The Supreme Court has upheld the effectiveness of a "no oral modification" clause in a licence agreement, reversing the Court of Appeal's decision.
This decision will be of great interest to all organisations that enter into commercial contracts and, in the real estate market, it will be of particular interest to operators and users of serviced offices.
In Rock Advertising Ltd v MWB Business Exchange Centres Ltd, Rock Advertising occupied serviced office premises belonging to MWB as licensee. Rock's business did not develop as it had planned and it fell into arrears. When MWB sought to terminate the agreement, Rock challenged that termination claiming that an oral agreement had been reached between Rock's managing director and MWB's credit controller to re-schedule the licence fee payments in such a way that the arrears would have been paid off. The first of the revised payments had been paid and accepted.
When the dispute reached the Court of Appeal, the key issues for it to decide were:
- whether the parties were able to vary the original licence agreement orally because a provision within it (the no oral modification or NOM clause) stipulated that any variations must be set out in writing and signed by the parties
- whether there had been consideration given for the oral variation, ensuring that it created a binding contract between the parties
The Court of Appeal held that the provision in the contract requiring variations to be in writing and signed by the parties did not prevent a valid variation by oral agreement, and also that there had been sufficient consideration to create a binding contract. Despite the relatively small amount in dispute (the arrears in question amounted to £12,000 or so), MWB appealed to the Supreme Court.
The Supreme Court's decision
The Supreme Court found in favour of MWB, holding the NOM clause to be effective. There is no public policy reason why the courts should not uphold such clauses. They do not frustrate or contravene any policy of the law. In many cases, statute prescribes a particular form of agreement; for example, section 2 of the Law of Property (Miscellaneous Provisions) Act 1989 requires agreements for the sale of property to be in writing and signed by the parties. There is no principled reason why contracting parties should not adopt a similar requirement by agreement.
Lord Sumption, who gave the lead judgment, identified three reasons why NOM clauses are commonly used in commercial agreements:
- They prevent attempts to undermine written agreements by informal means;
- They avoid disputes, not just about whether a variation was intended but also about its exact terms;
- They make it easier for organisations to police their own internal rules restricting the authority to agree variations.
It is true that the enforcement of NOM clauses involves the risk that a party may act on the varied contract but then find itself unable to enforce it. The safeguard against injustice lies in the various doctrines of estoppel. However, Lord Sumption cautioned that reliance on an estoppel would require at the very least some words or conduct unequivocally representing that the variation was valid despite it not being in writing. Contrary to the Court of Appeal's decision, the wording of the informal agreement itself would not be sufficient for this purpose.
Accordingly the Supreme Court held that the oral variation had not been effective to vary the original contract. This meant that MWB had validly terminated the licence agreement for non-payment of the licence fee.
The second issue - whether the variation had been supported by sufficient consideration - therefore did not need to be decided in this case. However Lord Sumption suggested that this area of law is probably ripe for re-examination.