The rocky ground of non-compliance with a “no oral modification” clause

14 June 2018

Author: Rachel Craig
Practice Area: Corporate - M&A

Rachel_craig

A ‘no oral modification’ or a “NOM” clause is a common feature in written contracts which gives parties a degree of assurance that a written agreement between them cannot be unilaterally undermined by the other, or have its terms informally amended. The UK Supreme Court (the “UKSC”) recently handed down judgment on the subject of NOM clauses in an appeal which the UKSC itself described as “exceptional”.

Background

MWB Business Exchange Centres Ltd. (“MWB”), an operator of serviced offices in central London, licensed office space (the “Premises”) to Rock Advertising Ltd (“Rock”) pursuant to the terms of a licence which commenced on 1 November 2011 (the “Licence”). The Licence contained, inter alia, the following term: “This Licence sets out all of the terms as agreed between MWB and Licensee. No other representations or terms shall apply or form part of this Licence. 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”).

By February 2012, Rock was in arrears and its sole director, Mr Idehen, proposed a revised schedule of payments to a credit controller employed by MWB, Natasha Evans. The revised schedule purported to defer part of the February and March payments and to spread the accumulated arrears across the remainder of the Licence term. Mr Idehen’s view was that Ms Evans agreed to vary the Licence accordingly; Ms Evans, however, viewed the revised schedule as a proposal in a continuing negotiation and she escalated it to her boss, who rejected it.

On 30 March 2012, MWB locked Rock out of the Premises on account of its failure to pay the arrears. MWB then terminated the Licence with effect from 4 May 2012. Was the variation agreement effective in law?

First instance

At first instance, the County Court found that an oral agreement had been made between Mr Idehen and Ms Evans to vary the Licence in accordance with the proposed revised schedule. The County Court also held that the variation agreement was supported by consideration. However, the County Court found in favour of MWB, holding that the variation was ineffective because it was not recorded in writing and signed on behalf of both parties, as required by Clause 7.6.

Court of Appeal

The Court of Appeal agreed with the County Court that the Licence had been varied and that the variation was supported by consideration. However, the Court of Appeal reversed the first instance decision stating that the oral agreement to revise the schedule of payments amounted to an agreement to dispense with Clause 7.6. The Court of Appeal’s decision sought to emphasise the parties’ autonomy and freedom of contract.

UKSC

The UKSC allowed the appeal, finding that Clause 7.6 was legally effective. The UKSC’s decision was unanimous, though Lord Briggs dissented as to reasoning.

Lord Briggs

Lord Briggs’ view was that a NOM clause should continue to bind parties to a contract until such time as the parties expressly (or by strictly necessary implication) agreed to dispense with it, which they were free to do even without complying with the formality of the NOM clause.

The majority of the UKSC, however, took a stricter approach.

Lord Sumption

In giving his judgment Lord Sumption (with whom Lady Hale, Lord Wilson and Lord Lloyd-Jones agreed) noted that the effect of the approach taken by the Court of Appeal in its judgment was “to override the parties’ intentions”. Instead, and based on previous case law, Lord Sumption’s view was that “the law should and does give effect to a contractual provision requiring specified formalities to be observed for a variation.” Reassuringly, this judgment is a reminder from the UKSC that the courts will seek to give effect to parties’ intentions in a contract as far as possible. Lord Sumption could find no contradiction between the fact that a contract, under English law, could be made informally and that a NOM clause would be given effect to by the courts.

Although the Court of Appeal, in reaching its judgment, had sought to give effect to party autonomy, Lord Sumption observed that “party autonomy operates up to the point when the contract is made, but thereafter only to the extent that the contract allows. Nearly all contracts bind parties to some course of action, and to that extent restrict their autonomy.” As such although English law permits contracts to be made informally, once an agreement is reached, there are parameters within which such agreement is to be carried out. To act otherwise places a party on rocky ground. The ability to reach an agreement informally does not give parties carte blanche to act as they please following such agreement. NOM clauses therefore, together with entire agreement clauses, are used by contracting parties to achieve “contractual certainty”.

The UKSC, however, did seek to acknowledge party autonomy in observing that NOM clauses do not forbid contract variations (which would be offensive to the principle of party autonomy); but they do render invalid any informal agreement to vary the contract that is not in accordance with the terms of the agreement.

Consequently Lord Sumption concluded that the oral variation made between MWB and Rock was invalid for the same reason as the County Court: it was not in writing and signed as per Clause 7.6 of the Licence. In light of reaching this conclusion, Lord Sumption did not address the issue of whether consideration had adequately been given for the variation.

Practical considerations

The UKSC’s decision will be welcomed by parties who include NOM clauses in their contracts for legal certainty. Such clauses are likely to be upheld by the courts. The clarity and certainty given in this recent decision may, in itself, reduce the volume and cost of litigation coming before the courts as a result of oral variations.

If and when seeking to vary a contract, parties should ensure they comply with the requirements of NOM clauses and any other formal requirements included in the contract in question – or else they run the risk that any attempted variation will not be effective. And in light of the UKSC’s recent decision, parties who do not comply with the formal requirements for variation will have limited recourse before the courts.

Parties who rely on significant long-term contracts should ensure that these are reviewed regularly to ascertain if they are being operated within their terms and to identify the need for any formal variations. Any required variations should then be carried out strictly in accordance with the terms of the contract in question.

Back