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Why a recent Supreme Court decision on 'no oral modification' clauses may signal the death of the side deal

Posted on 29 May 2018 by Simon Leaf

Why a recent Supreme Court decision on 'no oral modification' clauses may signal the death of the side deal

Simon Leaf, Managing Associate (Technology & Sport), looks at the implications that the recent ground-breaking decision by the Supreme Court will have on commercial contracts going forwards.

For some time lawyers have debated the merits of including clauses in contracts that state that the agreement shall not be amended unless agreed in writing (commonly known as a "no oral modification" or "NOM" clause) given that the same parties could then later vary such clauses. However, the debate appears to have now been settled following the Supreme Court's unanimous judgment in Rock Advertising Limited (RA) v MWB Business Exchange Centres Limited (MWB) on 16 May 2018, where it decided that a "NOM" clause was effective in defeating a subsequent oral variation of an agreement.

On the face of it, an outcome of 'court upholds what is written in a contract' may not come as much of a surprise. However, when analysed more closely, it is potentially ground-breaking as it suggests that contracting parties can bind themselves going forwards – therefore restricting how they go about doing business with each other – even if the world and their relationship have moved on from when they signed the original contract.

This decision will arguably be music to the ears of large organisations who can sometimes struggle to reign in over-eager sales and procurement teams doing side deals that conflict with what has been agreed in carefully negotiated and drafted contracts. Such side deals can put an organisation in potential difficulty when it later struggles to honour those ad hoc, oral commitments. In the past, case law has shown that provided such deals were validly agreed (including orally), they would override the existing agreement (including any NOM clause). However, following this decision, where there is a NOM clause, contracting parties will need to refer back to the original agreement when agreeing and documenting changes. As a result, it strengthens the need to get the drafting right when entering into a contract in the first place, because it will be harder to amend the agreement later.  

Nevertheless, it remains to be seen how far the courts will go in their approach to NOM clauses. For example, will they insist that a lengthy change control procedure must always be followed for any relevant changes to be effective? If so, this opens up the door for a party wanting to protect the original deal to make it as hard as possible for changes to be made later down the line. So, while on the face of it, it appears the Supreme Court is standing up for contractual certainty, in practice, the decision may actually make life more uncertain for parties – particularly when they do not follow specified procedures in the original agreement.

Brief Overview

RA took a licence to occupy office space in one of MWB's centres back in 2011. The licence provided that "all variations to this Licence must be agreed, set out in writing and signed on behalf of both parties before they take effect". However, when RA got into financial difficulty, it orally agreed with one of MWB's representatives to reduce the rent and pay the outstanding amounts over the coming months. This agreement was not committed to writing. RA was then surprised to find that it had been locked out of the premises. MWB sued for the amounts outstanding and RA counterclaimed for damages for wrongful eviction.

Prior to this case reaching the Supreme Court, NOM clauses were generally seen as an indication of the intention of the parties at the time of contracting and therefore arguably unenforceable against subsequent oral variations. In other words, such clauses could effectively be waived orally by the parties agreeing something completely different to what they had signed up to in the contract at a later stage.

The Decision

All of the judges agreed (albeit Lord Briggs gave a slightly different reason for his support to the majority) that the NOM clause was effective in preventing a subsequent variation that did not comply with the original agreement. There is one important caveat however in that the party seeking to rely upon the oral variation (here, RA) may demonstrate that the other party (MWB) is estopped from arguing that the oral variation was ineffective. Estoppel is not a particularly easy legal concept, but for RA to succeed on this point it would essentially have had to demonstrate that it had taken active steps in reliance on the oral variation to its detriment; something it was unable to do in this instance. RA had only benefitted from the rent reductions, and had taken no steps to its detriment.

The Supreme Court was also invited to revisit a long-standing (and presently uncertain) question of whether a contract variation that means one side accepts getting less than it originally bargained for (i.e. MWB receiving less rent) when not altering its own performance (i.e. MWB still providing the office space to RA) fails due to lack of consideration. Due to the outcome on the main question of whether the NOM clause was enforceable, the Supreme Court declined to take the opportunity to answer whether the oral variation was defective in its own right due to lack of consideration.

In conclusion, while this decision will certainly be cheered by those that have been burnt by side deals that have not been formally concluded in line with the provisions of an original agreement, it will mean that organisations should ensure that not only the original agreement contains a variation clause that reflects how they practically go about making changes to agreements but also that any variations that are then made comply with the original provisions.

 

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