Supreme Court enforces No Oral Modification clause

In Rock Advertising Ltd v MWB Business Exchange Centres Ltd [2018] UKSC 24, the Supreme Court has upheld a “No Oral Modification” or “NOM” clause in a licence agreement thereby overturning the decision of the Court of Appeal, who found the clause to be invalid.

A NOM clause aims to limit variations to a contract to those that are agreed in writing by the parties. The clause in question was worded as follows:

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

NOM clauses are used to avoid informal oral variations to a contract which can lead to uncertainty and disputes as to whether a variation has occurred and its terms.

Rock Advertising entered into a licence with MWB to occupy office premises in London for a fixed term of twelve months but after falling behind on its payments, Rock proposed a revised payment schedule. When MWB went on to exclude Rock from the premises, terminate the licence and claim for arrears, Rock argued that MWB had agreed orally to the new payment schedule and counterclaimed for damages.

The County Court found in favour of MWB, that any oral variation would be ineffective but the Court of Appeal disagreed, allowed the variation and reasoned the that the parties were entitled to agree orally to dispense with the NOM clause.

The Supreme Court, in overturning the Court of Appeal’s decision stated that the law should give effect to a contractual provision requiring specified formalities to be observed for a variation. The Court recognised that these types of clauses are commonly included in written agreements and are used for legitimate commercial reasons, that is: to prevent attempts to undermine written agreements by informal means; to avoid misunderstandings and disputes created by oral discussions; and to provide formality in recording variations making it easier for corporations to police internal rules for agreeing to variations.

The argument previously put forward by the Court of Appeal, who invalidated the NOM clause, in favour of party autonomy was held to be a fallacy by the Supreme Court, as party autonomy operates up to the point when the contract is made, but thereafter only to the extent that the contract allows. Parties should be able to validly bind themselves as to the manner in which future changes in their legal relations are to be achieved.

The Supreme Court went on to say that the reasons for disregarding NOM clauses in case law are entirely conceptual. The argument that it is conceptually impossible for the parties to agree not to vary their contract orally because any such agreement would automatically be destroyed upon their doing so, doesn’t hold up. There are examples of legal systems and widely used codes which contain a general rule allowing contracts to be made informally and a specific rule that effect will be given to a contract requiring writing for a variation, so succeeding in overcoming any possible conceptual inconsistency. If parties fail to observe the formal requirements of a NOM clause then the natural inference is not that they intended to dispense with it but that they overlooked it.

The Supreme Court raised the concern that the enforcement of NOM clauses carries with it the risk that a party may act on the contract as varied by an oral communication, by performing it and then finding itself unable to enforce it. In which case, that party may seek to rely on estoppel, so that if certain requirements are fulfilled, the other party can be estopped from relying on the original contractual provision setting out the no oral variation condition. The requirements are that a party has engaged in conduct that amounts to a clear and unambiguous representation that it agrees to the variation, it has conducted itself so that a reasonable person would have believed it was meant that the party should act on it and the other party to the contract did, in fact, act on the representation. The Supreme Court did point out that the scope of estoppel cannot be so broad as to destroy the whole advantage of certainty set out by the parties when agreeing to include the NOM clause.

This Supreme Court decision will provide clarity on the use of these types of no oral variation clauses and supports an adherence to the parties’ original intentions when forming the contract.