Effectiveness of anti-oral variation clauses upheld by the Supreme Court of the United Kingdom

Publication | May 2018

Introduction

In the recent decision of Rock Advertising Limited (Respondent) v MWB Business Exchange Centres Limited (Appellant) [2018] UKSC 24, the Supreme Court unanimously upheld the effectiveness of a “No Oral Modification” clause, or NOM clause,  holding that the purported oral agreement or variation of the contract was invalid for want of the writing and signatures required by the NOM clause.

Contrary to a number of previous decisions, including that of the Court of Appeal in Globe Motors Inc v TRW Lucas Varity Electric Steering Ltd [2016] 1 CLC 712, which held that parties may orally vary a contract even it contained a NOM clause, the Supreme Court held that the law gives effect to contractual provisions requiring specified formalities to be observed for a variation to contract to be effective. 

Background

The parties entered into a licence agreement for office space which contained a NOM clause which provided that all variations to the licence must be agreed, set out in writing and signed on behalf of both parties before they took effect. The Respondent argued that the parties had agreed orally to vary the licence agreement with a revised schedule of payments, and a dispute arose as to whether the oral variation was effective in law. The County Court found that the oral variation did not satisfy the formal requirements of the NOM clause. The Court of Appeal reversed this decision, holding that the oral variation amounted to an agreement to dispense with the NOM clause. The Appellant brought the case to the Supreme Court.

Decision

The Supreme Court observed that it is rare for fundamental issues in the law of contract to be raised in modern litigation, but that the issue of oral variation of contracts containing a NOM clause was an exception. In the present case, one of the main issues before the Court was whether the contractual term precluding amendment of an agreement other than in writing (i.e. the NOM clause) was legally effective. The appeal was allowed unanimously, holding that the law should and does give effect to a contractual provision requiring specified formalities to be observed for a variation to a contract.

It was noted by the Court that NOM clauses are common in business agreements and are recognized as effective in many legal codes around the world for three reasons:

  1. they prevent attempts, including abusive attempts, to undermine written agreements by informal means;
  2. they avoid disputes not just about whether a variation was intended but also about its exact terms; and
  3. they make it easier for corporations to police their own internal rules restricting the authority to agree variations.

In addition to finding that the above points represented legitimate commercial reasons for parties to agree to a NOM clause, the Court held that the “law of contract does not normally obstruct the legitimate intentions of businessmen, except for overriding reasons of public policy. Yet there is no mischief in No Oral Modification clauses, nor do they frustrate or contravene any policy of the law”.

The Court held that the approach by the Court of Appeal was to override the parties’ intentions to bind themselves as to the manner in which future changes in their legal relations are to be achieved, and in doing so deferring to powerful considerations in favour of party autonomy. This was, in the view of the Court, a fallacy, with party autonomy only operating up to the point when the contract is made, but thereafter only to the extent that the contract allows. Nearly all contracts, for example contracts for the sale of land and certain regulated consumer contractors, bind the parties to some course of action and to certain extent restrict their autonomy. There is no principled reason why the parties should not adopt the same principle by agreement.

Further, parties who agree an oral variation in spite of a NOM clause do not necessarily intend to dispense with that clause. What the parties agreed was that oral variation will be invalid, not that they are forbidden. The Court further reasoned that the natural inference from a failure to observe a NOM clause is not that the parties intended to dispense with it, but that they overlooked it. And if they had it in their mind, then they were “courting invalidity with their eyes open”.

Comments

The decision in the Court of Appeal risked opening the floodgates to claimants seeking relief through purported oral variation of contracts. This decision by the Supreme Court has materially restricted the potential for the proliferation of such future litigation, while maintaining the safeguards against injustice afforded by the various doctrines of estoppel, which may apply where a party acts on a contract purportedly varied orally in breach of a NOM clause.

There is no principled reason why contracting parties should not be able to contractually agree to prescribe a particular form of agreement or manner in which future changes to their legal relationship are to be achieved. It upholds the autonomy of the parties to stipulate and respect their own contractual arrangements.


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