Holding parties to their bargain: the Supreme Court enforces a “no oral variation” clause

The Supreme Court has overturned a Court of Appeal decision that allowed a contractual clause requiring variations to the contract to be in writing to be overridden by a later oral agreement. This decision will help to provide certainty to contracting parties and may reduce the frequency and costs of disputes about alleged oral variations.

Background

In Rock Advertising Limited v MWB Business Exchange Centres Limited [2018] UKSC 24, Rock Advertising Ltd (“Rock”) entered into a licence with MWB Business Exchange Centres Ltd (“MWB”) to occupy office space for a fixed term of 12 months. The licence contained a clause requiring all variations to be set out in writing and signed on behalf of both parties.

Six months later, the director of Rock had a telephone conversation with MWB’s credit controller about payment arrears. The court at first instance found that, during this conversation, a variation to the payment schedule was agreed. However, MWB treated the variation as merely a proposal and ultimately rejected the varied schedule, locked Rock out of the premises for failure to pay the arrears, and terminated the licence.

The decision

The Court of Appeal had previously held that, as a matter of principle, a “no oral modification” (“NOM”) clause cannot be effective because party autonomy dictates that parties are free to vary the clause itself orally. Where parties agree orally to vary a contract containing a NOM clause, the court held that it was necessarily implied that they also intended to vary the NOM clause to allow the oral variation.

The Supreme Court disagreed. Lord Sumption, giving the leading judgment, found that the proper understanding of party autonomy is that parties are free to bind their future conduct by agreement. This includes the manner in which future changes to their legal relations are to be achieved, as in a NOM clause. Lord Sumption made particular note of the certainty this will give contracting parties and corresponding reduction in litigation risk. The effect of this is that a NOM clause will successfully prevent oral modification of the contract, unless the NOM clause itself is first varied in accordance with its own requirements, i.e. in writing.

Lord Briggs concurred with the outcome on slightly different grounds. He held that NOM clauses can be varied orally, but only by an express reference to the NOM clause or where the variation is a strictly necessary implication of the parties’ subsequent agreement. This would usually only be the case where the agreement was immediately implemented in circumstances giving rise to an estopped. On the facts, this did not apply in the current case.

On the basis that the court held that the oral variation was ineffective, it was not required to rule as to whether a practical benefit, such as an increased chance of payment, can be regarded as good consideration and as such fulfil one of the requirements to create a binding contract (including a variation agreement). However, the court noted that this area of law is “ripe for re-examination” in a future case.

Comment

This decision will bring welcome certainty to contracting parties and their advisors. Parties can now be more confident that the written contracts and documentation they possess fully reflect the terms of the agreement, which may in turn reduce the volume and cost of litigation about oral variations.

This case also functions as a reminder to parties that when varying a contract, they should check to see if there are any formal requirements for variation. Parties who subsequently wish to dispense with an NOM clause should agree this expressly and record that agreement in writing.

The authors would like to acknowledge the assistance of Mitchell Abbott, Trainee Solicitor, in preparing this article.