UK Supreme Court confirms that No Oral Modification clauses are binding.
The Supreme Court recently ruled that clauses which limit a party’s ability to vary a contract, also known as “no oral modification clauses” (NOMs), are binding on the parties. Subsequently, it was held that a proposed oral variation to a contract was ineffective.
In Rock Advertising v MWB Business Exchange Centres  UKSC 24, the Supreme Court clarified that NOMs, which are intended to impose specific formalities for variation, embrace the fundamental issues in the law of contracts and are legally binding on the parties to the contract. This decision, confirming that oral modifications will not be effective if the contract contains a NOM clause, shows a change in the direction of the courts, going against previous decisions.
MWB Business Exchange Centres Ltd (MWB) had granted Rock Advertising Ltd (Rock) a contractual licence to occupy office space in London.
This licence contained a clause stating that “All variations to this Licence must be agreed, set out in writing and signed on behalf of both parties before they take effect”.
Rock had fallen into significant arrears with its payments and proposed a revised payment schedule. Although as a result MWB would receive less overall, this would increase their chances of recovering some payment.
Rock alleged that MWB had orally accepted the revised schedule. However, MWB continued on the basis that this schedule had not been accepted, locking Rock out of the premises and terminating the licence. MWB then went on to issue a claim for the arrears.
Rock then counterclaimed for wrongful exclusion. Both claim and counterclaim centred around whether the agreement had been effectively varied.
The Supreme Court allowed MWB’s appeal, despite the decision of the Court of Appeal finding the NOM clause to be unenforceable. The Supreme Court held that the parties were bound to the NOM clause and that the oral variation was ineffective.
The Supreme Court considered the legitimate, commercial reasons for including such clauses, and based its decision on the following reasons:
- NOM clauses prevent attempts to undermine written agreements by informal means, which may be open to abuse;
- NOM clauses avoid disputes not just about whether a variation was intended but also about the exact terms; and
- Recording variations makes it easier for corporations to police internal rules restricting the authority to agree them.
The Supreme Court examined the reasons as to why businesses agree to NOM provisions and held that it was not the courts role to interfere or obstruct the intentions of such businessmen, nor was it to override parties’ intentions to bind themselves to a contract.
This decision has brought welcome clarification to an area of contract law that has been uncertain for some time.
It is now clear that where parties have agreed to a NOM provision, the safest and most sensible approach to make any changes it to make such variations in writing.
Nevertheless, we are sure that parties will continue to make oral variations with a desire to confirm such variation in future. However, the Supreme Court’s latest decision has made it clear that parties who adopt this approach will face the risk that such an oral variation will not be an effective amendment to a contract.
Contractual parties to commercial agreements should take note of this decision and be mindful to the risks they are exposing themselves to in proceeding to perform based on an oral modification where NOM clauses are present. Parties seeking to vary a contract must be sure to review the terms of their contracts and comply with any formal requirements contained within such contracts.
If you have any questions on the above, or would like any further advice on commercial contracts, please contact Dan Dowen on firstname.lastname@example.org or 02920 345511.