The Supreme Court has handed down judgment in a case (MWB Business Exchange Centres Ltd v Rock Advertising Ltd) which examines whether a contract can be varied informally by the parties even where the contract says that oral variations are not permitted. Although the case concerned a property licence agreement, it has wide ramifications for all types of contracts – and not just those made between commercial parties.

Facts of the case

MWB operated a managed office space which Rock Advertising occupied as a licensee. Rock Advertising became unable to afford the agreed rates and fell into arrears. In exercise of its rights under the licence agreement, MWB terminated the arrangement and sued for arrears and damages. Rock Advertising counterclaimed for wrongful exclusion from the premises.

Issues between the parties

Rock Advertising claimed that it had made an oral agreement with MWB’s credit controller to adjust the licence fee payments in a way which would allow the arrears to be cleared over time. Rock Advertising had paid an agreed sum of £3,500 on the same day in accordance with this revised ‘agreement’. MWB denied there being any revised agreement and stated that if there had been such an agreement: a) variation of the original written contract had to be in writing since oral variation was precluded by the terms of the agreement; and b) any variation would be unenforceable for a lack of consideration (i.e. value for MWB, which is required to support a contract variation).

Decision – MWB wins appeal

In a decision which may be welcomed as having avoided the floodgates to uncertainty – but perhaps unnecessarily curtailing contracting parties’ flexibility - the Supreme Court has allowed MWB’s appeal and refused to allow the “no oral modification” clause (or “NOM” clause) to be ignored. The oral variation agreed between the parties was found to be invalid because of the failure to comply with the formalities required by the contract. In light of this finding, it was unnecessary for the Court to deal with the issue of consideration.

At first glance, this decision might suggest that the Supreme Court has rejected the idea that party autonomy should be given precedence, including the right to conclude a later informal agreement to vary the terms of the first. However, the decision points out that parties who agree an oral variation despite the presence of a NOM clause do not necessarily intend to dispense with the clause and may often have overlooked it. Lord Briggs’ judgment indicates later variations are still possible, but there should be an express (or necessarily implied) agreement between the parties to do away with the NOM clause they have previously agreed. The difficulty for Rock Advertising here was that the oral variation did not mention the parties’ NOM clause.

The Supreme Court therefore upheld MWB’s argument that contracting parties should be free to bind themselves as to the manner in which their future legal relations are changed, including the option to disallow oral variations. The decision makes it clear that such contract terms should not simply be disregarded. In their analysis of the legal principles, their Lordships have reminded parties of the benefits of such clauses, for example preventing attempts to undermine written agreements and avoiding disputes about the exact terms of an agreement. For many organisations, it is also vital that they have contractual arrangements which reflect their internal rules when it comes to who has authority to vary contracts.

This decision by the Supreme Court clarifies the law in this area and gives real meaning and support to “no oral modification” clauses within contracts. Although some will be concerned that it is too restrictive of parties’ contractual freedom and that commercial relations require greater flexibility when it comes to varying arrangements, any finding that the “no oral modification” clause was ineffective would have created the potential for significant uncertainty for contracting parties and those advising them. Instead, the judgment offers a welcome clarification of the ways in which parties can agree to change the terms of their contracts. In this case, the parties could have chosen to remove the “no oral modification” clause in a more formal way, allowing them the freedom – with the accompanying uncertainty - to vary the terms of the deal in the future with nothing more than a spoken agreement.

The judgment does not seek to take emphasis away from the notion of party autonomy, but rather to place focus on the actual wording agreed in a contract. This is an important reminder to follow formal procedures in a contract to effectively vary the terms of the deal. It also confirms that relying on a spoken agreement to vary the terms of a contract may not be enough if the contract contains a “no oral modification” clause. Small businesses and consumers in particular should look out for this seemingly innocuous clause, which they might otherwise overlook. Even if the other party appears amenable and cooperative to changing the terms of the contract informally, it is important to double check the procedure set out in the contract as to how it can be varied as it may require the agreed position to be in writing and signed by the parties.

There may be concern arising from this judgment for those who agree to vary arrangements in good faith and subsequently find the other party trying to avoid the revised agreement on the basis of a ““no oral modification” clause. However, the Supreme Court recognised this and emphasised that the principle of estoppel still has a role to play in safeguarding against injustice in such situations.

In our view, the Supreme Court has taken a course which ensures that parties have a good level of certainty about their contractual relations, recognising that parties can still follow the route required by the contract to achieve a variation and that there other legal rules in place (such as estoppel) which protect parties from broken promises.