Supreme Court confirms that clauses providing for "No Oral Modification" of contractual terms are enforceable

After nearly two decades of unsettled case law, the Supreme Court has confirmed that oral variations made to written contracts, in circumstances where the contract expressly requires variations to be made in writing, are ineffective.

Lord Sumption, giving the leading judgment in Rock Advertising Limited v MWB Business Exchange Centres Limited [2018] UKSC 24 held that "the law should and does give effect to a contractual provision requiring specified formalities to be observed for a variation".

Background

The case concerned a contract between a serviced office provider (MWB) and licensee (Rock Advertising). The contract included a term that all variations must be made in writing (a "No Oral Modification" clause, or "NOM" clause). When Rock Advertising fell into arrears and could no longer afford the agreed serviced office rates, the director of Rock Advertising telephoned a credit controller at MBW, whereby the parties agreed to vary the license terms in accordance with a revised payment schedule. MWB denied the existence of the variation and pursued Rock Advertising for arrears. Rock Advertising counterclaimed against MWB for wrongful exclusion from the premises.

The Judgment

Initially, the Court of Appeal held that the oral variation was effective. However, on appeal the Supreme Court disagreed, remarking that the autonomy of parties operates up until the point the contract is made, and thereafter only to the extent the contract allows. Such restrictions in a contract do not undermine party autonomy under common law. Further, upholding NOM clauses provides certainty to contracting parties by minimising the risk of misunderstanding when varying contracts, limiting the opportunity for employees to inadvertently bind the business and avoiding exploitation of variations by counterparties.

The equitable doctrines of estoppel will continue to operate to protect parties who have been detrimentally affected by reasonably relying on unequivocal representations that an oral variation is effective.

Comment

The Supreme Court judgment is welcome, as it provides contractual certainty and settles the law on the effectiveness of NOM clauses. In light of this key decision, the following should be considered when contracting:

  1. When entering into a written contract, parties should consider whether they desire the certainty and protection of a NOM clause or the greater flexibility of oral variation;
  2. When amending a written contract, parties should check whether there is a NOM clause and ensure that the NOM clause is complied with;
  3. When operating under a written contract, parties should ensure that employees are aware of their authority to vary contracts (or lack thereof) and the contractual requirements for the variation to be effective; and
  4. If acting under an oral variation where a NOM clause exists but has not been complied with, parties should seek to put the required written variation in place as soon as possible, remembering that estoppel may (depending on the type of estoppel in question) act only as a defence under English law and cannot form the basis of an action.

It should also be noted that Rock Advertising raised a second fundamental issue in the law of contract, namely, "whether an agreement whose sole effect is to vary a contract to pay money by substituting an obligation to pay less money or the same money later, is supported by consideration." The Supreme Court declined to consider this issue in any detail but the subject remains "ripe for re-examination" in the future.

For more information on this judgment contact Naomi Hall, Solicitor on Naomi.Hall@michelmores.com or +44 (0)207 659 7661.