Contract law: important decision relating to variation of contracts

Contract law: important decision relating to variation of contracts

The validity of “No Oral Modification” clauses

Who would have thought that a property dispute involving just over £12,000 in licence fee arrears would trouble not only the Court of Appeal and Supreme Court but also lead to a decision on a fundamental and, until now, unsettled, issue of contract law?

Well, Rock Advertising Limited v MWB Business Exchange Centres Limited [2018] UKSC 24  is just such a case.

The contract law issue was this: if there is a clause in a contract that states that it may not be amended save in writing signed on behalf of the parties (known as a “No Oral Modification” clause) what happens when the parties orally agree to vary the contract but do not back up the variation in writing. Is the variation legally effective?

The dispute itself can be described quite simply. Rock had entered a contract with MWB allowing it to occupy space in MWB’s London serviced offices. Having accumulated arrears of the licence fees, Rock had a telephone discussion with MWB’s credit controller seeking to agree a revised schedule for payment of the arrears and the fees for the remainder of the licence term. There was dispute as to whether agreed revised terms were actually agreed in that telephone conversation: Rock contended that revised terms were indeed orally agreed; while the credit controller at MWB had treated it simply as a proposal, which she had taken to her boss, who had rejected it. That particular issue was resolved (at first instance by the Central London County Court) in favour of Rock. So, an oral agreement to vary the licence had been reached. However the judge also held, amongst other things, that the variation was ineffective because it was not recorded in writing signed on behalf of both parties.

This question was then considered by the Court of Appeal and, ultimately, by the Supreme Court.

The Court of Appeal had considered that the oral agreement to revise the schedule of payments also amounted to an agreement to dispense with the No Oral Modification clause. It followed that MWB were bound by the variation.

The Supreme Court disagreed and found that the law should and does give effect to a contractual provision requiring specified formalities to be observed for a variation.

The Supreme Court pointed out that party autonomy operates up to the point when the contract is made, but thereafter only to the extent that the contract allows. Effectively, because the parties have agreed to include a No Oral Modification Clause when signing the contract, their autonomy does not extend beyond that date in allowing them to ignore such a clause and agree oral variations thereafter. To do so would override their intentions.

Generally, at common law, there are no formal requirements for the validity of a simple contract. So, agreements can be made quickly and informally and without the need for legally drafted documents. But this flexibility is something of a mixed blessing and not always welcome, hence the fact that No Oral Modification Clauses are often included in contracts. There are at least three reasons for including such clauses:

  1. it prevents attempts to undermine written agreements by informal means;
  2. where oral discussions can easily give rise to misunderstandings and crossed purposes, it avoids disputes not just about whether a variation was intended but also about its exact terms; and
  3. formality in recording variations makes it easier for corporations to police internal rules restricting the authority to agree them.

These three reasons are all legitimate commercial reasons for agreeing to a No Oral Modification clause. The law of contract does not normally obstruct the legitimate intentions of businessmen, except for overriding reasons of public policy and no such reasons applied here.

Finally, what of an argument that parties who agree an oral variation in spite of a No Oral Modification clause must have intended to dispense with the clause? This does not follow. More likely, parties will simply have overlooked the No Oral Modification Clause, rather than intended to dispense with it. If, on the other hand, they had it in mind, then they were courting invalidity with their eyes open.

The Supreme Court’s conclusion? The oral variation, found by the county court to be agreed, was invalid for the want of writing and signatures.

“No Oral Modification” clauses are valid and enforceable.

William Lawrence