The Supreme Court's recent decision in Rock Advertising Ltd v MWB Business Exchange Centres Ltd [2018] UKSC 24 upheld the validity of a clause that limited the parties' freedom to vary their contract orally.

In reversing the Court of Appeal's decision to find the 'no oral variation' or 'no oral modification (NOM)' clause binding, the Supreme Court resolved a fundamental issue of contract law. The outcome of the decision is that parties to contracts including NOM clauses will need to comply with the formalities specified in the contract to effect a valid variation.

Background

Rock Advertising rented serviced offices from MWB under a 12 month fixed term contractual licence. Clause 7.6 of the agreement provided:

“This Licence sets out all the terms as agreed between MWB and [Rock]. 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.”

Rock fell into arrears and claimed that MWB had orally agreed a revised schedule of payments which had allowed Rock to defer some payments and spread the cost the accumulated arrears over the remainder of the term . MWB sued for arrears, and asserted that there was no variation, pointing to clause 7.6 in the Licence. It was uncontested that there was no such written variation.

The judge at first instance found in favour of MWB. He held that the oral variation was ineffective as it was not in accordance with the NOM clause. The Court of Appeal overturned this on the view that the oral agreement revised the schedule and amounted to an agreement to dispense with the NOM clause itself, permitting oral variations. MWB appealed to the Supreme Court.

Judgment

The Supreme Court unanimously held that the NOM clause was valid. The variation that Rock claimed to have agreed was not set out in writing and signed on behalf of both parties and was therefore ineffective.

In his judgement, Lord Sumption addressed the Court of Appeal argument in defence of party autonomy, that the parties should be free to orally amend contracts. It was noted that nearly all contracts bind parties to some course of action, and to that extent restrict their autonomy. The presence of a NOM clause does not prevent the parties from varying a contract; all that is required is to comply with the specified formalities. It was also noted that there are many statutes in place which require agreements to take a particular form and there was no reason why contracting parties could not adopt the same approach in written agreements.

The Supreme Court also recognised that there were legitimate commercial reasons for including NOM clauses in business contracts:

  • To prevent attempts to undermine written agreements by informal means
  • To avoid disputes where oral variations could lead to misunderstandings
  • To introduce formalities to allow corporations to restrict authority to agree variations

The court observed that contract law facilitates the exercise of legitimate commercial interests unless there is an overriding public policy reason not to do so, and in this case the court saw none.

It was acknowledged that in enforcing NOM clauses there was a risk that a party might act on the understanding that a contract was varied, then find itself unable to enforce the variation. Lord Sumption identified the safeguard against this potential injustice as the doctrine of estoppel. An estoppel may arise if a party has been induced to act on a proposition made by another, and the proposing party then seeks to resile from that proposition. Where an estoppel is established it will operate to bind the proposing party to its proposition. This might arise to prevent a party relying on a NOM clause where it has made a clear representation to the other that the variation was valid and there is evidence that the other party relied on the representation.

As it was held that the NOM clause rendered the oral variation invalid, Lord Sumption stated that it was unnecessary and undesirable for the court to address the secondary issue of whether an agreement to vary a contract to pay money by agreeing to pay less money (or the same amount later), amounted to the consideration required to support a variation.

Comment 

It was feared that the result of the Court of Appeal decision would open the floodgates to a raft of cases claiming that there had been oral variations to agreements containing NOM clauses. The Supreme Court decision stems the potential tide of such claims.

The leading judgment from Lord Sumption was founded in pragmatism, with legitimate commercial reasons trumping conceptual objections. The result is to be welcomed in providing much needed clarity on the effectiveness of NOM clauses and giving contractual certainty.

However for the purposes of contract drafting, this also raises a point around ensuring that there is absolute clarity in agreements about the meaning of 'in writing'. In the case in hand, the original Licence set out that the parties needed to sign a form of variation before it became binding. In many contracts where the wording does not go this far and the provision simply states 'in writing', it will be important to distinguish whether this would include, for example, amendments agreed over email exchange. This may often be the case for smaller or more commercial changes to an arrangement. Contracts should be very clear on the specific mechanics of what will constitute a valid variation.