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Your Word May No Longer Be Your Bond

Those operating at the coal face of commerce know that it is common, and often necessary, for business arrangements to rapidly flex in response to changing circumstances.

Businesses need to be nimble if they are to adapt and survive. Yet, businesses also require certainty with regard to their contractual rights and liabilities. These two needs can clash, as was seen in a recent Supreme Court decision which came down on the side of certainty over flexibility.

In what was described by the Supreme Court as raising a “truly fundamental issue in the law of contract”, the decision in Rock Advertising Ltd v MWB Business Exchange Centres Limited has confirmed that legal effect will be given to 'No Oral Modification' clauses (NOMs).

What is a NOM?

A NOM is a clause which may be included in many types of contract and states that the contract may not be varied orally. Such clauses typically require the parties to agree variations in writing, and for the variation to be signed by both parties. It is common to see these clauses in practice.

The facts in the Rock Advertising case

Rock Advertising was the licencee of serviced offices, managed by MWB, with a written licence agreement which included a NOM.

Rock was suffering from financial difficulties and fell into arrears with the licence fee. Representatives of Rock and MWB agreed a reduced licence fee for a period over the telephone. It was also orally agreed that the licence fee would later increase above the original level, so that the licence fee arrears would be cleared by the end of the year. Rock paid the first instalment of the reduced licence fee but MWB then denied Rock access to the premises and purported to terminate the licence in reliance upon the NOM.

At first instance, the trial judge found that the oral variation agreement was not valid due to the existence of the NOM. The Court of Appeal took a different view and held that the parties’ contractual autonomy allowed them to agree to disapply the NOM clause.

The Supreme Court’s decision

The Supreme Court’s view was that a contract containing a NOM clause could only be varied by the method prescribed by that NOM clause. So the variation to the licence fee arrangement made on the telephone was not binding on the parties. Whilst this may sound like an obvious and uncontroversial conclusion, it does break rank with other common law jurisdictions and is a significant victory for certainty over contractual freedom and flexibility.

As Lord Sumpton noted in his judgment: “party autonomy operates up to the point when the contract is made, but thereafter only to the extent that the contract allows.”

Special considerations for property contracts

This dispute concerned a licence agreement which is a form of simple contract. There are no formal requirements for the validity of a simple contract.

In contrast, contracts for the sale, or other disposition, of an interest in land must be in writing, signed and incorporate all the terms expressly agreed by the parties. This is the requirement of Section 2 of the Law of Property (Miscellaneous Provisions) Act 1989. Many property contracts (and any agreement to vary such contracts) will be caught by Section 2 in any event and will not be capable of oral variation.

Practical considerations

  1. In many instances, the parties to a contract will prefer the certainty that this decision brings. If a contract says it cannot be orally varied, then that will be upheld and the written agreement cannot be undermined. Misunderstandings and uncertainties will be avoided and it will be easier to police contractual arrangements. Future litigation may be avoided. It should be noted, however, that an oral variation could still, on rare occasions, give rise to an estoppel. Thus, equity may prevent a party from relying on a NOM, where that party has represented that an oral variation is valid and the other party has reasonably relied on this.
  2. The reality of commercial agreements, however, is often not quite so black and white. Contracts are living, breathing arrangements and it is very common for parties to agree minor variations, on a day-to-day basis, to oil the wheels of commerce. In future, where a contract contains a NOM, the parties will need to ensure that any changes to the agreement are documented in writing. Such changes could include seemingly innocuous variations, such as a minor extension of a deadline or a small change in the specification of a product which a supplier has contracted to provide. The effect of the Supreme Court decision is that those who deal with day-to-day operations will need to be periodically reminded by in-house counsel of the existence of NOMs and advised of the need to adhere to their requirements. Equally, there may be specific occasions when the parties feel that the flexible or time-critical nature of a contractual arrangement is such that it is not appropriate to include a NOM in the contract at all.

Autumn 2018

Key Contact

Elizabeth Thomson