Supreme Court confirms legal effectiveness of "no oral modification" clauses

In Rock Advertising Ltd v MWB Business Exchange Centres Ltd, the UK Supreme Court held that "no oral modification" (NOM) clauses are legally effective. In doing so, it unanimously overturned the decision of the Court of Appeal which had given effect to an oral variation to a contract despite the existence of a NOM clause. 

The judgment is significant. It means that oral variations agreed in spite of a NOM clause will be invalid. This could potentially result in injustice where contracting parties rely on an oral variation in good faith. However, a contracting party in that position could fall back on estoppel arguments, although the scope of this estoppel will be limited. An oral variation of itself will not suffice; there would need to be an unequivocal representation that the variation was valid notwithstanding the lack of formality.

Those involved in commercial contracts will welcome the decision. NOM clauses play an important role in preserving the bargain made by the parties as documented in the written agreement. They promote certainty and help avoid false or frivolous claims of subsequent oral agreements. Subject to any estoppel arguments, they will be upheld. 

However, the use of such clauses also means that extra care will need to be taken whenever a contract needs to be varied. If oral variations are agreed, these should be documented and any formal requirements satisfied before acted upon. That is preferable than having to rely on the estoppel defence. 

Background

Rock Advertising (Rock) entered into a licence agreement with MWB Business Exchanges Centres Ltd (MWB) to occupy office space for a fixed term. The Agreement contained a standard NOM clause as follows: 

"All variations to this Licence must be agreed, set out in writing and signed on behalf of both parties before they take effect." (Clause 7.6.) 

After accumulating licence fee arrears, Rock proposed to revise the payments schedule to the Agreement so that payment of the accumulated arrears would be spread over the remaining period of the licence. 

Following a telephone call between Rock and MWB, a dispute arose as to whether MWB had orally accepted Rock's proposal. Based on the position that no variation had been agreed, MWB locked Rock out of the premises, terminated the licence, and sued for the arrears. Rock counterclaimed, seeking damages for wrongful exclusion from the premises.

Decision of the lower courts

In the County Court the judge found that the parties had agreed the revision orally. He further found that there was sufficient consideration for such a variation, derived from the practical advantages of an enhanced prospect of MWB receiving payment from Rock. 

However, the judge held that the oral agreement was invalid as it did not satisfy the formal requirements under the NOM clause. This consequently meant that MWB could claim the arrears back from Rock without regard to the oral agreement. Rock appealed.

The Court of Appeal allowed the appeal. It agreed that the variation was supported by consideration but held that the oral variation was effective. In its view, freedom of contract was paramount. Parties have the freedom to agree whatever terms they choose to, and can do so however they want: in writing, orally or by conduct. Following that general principle, the Court reasoned that a NOM clause in a contract did not prevent the parties from later making a new contract varying the original contract orally. In other words, the oral variation had amounted to an agreement to dispense with Clause 7.6. MWB was therefore bound by the variation. 

MWB appealed to the Supreme Court. The appeal raised two issues: 

1. The legal effect of Clause 7.6: whether a contractual term precluding amendment of an agreement other than in writing is legally effective.
2. Consideration: whether the variation of an agreement to pay money, by substituting an obligation to pay either less money or the same money later, is supported by the necessary consideration.  

Decision of the Supreme Court

The Supreme Court unanimously allowed the appeal. Lord Sumption gave the majority judgment, upholding the County Court decision that the oral variation was invalid due to failure to comply with the NOM clause. Lord Briggs gave a concurring judgment. Although he agreed that the oral variation was legally ineffective, he disagreed with Lord Sumption's reasoning.

The conceptual obstacle: squaring the circle

Both Lords Sumption and Briggs acknowledged the conceptual obstacle to giving legal effect to NOM clauses: the party autonomy rationale applied by the Court of Appeal. 

Lord Sumption dismissed the party autonomy reasoning in these circumstances as "a fallacy". In his view, party autonomy operates until the contract is agreed but after that, only to the extent allowed by the contract. "The real offence against party autonomy is the suggestion that they cannot bind themselves as to the form of any variation, even if that is what they have agreed."  

Similar treatment was given to the argument that it was conceptually impossible for the parties to agree not to vary their contract orally because any such agreement would automatically be destroyed when they orally agree a variation. Other legal systems had managed to square that particular circle, such as the Vienna Convention on Contracts for the International Sale of Goods (1980), and the UNIDROIT Principles of International Commercial Contracts (2016).¹ They allowed contracts to be made informally but also included specific rules giving legal effect to NOM clauses. In his view, there was no reason why English law should not do the same.    

Lord Sumption then dealt with the argument that parties who agree an oral variation in spite of a NOM clause must have intended to dispose of the clause. In answer to that he observed that the purpose of a NOM clause is to invalidate any subsequent oral variations, not forbid them. As such, the mere fact of agreeing to an oral variation is not a contravention of the NOM clause. The natural inference to be made when parties fail to comply with a NOM clause is that they simply overlooked it.

Guarding against potential injustice: estoppel arguments 

Lord Sumption recognised that there will be circumstances where contracting parties have relied on a non-compliant variation in good faith. In his view, a contracting party in that position could fall back on estoppel arguments. However, mindful of the fact that estoppel arguments could be used to circumvent NOM clauses by the back door and effectively undermine the contractual certainty they are intended to promote, he made it clear that the scope of this estoppel will be limited; "at the very least, there would have to be some words or conduct unequivocally representing that the variation was valid notwithstanding its informality and  something more would be required for this purpose than the informal promise itself".

In the present case, the courts below rightly held that the minimal steps taken by Rock were not enough to support any estoppel defence. 

The consideration point 

Having decided that the oral variation was ineffective, it was unnecessary for the Court to decide the consideration issue. Lord Sumption also thought it undesirable to do so, as any decision will require a re-examination of the decision in Foakes v Beer (1884). However, that required an enlarged panel of the Court and a case where the decision would be more than obiter dictum. 

Decision of Lord Briggs

Lord Briggs took a less radical approach to the legal effect of NOM clauses. He disagreed with Lord Sumption and considered that parties can agree to remove a NOM clause orally, either expressly or by "necessary implication". In his view, this approach reflected the contractual freedom parties have to bind themselves as to future conduct, while preserving their freedom to agree to release themselves from that inhibition.

In practical terms, there is little difference between the two approaches. The test for "necessary implication" would be strict - an oral variation of itself would not suffice. The example Lord Briggs gave was where the oral variation had to be acted upon before it could be documented and signed. Facts such as that would likely also support an estoppel defence under Lord Sumption's analysis. 

What does this mean for contracting parties?

Those involved in commercial contracts will welcome the decision. NOM clauses play an important role in preserving the bargain made by the parties as documented in the written agreement. They promote certainty and help avoid false or frivolous claims of subsequent oral agreements. Subject to any estoppel arguments, they will be upheld. 

However, the use of such clauses also means that extra care will need to be taken whenever a contract needs to be varied. If oral variations are agreed, these should be documented and any formal requirements satisfied before acted upon. That is preferable than having to rely on the estoppel defence.  

Authors: Tom Cummins, Lianne Sneddon and Andra Ignat.

Cases referred to:
Rock Advertising Ltd v MWB Business Exchange Centres Ltd [2018] UKSC 24 (16 May 2018)

Foakes v Beer (1884) 9 App Cas 605

1. The relevant provisions can be found at articles 11 and 29(2) of the Vienna Convention and articles 1.2 and 2.1.18 of the UNIDROIT Principles.