'No oral modification' clauses are binding - Supreme Court

High Court decision highlights contractual termination pitfalls

In Rock Advertising Limited v MWB Business Exchange Centres Limited [2018] UKSC 24, the Supreme Court  held that a contract containing a provision that “all variations to this licence must be agreed, set out in writing and signed on behalf of both parties” (i.e. a ‘no oral modification’ (“NOM”) clause) precluded an agreed oral variation of the contract by the parties.

 

Facts

MWB operated serviced offices in London. Rock Advertising Limited (“Rock”) entered into a licence to occupy office space for a 12 month period at a set licence fee. Six months later, having accumulated licence fee arrears of £12,000, Rock proposed a revised payment schedule which spread the accumulated arrears over the remainder of the licence and which had the overall effect of reducing Rock’s payment obligations to MWB. The repayment schedule was discussed and (Rock asserted) agreed by telephone. MWB subsequently terminated the licence for failure by Rock to pay the licence fees and changed the locks on the premises. MWB sued for the arrears and Rock counterclaimed damages for wrongful exclusion from the premises.

Earlier decisions

At first instance, Judge Moloney Q.C. found in favour of MWB. Although he considered that an oral agreement had been made and proper consideration was given (i.e. the enhanced prospect of payment to MWB for the arrears), the Judge held that the NOM clause precluded variation that was not recorded in writing.

On appeal, the Court of Appeal had held that an oral agreement to vary payments under a licence also amounted to an implied agreement to dispense with the NOM clause. The Court of Appeal was particularly influenced by the following passage in the judgment of Cardozo J in the case of Beatty v Guggenheim Exploration Co (1919) 225 NY 380: “Those who make a contract, may unmake it. The clause which forbids a change, may be changed like any other. The prohibition of oral waiver, may itself be waived.” Accordingly, it found in favour of Rock that the contract could be varied orally despite the NOM clause, finding that the contractual parties’ autonomy may otherwise be compromised.

The Supreme Court

In his leading judgment in the Supreme Court, Lord Sumpton disagreed. He found that “the law should and does give effect to a contractual provision requiring specified formalities to be observed for a variation”. It was the parties' clear intention to bind themselves as to how future changes in their legal relations were to be achieved. The court was persuaded that there were legitimate commercial reasons for NOM clauses, namely:

  • To prevent attempts to undermine written agreements by informal means;
  • To avoid disputes about whether a variation had been intended and its exact terms; and
  • To make it easier for corporations to police their own internal rules restricting authority to agree variations.

Lord Sumpton considered that the concept of ‘party autonomy’ is a fallacy after the point at which the contract is formed; from then on, autonomy can only operate to the extent that the contract allows. There are many international codes and conventions which contain both a general rule allowing contracts to be made informally (including orally) and a specific rule preventing oral variation. Lord Briggs, in his judgment, reasoned that the NOM clause did not offend the concept of party autonomy at all because the parties were at liberty to agree to release themselves from it, so long as that agreement was recorded in writing. He drew the analogy of negotiations made ‘subject to contract’; even though terms may be agreed STC “no binding obligations thereby ensue unless or until they have made a full written contract”.

Lord Sumpton did acknowledge there was a risk a party could act as if the contract had been varied but then find itself unable to enforce, although the doctrine of estoppel would assist parties from suffering injustice here.  In this case, they found that insufficient steps had been taken by Rock to give rise to any estoppel argument. Accordingly, it was found that the parties were bound by the NOM clause and the oral variation to the licence was consequently invalid.

As a separate issue, Lord Sumpton also commented that the common law rule in Foakes v Beer (1884) 9 App Cas 605 (that part payment of a debt is not good consideration for the remainder of the debt) should be revisited. In view of the plethora of Company Voluntary Arrangement proposals facing many landlords and retailers these days, it is difficult to reconcile this historic rule with the practical advantages to the landlords of an enhanced prospect of at least part payment of the arrears owed to them and retaining a tenant on an ongoing basis rather than leaving their premises empty.

In any event, for parties considering a variation of their contracts, careful consideration should be given to the manner in which such variation is agreed and recorded. NOM clauses are routinely included as standard in contracts and so advice should be sought before any variation is agreed. This could be of particular relevance for parties giving notice under contracts by email, where the contract provides only for notice by post or fax. Parties should ensure any agreement to accept service by alternative means (or any other agreed variation to contractual terms) is documented in writing.

Contact our experts for further advice

View profile for Tim CarterTim Carter, View profile for Lucy WalkerLucy Walker

Search our site