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Non-oral modification clauses: between a Rock and a hard place? No more!

Posted on 31 May 2018

Non-oral modification clauses: between a Rock and a hard place? No more!

Reversing the decision in the Court of Appeal, the recent Supreme Court decision in Rock Advertising v MWB Business Exchange Centres has confirmed that non-oral modification (or "NOM") clauses in written agreements are enforceable.

Facts

When Rock Advertising fell into licence fee arrears to occupy one of MWB's office spaces, it proposed a revised payment schedule to defer part of its February and March payments and to spread its accumulated arrears over the remainder of the term of the licence. 

A telephone conversation took place in which, so Rock claimed, an MWB credit controller verbally accepted this revised payment schedule (although MWB denied this).

After MWB locked Rock out of the building for non-payment and sued for arrears, Rock brought a counter-claim for wrongful exclusion on the basis that an oral agreement between the parties in relation to the outstanding sums had been reached. 

MWB rejected this contention, relying on a clause in the licence which stated that variations "must be agreed, set out in writing and signed on behalf of both parties before they take effect". 

Rock's fate therefore turned on whether a written agreement with a NOM clause could still be varied verbally

Decision

The Supreme Court agreed with MWB's interpretation and upheld the appeal, concluding that the law should and does give effect to NOMs.  As a result, the oral modification between the parties was ineffective as it was not recorded in writing as required by the express terms of the contract. 

Lord Sumption, who gave the leading judgment of the Court, set out three reasons for this:

  1. It prevents abuse from parties attempting to undermine written agreements by informal means.
  2. It prevents oral discussions giving rise to misunderstandings and disagreements in relation to exact terms.
  3. It makes it easier for contracting parties to police their internal rules and restricts the authority to agree variations to them.

Whilst the court below had preferred to allow parties autonomy to vary their contracts, the Supreme Court said that there was already an avenue to do so – simply by recording any agreed variation in writing, signed by both parties.  Therefore there was no difficulty in the parties simply complying with the formalities set out in their contract, if that is what they had wanted.  

The Supreme Court's judgment removes uncertainty caused by earlier inconsistent court decisions.  It lays down simple, clear rules for contracting parties and is good news for those who include NOMs in their standard terms and conditions.

Consequences

Though the issue of NOM clauses in this case arose in a property context, the judgment has far wider implications for all written commercial contracts. 

While the interpretation of each contract will turn on its own terms, contracting parties and their advisors can now be confident that when dealing with NOMs, parties must comply with their terms if the intended modifications are to be binding.

This judgment significantly reduces the opportunities for a contracting party to argue that an inadvertent oral agreement is binding.  The Supreme Court did, however, make clear that in appropriate cases of injustice, other legal principles (such as estoppel) will still have a role to play in safeguarding the interests of contractual parties. 

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