Summary
The Supreme Court overturned the Court of Appeal's decision in Rock Advertising v MWB [2018] UKSC24 last month, upholding the effectiveness of a "No Oral Modification" clause in a contract which required modifications to the contract to be affected in writing and by signatures of the parties.
Although it considered a long line of authorities which supported the view that parties may orally vary a contract even if it contained a No Oral Modification clause, the Supreme Court ultimately decided that the law should give effect to contractual provisions which require specific formalities to be observed in order for a variation to a contract to be considered valid.
Background
Rock Advertising Limited ("Rock Advertising") and MWB Business Exchange Centres Limited ("MWB") entered into a licence providing for Rock Advertising to occupy an office space in one of MWB's properties in Central London. The licence contained a No Oral Modification clause providing that "All variations to this Licence must be agreed, set out in writing and signed on behalf of both parties before they take effect".
Several months later, Rock Advertising subsequently accumulated arrears of licence fees of over £12,000 and the parties disputed whether an oral agreement had been reached between Rock Advertising and MWB to revise the payment schedule in the licence in order to defer part of the payments overdue and spread the accumulated arrears over the remainder of the licence term.
MWB did not consider the revised payment schedule to be agreed and locked Rock Advertising out of the premises for its failure to pay the arrears and terminated the licence. MWB sued Rock Advertising for the arrears under the original terms of the licence. Rock Advertising counterclaimed damages for wrongful exclusion from the premises.
The key issue of the case centered on whether the agreement to vary the payment schedule had been accepted orally and was effective in law, despite being in breach of the requirements of the No Oral modification clause.
Court of Appeal Decision
The court at first instance had decided in favour of MWB, finding that an oral agreement was reached between Rock Advertising and MWB to vary the payment schedule under the licence, which was supported by consideration (i.e. the enhanced prospect of receiving payment). However, this variation was ineffective because it was not recorded in writing and signed by both parties, as stipulated by the No Oral Modification clause.
The Court of Appeal disagreed and overturned the first instance decision. It reasoned that English law imposes no formal requirements to bring a contract into being and therefore the parties could just as easily change its terms. The Court of Appeal considered that the oral agreement to revise the payment schedule also amounted to an agreement to dispense with the No Oral Modification clause. The oral agreement also amounted to valid consideration on the basis that the increased chance of payment and the property being occupied for longer was of a practical benefit to MWB.
In reaching its decision, the Court of Appeal was heavily guided by the principle of party autonomy, which demanded that parties should be permitted to amend their contracts even in situations where they had previously agreed only to do so by specific means.
Supreme Court Decision
The Supreme Court overturned the Court of Appeal's decision, ruling that the oral variation was invalid.
Lord Sumption (with whom Lady Hale, Lord Wilson and Lord Lloyd Jones agreed), argued that the Court of Appeal's emphasis on party autonomy was a "fallacy", deciding that "Party autonomy operates up to the point when the contract is made, but thereafter only to the extent that the contract allows". The implication being that once parties reach an agreement as to their future conduct, that agreement should set the boundaries of party autonomy.
Lord Sumption also noted three reasons justifying the inclusion of No Oral Modification clauses in commercial contracts, namely:
- they prevent attempts to undermine written agreements by informal means;
- given that oral discussions can easily give rise to misunderstandings, they avoid disputes about whether a variation was intended about and also about its exact terms; and
- they make it easier for corporations to police internal rules restricting authority to agree variations.
Lord Sumption considered there was no conceptual inconsistency between the general rule allowing contracts to be made informally (e.g. orally) and a specific rule that effect will only be given to variations to a contract made in writing only. What parties agree in a No Oral Modification clause is not that they are forbidden to subsequently agree to vary the contract informally, but that any informal agreement which does not comply with the formal requirements stipulated by the parties will be ineffective.
Comment
This is an important decision confirming that No Oral Modification clauses will be upheld to prevent contracting parties from being bound by a subsequent variation unless the formalities specified by the contract are complied with. The Court of Appeal's decision had threatened a surge of unscrupulous litigants seeking relief through purported oral variations of contracts, and the Supreme Court's enforcement of No Oral Modification clauses will certainly help reduce the risk of such future litigation.
In a construction context, employers and clients will feel vindicated by their use of such No Oral Modification clauses to achieve commercial certainty. Given the nature of construction projects, all too often informal instructions are given and agreements reached without records being created or kept, often without a second thought for what the contract might require.
The Supreme Court's decision also serves as a useful reminder that care should be exercised in administering contracts post-signature. For example, if parties have modified their ways of working, it is important to capture that change, if possible, in a variation which complies with a No Oral Modification clause. Care will also be needed to ensure that the procedural requirements prescribed by a No Oral Modification clause for agreeing a variation are complied with in order for this to be legally effective.
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