In a ground-breaking decision, the UK Supreme Court has confirmed the effectiveness of ‘No Oral Modification’ clauses precluding the parties from orally varying an agreement: Rock Advertising Ltd v MWB Business Exchange Centres Ltd  UKSC 24.
Commercial contracts often include a provision that the agreement may only be varied in writing (‘No Oral Modification’ or ‘NOM’ clause). Although this type of clause is included by the parties in the interest of commercial certainty, past authorities have suggested that a NOM clause did not prevent a subsequent oral variation from taking effect. The Supreme Court’s decision provides a welcome clarification that a NOM clause does in fact prevent a subsequent oral variation from being effective to amend the written contract.
Background to the Decision
The Defendant (“Rock”) entered into a licence agreement with the Claimant (“MWB”) to occupy office space for a fixed term of 12 months. The agreement contained a clause requiring all variations to be in writing and signed on behalf of the parties. As Rock was unable to pay its rent and fell into arrears, a director of Rock had a telephone conversation with MWB’s credit controller during which they agreed a revised payment schedule. When Rock paid the rent at the revised rate, MWB locked Rock out of the premises, terminated the licence and sued Rock for the rent arrears. Rock counterclaimed for wrongful exclusion from the offices. Both claims turned on the legal effect of their oral agreement to vary the licence.
At first instance, it was held that the oral variation was ineffective because it was not recorded in writing and signed by the parties, as required by the NOM clause. The Court of Appeal disagreed with this decision and held that MWB was bound by the oral amendment, which also amounted to an agreement to dispense with the NOM clause. The Court of Appeal’s decision emphasised the importance of party autonomy.
On appeal, the UK Supreme Court unanimously held that the oral amendment to revise the terms of the payment schedule was ineffective. The Supreme Court’s reasoning was that, where the parties originally agreed a contractual provision specifying the formalities required to vary their contract, this should be upheld by the courts to provide commercial parties with legal certainty and avoid disputes about whether a variation had been intended (and its precise terms).
The Supreme Court however recognised the potential for injustice in cases where a party relies on an oral variation to its detriment and noted that various doctrines of estoppel would provide a safeguard in certain cases.
The interesting question of whether an agreement to vary a contract to pay money by substituting an obligation to pay less money is supported by consideration had been raised at first instance and in the Court of Appeal. The finding on the NOM clause meant that the consideration point did not need to be decided. The Supreme Court declined to express a view as it wished to see the point fully argued before an enlarged panel in a case where it was directly in issue.
Practical Effects of the Decision
This decision provides welcome certainty to contracting parties and their advisors by making informal changes to agreements more difficult to enforce and allowing parties to be more confident that their written contracts fully reflect the terms of their agreements. It means that contracting parties no longer have to worry about employees with ostensible authority amending a contract during a conversation with a representative from the other party.
It is also an important reminder that any party seeking to amend an agreement should check the underlying contractual documentation to clarify the requirements for variation and, where appropriate, document agreed changes formally to ensure they are effective.