UK Supreme Court upholds validity and effectiveness of no oral variation clauses

The background to the case was that Rock had licensed offices in London from MWB. The licence included a clause preventing oral variations to the licence. Rock could not keep up with the licence payments and so representatives of Rock and MWB orally agreed to an instalment schedule for payment of part of the rent. MWB subsequently sought to enforce the terms of the original licence. The question arose as to whether the variation was binding on Rock and MWB. 

The Court of Appeal had ruled in favour of Rock that the oral variation was binding based on the importance of party autonomy and also that MWB received a practical benefit from the arrangement so that there was adequate consideration. MWB appealed.

The Supreme Court was asked to consider two issues on appeal:

1. Whether a contractual term precluding amendment to a contract other than in writing (referred to by the Court as a "NOM" or "No Oral Modification Clause") is legally effective ("the NOM issue"); and
2. Whether the variation of an agreement to pay money by substituting an obligation to pay less money or the same money later is supported by consideration, so as to have contractual effect ("the Consideration Issue").

Decision on the NOM Issue

The Court unanimously allowed MWB's appeal finding that the variation was not effective because the parties had not complied with the requirements of the NOM clause.

Lord Sumption gave the leading judgment with which the majority of the court agreed.

He considered that the argument of party autonomy as a justification for not enforcing NOM clauses was a "fallacy" and that it would be greater offence against party autonomy if parties were not able to bind themselves as to the form of a contractual variation. Reference was made to statutes where a prescribed form of agreement was required (such as contracts for the sale of land) and Lord Sumption considered that there was no principled reason why parties could not adopt the same principle by agreement.

Further, Lord Sumption rejected the argument that it is conceptually impossible for the parties to agree not to vary their contract orally because such an agreement would be undermined by the oral variation. Lord Sumption relied on a number of international legal codes that supported the view that there was no conceptual inconsistency between a general rule permitting contracts to be made informally and the enforcement of NOM clauses. He supported this point by analogy with the use of entire agreement clauses in contracts and the courts' willingness to enforce entire agreement clauses to prevent collateral agreements which would otherwise modify the effect of the contract.

Lord Sumption also considered the argument that parties who agreed an oral variation despite the existence of a NOM clause must have intended to dispense with that clause. In agreeing to a NOM clause, the parties agree that variations are invalid and not that they are forbidden. The natural inference of a failure to observe the NOM clause will be that the parties failed to observe the formal requirements of such a clause but that,  if they had put their mind to it,  they were clearly running the risk of invalidity.

Lord Briggs agreed that the appeal should be allowed but on narrower grounds. He disagreed with some of the reasoning of Lord Sumption (including his analogy with entire agreement clauses) and considered that the effect of a NOM clause was that it would be binding on the parties until they have agreed expressly or by necessary implication to do away with the NOM clause.  In the current case,  the oral agreement between Rock and MWB to vary the licence said nothing about the NOM clause and it could not be treated as being disposed of by necessary implication.

Decision on the Consideration Issue

In light of their decision on the NOM issue the Court declined to rule on the Consideration Issue. Lord Sumption considered that the issue and the case law that underpinned it (the rule in Foakes v Beer) was ripe for re-examination but that it merited an enlarged panel of the Court and it should be more than obiter dictum.

Comment

Lord Sumption in his judgment placed some emphasis on the commercial rationale for NOM clauses which he saw as: preventing attempts to undermine written agreements by informal arrangements; avoiding uncertainty about what was agreed in oral discussions and disputes about whether a variation was intended and its terms; and the requirement for formality making it easier for corporations to police internal rules restricting authority to agree them. The judgment of Lord Sumption will give greater certainty to commercial parties and encourage strict compliance with NOM clauses.  The decision of Lord Briggs, however, hints at a more flexible approach. If the parties have orally agreed a change to their relationship and expressly (or by necessary implication) agreed that the NOM clause is to be dis-applied then that variation should, in his view, be effective. This may be of assistance to parties where rigid adherence to the NOM clause may not be practical or necessary. However, the safest option will be to ensure that the variation complies strictly with the terms of the NOM clause.

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You can read extracts of this article in the Lexis Nexis current awareness update: No oral modification clause case will have ‘wide ramifications for all types of contracts’