Thu 17 May 2018

The UK Supreme Court on "No Oral Modification" Clauses

On 16 May 2018 the UK Supreme Court gave its judgement in the case of Rock Advertising Limited v MWB Business Exchange Centres Limited [2018] UKSC 24. 

At the heart of the case was one of the most fundamental issues in modern contract law - whether a contractual term that provides that an agreement may not be amended save in writing signed on behalf of the parties (referred to as a "No Oral Modification" or "NOM" clause) is legally effective. While the judgement arose out of an English litigation and it is by no means certain that it will be followed in Scotland, it will obviously be highly persuasive to the Scottish courts.

The NOM clause was in a contractual licence between the parties to occupy office space at Marble Arch Tower in London. It 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". There was then a discussion between the parties' representatives on the telephone in the course of which the claimant's director contented that the respondent's representative had agreed to vary the licence in accordance with a revised schedule of payments which had been prepared. The effect of the revised schedule was to defer part of the February and March payments and to spread arrears over the remainder of the licence. The respondent contended that no such agreement had been reached and that, in any event, no variation of the licence could take place orally on the basis of the NOM clause.

The High Court had found that the provisions of the NOM clause could not be departed from. The Court of Appeal disagreed. It held that an oral agreement to revise the schedule of payments amounted to an agreement to dispense with the provisions of the NOM clause. The Supreme Court (in a judgement given by Lord Sumption) starts by looking at the arguments for treating NOM clauses as ineffective. First, a variation of an existing contract is also a contract. Secondly, there are no requirements of form on the making of contracts. Thirdly, the parties must have intended to dispense with the existing clause by the mere act of reaching an oral agreement. The court also cited Cardozo J in his judgement in the New York Court of Appeals in Beatty v Guggenheim Exploration Co (1919) 225 NY 380 in which he said "Those who make a contract, may unmake it. The clause which forbids a change, may be changed like any other. The prohibition of oral waiver, may itself be waived. Every such agreement is ended by the new one which contradicts it".

The Supreme Court, however, did not agree and held unanimously that the law should give effect to NOM clauses. Lord Sumption regarded the party autonomy argument as a fallacy. It would be unsatisfactory if parties could not validly bind themselves as to the manner in which future changes in their legal relations are to be achieved, even if they have clearly expressed their intention to do so. Party autonomy only exists up to the point that the contract is made but, thereafter, only to the extent that the contract allows. Further, there are very good commercial reasons why NOM clauses are inserted into agreements. First, they prevent attempts to undermine written agreements by more informal means. Secondly, oral discussions can give rise to misunderstandings that written agreements are more likely to avoid. Thirdly, formality in recording variations makes it easier for companies to police internal rules restricting authority to agree them.

The Supreme Court also considered that the reasons for disregarding NOM clauses were entirely conceptual. As Lord Sumption said "The argument is that it is conceptually impossible for the parties to agree not to vary their contract by word of mouth because any such agreement would automatically be destroyed upon their doing so". If that argument was to hold, then it cannot be done.  But there are many legal systems and international codes which impose no formal requirements of validity and yet give effect to NOM clauses. So the conceptual difficulties are not insurmountable.

Ultimately, according to the court, there is no conceptual inconsistency between a general rule allowing contracts to be made informally and a specific rule that effect will be given to a contract requiring variations to be in writing. It is not the case that parties to an oral variation of a NOM clause must have intended to dispense with it. The more natural inference is that the parties' failure to agree a variation in writing is that they overlooked the clause, not that they intended to dispense with it. If, on the other hand, they knew about the clause and ignored it, then they must have known that their variation would run the risk of being invalid.

Lord Briggs gave a concurring opinion on slightly different grounds. He agreed with Lord Sumption's proposition that parties who orally agree the terms of a variation do not impliedly agreed to dispense with the NOM clause. However, he did not think entire agreement clauses were an apt analogy. As they do not bind the parties' future conduct they do not suffer from the same conceptual difficulties as NOM clauses. A better analogy, in his view, is the way in which the law treats negotiations subject to contract where the parties may abandon the requirement of a formal written agreement only expressly or by necessary implication. NOM clauses, according to Lord Briggs, bind the parties in the same way (i.e. until they agree to do away with them expressly or by necessary implication).

This is an important addition to the law of contract and will affect any of us regularly dealing with written agreement whether in the commercial, corporate, property or employment contexts where such clauses regularly apply. As I outlined at the outset of the article, it is a judgement arising from an English case and it is, therefore, not free from doubt that it would apply in Scotland. However, it would be unsatisfactory if this aspect of contract law looked at differently north and south of the border and the same conceptual difficulties have always been an issue in Scotland. It may, therefore, be expected that the Scottish courts will follow this judgement.

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