Observe the formalities: the Supreme Court upholds anti-oral variation clauses


Author: Leigh Callaway


Leigh Callaway, Senior Associate, Fladgate LLP (lcallaway@fladgate.com)

Chris Wilkinson, Trainee Solicitor, Fladgate LLP (cwilkinson@fladgate.com)


 

In a judgment with potentially wide-reaching commercial ramifications, the Supreme Court in Rock Advertising Limited (Respondent) v MWB Business Exchange Centres Limited (Appellant) [2018] UKSC 24, has overturned the Court of Appeal’s decision by holding that a ‘No Oral Modification’ (NOM) clause was legally effective.

In 2011, Rock Advertising Ltd (Rock Advertising) entered into a licence with MWB Business Exchange Centres Ltd (MWB) to occupy office space. By 2012, Rock Advertising had accumulated arrears of licence fees of more than £12,000. The licence included the following NOM clause:

All variations to this Licence must be agreed, set out in writing and signed on behalf of both parties before they take effect.

Rock Advertising contended that a revised payment schedule (by which ongoing fees and arrears would be settled) had been agreed orally by a company director of Rock Advertising and a credit controller of MWB, while MWB stated that it was merely a proposal. MWB locked Rock Advertising out of the premises for failure to pay and brought proceedings against Rock Advertising for the arrears. The court was asked to determine, inter alia, whether the oral agreement to the payment plan varied the licence, despite the fact that the licence agreement contained a NOM clause.

The claim progressed to the Supreme Court, which unanimously agreed that the decision of the High Court should be upheld and that the NOM clause was effective, while the variation was not.

In a finding of great significance to parties to commercial agreements, the Supreme Court held that to allow the oral variation, in this case, would be to go against the intentions of the parties when they entered into the agreement. The parties were able to decide exactly what wording went into the agreement and in doing so state their intentions; including how they wished to be able to validly bind themselves in relation to any variation of the contract and any changes to their legal relations. During the contractual negotiation process parties have the autonomy to specifically omit a NOM clause or draft it in such a way that they are content to include it.  If the parties wish to have the most flexibility possible in relation to oral variations of the contract, then the best course of action is to include a NOM clause that each party is content to abide by or none at all.

In short, as noted by Lord Sumption in the leading judgment: “…the law should and does give effect to a contractual provision requiring specific formalities to be observed for a variation”.  In the case of the licence in question, this included a NOM clause, and therefore those specific formalities, namely the need for all variations to be in writing and signed on behalf of both parties, should have been observed. Whereas the importance of allowing flexibility in commercial dealings was noted, the court held that: “Party autonomy operates up to the point when the contract is made, but thereafter only to the extent that the contract allows”.

Interestingly, Lord Briggs, in a separate judgment which dissented as to the reasoning but not as to the result, indicated that if the parties in this case had specifically referenced in their oral discussions that their oral variation to the payment schedule also included an amendment to remove the NOM clause from the contract, then the variation would have been upheld. Given the majority judgment of Lord Sumption, however, it is unlikely this will provide any relief to commercial parties in respect of post-contractual variations.

The clarity provided by the Supreme Court, whilst perhaps frustrating to commercial parties who may be more occupied with doing deals than observing the legal niceties, should nevertheless be welcome. The position is now clear: where parties have contractually agreed to prescribe a particular form by which variations to their legal relationship are to be achieved, those formalities will need to be satisfied. Informal agreements which do not satisfy that form will not be valid.

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