Tue 29 May 2018

Supreme Court upholds clause restricting informal variation of contract

Overturning the Court of Appeal, the Supreme Court has confirmed that "no oral variation" clauses are enforceable.

Although the case of Rock Advertising Limited v MWB Business Exchange Centres Limited concerned a contractual licence to occupy office  space in Marble Arch Tower in London it concerned a fundamental issue of contract law which is equally applicable in employment contracts. 

The point in dispute was whether a contractual term stating that an agreement may not be amended other than in writing signed on behalf of the parties (often called a "No Oral Modification" clause or "NOM") was legally enforceable.  The aim of NOM's is to prevent informal and perhaps unintentional variations being made to an agreement orally.

The case turned on whether the alleged oral variation of a payment schedule was effective in law. 

The case went to the Supreme Court which unanimously held that contractual provisions requiring specified formalities to be observed for a contractual variation were effective.  By including a NOM clause in a contract the parties clearly intended to bind themselves as to how future changes were to be achieved.  There were legitimate commercial reasons for using NOM clauses including prevention of attempts to undermine written agreements by informal means and avoiding disputes about whether a variation was intentional and what its exact terms were.

This decision does bring with it the benefit of certainty for parties to a contract.  However, it also brings with it the risk of parties informally agreeing variations to contracts, one of the parties then acting in good faith on the basis of the variation but the other subsequently relying on the NOM to avoid the agreed change.  The Supreme Court recognised that estoppel (or personal bar in Scotland) might safeguard against this (where the actions of the parties would unequivocally show that the variation was valid notwithstanding the informality) but evidence of more than just the agreement to vary would be required to support that. 

Going forward employers need to ensure that anyone with authority to vary contracts is aware of the existence of any NOM clause in a contract of employment and that either the proper formalities for variations are abided by or, if greater flexibility is required, the parties validly vary the contract to remove the NOM clause.

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