lord Sumption, these were all legitimate commercial reasons for agreeing such a clause as clause 7.6. There was “no mischief” in No Oral Modification clauses and they did not frustrate or contravene any policy of the law. Oral variations and agreements are common in construction contracts. Regard should therefore be had to these words of Lord Sumption:
“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.”
Lord Hope agreed with Lord Sumption’s conclusion but not with all of his reasoning. For Lord Hope, as long as either (or any) party to a contract containing a NOM clause wishes the NOM clause to remain in force, that party may so insist, and nothing less than a written variation of the substance will suffice to vary the rest of the contract. The NOM clause will remain in force until they both (or all) agree to do away with it. In particular it will deprive any oral terms for a variation of the substance of their obligations of any immediately binding force, unless and until they are reduced to writing, or the NOM clause itself is removed or suspended by agreement. To Lord Hope, that fully reflected “the autonomy of parties to bind themselves as to their future conduct, while preserving their autonomy to agree to release themselves from that inhibition”.