Picture the unfortunately common scenario:
- The Party A person with responsibility for the day-to-day performance of a commercial contract orally agrees some variation over the telephone with Party B's representative, under full authority to do so on behalf of Party A.
- No attention has been paid to the fact that the underlying contract has, buried away in the boiler print provisions section, a "No Oral Modification" clause inserted by diligent lawyers keen to minimise risk of litigation about performance under the contract.
- The agreed variation concerns a revised schedule of payments – the effect of which is to defer part of two months' payments and to spread the accumulated arrears over the remainder of a licence term. This proposal is verbally agreed, but not recorded in writing (as required by the terms of the original contract).
- Two months later, Party B terminates the licence on account of Party A's failure to pay the arrears. Party A is then sued for the arrears. Party B denies that the oral amendment ever happened and/or argues that any such oral agreement is unenforceable and seeks to rely on the original payment terms of the agreement.
A recent case with similar facts to the above saw the Court of Appeal and the Supreme Court arrive at different conclusions as to the legal effect of a term prescribing that an agreement may only be amended in writing and signed on behalf of the parties – Rock Advertising Limited (Respondent) v. MWB Business Exchange Centres Limited (Appellant) [2018] UKSC 24.
What is a "No Oral Modification" (NOM) clause?
A NOM clause is routinely used in commercial contracts in order to restrict how future amendments or variations to a contract can be made. A NOM clause typically looks something like:
"No variation to this contract will be valid unless it is in writing and signed by or on behalf of both parties."
Or, less stringently:
"Any variation of this agreement must be agreed by both parties and recorded in writing."
The main purpose of such clauses is to achieve contractual certainty as to how any subsequent variations should be made. If no NOM clause existed, the parties would not be precluded from agreeing further variations purely orally (see below for the default position). However, oral discussions can easily give rise to misunderstandings and disputes about the exact terms of the variation, and this type of "he said she said" scenario may not always be welcome by business people. Insisting upon the formality of committing contractual variations to writing may also assist companies in policing internal rules restricting the authority to agree variations.
What is the common law / default position?
At common law there are no formal requirements for the validity of a simple contract provided the essential elements of offer, acceptance, consideration and intention to create legal relations are satisfied.
The advantages of the common law’s flexibility about formal validity are that it enables agreements to be made quickly and informally without any obligation to have legally drafted documents.
The main thrust of the Court of Appeal's argument was that to insist on enforcing a NOM clause in the face of an oral amendment would be to override the parties' intentions. In other words, the mere act of agreeing a variation informally when the principal agreement required writing means that they must be taken to have intended to do this. The Court of Appeal maintained a conceptual argument that parties cannot bind themselves as to the manner in which future changes in legal relations are to be achieved.
However, The Supreme Court noted that in many cases, statute prescribes a particular form of agreement in the interests of public policy, (such is the case in contracts for the sale of land and certain regulated consumer contracts), and held that there is no good reason why contracting parties should not adopt the same prescriptions by agreement, especially given the prospect that a NOM clause can itself be removed.
The balance
Businesses (as assisted by advisers) need to strike a balance between preserving party autonomy – allowing parties the freedom to amend agreements in whatever manner they so wish at a particular point in time – and mitigating the risk of ambiguity over the precise scope of new terms which are different from those previously recorded in writing in a contract. However, as things stand, if a NOM clause appears in a contract, parties wishing to vary that contract should do so in writing in accordance with the NOM clause's precise requirements if the contractual amendments are to be valid and binding on the parties.