The May 2018 Supreme Court case of Rock Advertising Limited (Respondent) v MWB Business Exchange Centres Limited (Appellant)  UKSC 24 has amended how 'no oral variations' clauses are interpreted and is likely to stop any 'variation by conduct' arguments in respect of PFI contracts where the contract contains a clause requiring any amendments to be made in writing (a 'no oral variations' clause).
The background to this was that three cases in 2016 had encouraged us all to believe that the courts would be prepared to permit variation by conduct arguments, even where the Contract contained a 'no oral variations' clause. This was particularly relevant to PFI contracts, where parties had been able to argue that their contract had been varied by conduct, despite the presence of a 'no oral variations' clause, if:
- Objectively, the parties could be seen to have reached the stage where they intended to vary the contract; and
- Consideration had been provided.
For example, this argument has been put forward by service providers where they have been operating (often for a number of years) in slight variance to the terms of the original PFI contract (without objection) and the Project Co or the Authority has subsequently sought to reduce payment under the PFI due to the contractor's failure to comply with the strict contractual provisions.
One of the three 2016 cases was the decision in Rock v MWB in the Court of Appeal. That decision has now been overturned by the Supreme Court.
Although not directly related to PFIs, the case of Rock v MWB considered 'no oral variations' clauses in the context of commercial contracts. Rock Advertising occupied office space near Marble Arch under a licence from MWB. Rock had argued that a licence agreement had been varied by a telephone conversation between the parties and that such amendment had the effect of overriding the 'no oral variation' provision. The Supreme Court rejected Rock Advertising's argument on the basis that "the law should and does give effect to a contractual provision requiring specified formalities to be observed for a variation."
The Supreme Court expanded on this general view by outlining that (where a 'no oral variations' clause is present in a contract) any oral variation would not be effective unless and until it is reduced to writing, or the 'no oral variations' clause is itself removed or suspended by written agreement. The basis of this view is that it fully reflects the parties' autonomy to bind themselves as to their future conduct, whilst preserving their ability to release themselves from the inhibition.
The effect of this decision on PFI contracts containing the standard 'no oral variations' clause will be that any amendment to the contract will have to be made in writing, in accordance with the variation procedures in the contract (either, as relevant, via the formal "Variation Procedure" or pursuant to the "no oral variation" clause). Without this, it is unlikely to be possible to argue that a PFI contract has been varied simply because the parties have been doing something a particular way for a number of years, and they may therefore face financial consequences if they are not operating in accordance with the contractual terms. The Supreme Court's decision emphasises the importance of efficient and accurate contract management throughout the duration of a project.