"Exceptional" appeal overturns law on oral contract variations

"Modern litigation rarely raises truly fundamental issues in the law of contract. This appeal is exceptional. It raises two of them."

So starts a judgment that establishes itself as an instant classic for fans of judicial clarity, and solves a particularly troublesome source of disputes for businesses. The decision establishes that, contrary to recent judicial doubt, a 'no oral modification' (NOM) clause can be effective in preventing a contract from being subsequently varied orally

What's the issue?

The scenario that gave rise to the dispute in this case will be only too familiar to in-house lawyers and contract managers:

• A contract (in this case a licence to occupy office premises) requires a business to make payments by specific dates.
• The business falls behind on its payments, but orally agrees a revised schedule of payments that offer it some relief.
• A dispute arises as to what exactly was agreed and the other party (the landlord) looks to rely on the original contract requirements.
• The landlord points out that the contract contained a NOM clause, so even if there had been an oral agreement to vary the contract (which it denies), that agreement would not be effective.

Until now, that would not necessarily have been the end of the matter. The courts in recent years have cast doubt on whether a NOM clause can effectively prevent an oral variation. The argument runs as follows: since general contracts can be entered into or varied orally, this must include NOM clauses. An oral agreement to vary the terms of the contract is also, by implication, an agreement to vary the NOM clause.

That is precisely what the Court of Appeal held in Rock Advertising v MWB Business Exchange Centres, but that argument has now been comprehensively dismissed by the Supreme Court.

What was the dispute about?

As with many a landmark case, the dispute itself started out fairly inauspiciously. Rock Advertising entered into a licence to occupy offices in central London, for a fixed term of 12 months. After falling into arrears, Rock's director proposed a revised payment schedule to a credit controller at MWB. A dispute arose about whether the parties had orally agreed to the revised schedule, and if so, whether this constituted an effective variation of the contract, which contained a NOM clause.

In the County Court, the judge found in MWB's favour. He found that the parties had in fact reached an oral agreement to vary the contract, but the NOM clause rendered that variation ineffective.

The Court of Appeal overturned this decision, finding that the agreement to vary the contract was also an agreement to dispense with the NOM clause. MWB appealed further to the Supreme Court.

What did the Supreme Court decide?

The Supreme Court, finding unanimously in MWB's favour, held that the NOM clause was effective.

Lord Sumption, giving the leading judgment, explained that there were sound commercial reasons for giving effect to NOM clauses, such as the need in a large organisation to police how agreements may be made by its employees, and the desire to avoid the sort of misunderstandings that often occur in oral agreements. By contrast, he explained, "[t]he reasons advanced in the case law for disregarding them are entirely conceptual." Lord Sumption then looked at how other widely-used legal codes (the Vienna Convention on Contracts for International Sale of Goods and the UNIDROIT Principles of International Commercial Contracts) address this issue, drawing comfort that they demonstrate that there is no fundamental conceptual inconsistency in upholding NOM clauses.

Likewise, upholding NOM clauses would not undermine parties' autonomy (as had been argued). Rather, party autonomy would truly be undermined if the parties were not free to agree any restriction on the form of future variations.

There is of course a risk that, despite there being a NOM clause, the parties may act on the basis of any oral modification to the contract. However, the other legal systems that he had considered each had an answer to this: a party may be prevented from relying on a NOM clause on the basis of their conduct, if the other party has relied on that conduct.

In English law, this translates as a estoppel argument. To rely on an estoppel defence in a case such as this, the Court held, a party would need to show that:

• there had been some words or conduct unequivocally representing that the variation was valid notwithstanding its informality; and
• "something more" would be required by way of words or conduct than simply the informal promise of payment given in this case.

But what about the other fundamental issue?

As trailed in the judgment's opening, this case raised a second fundamental issue: whether the promise simply to pay (late) an amount already owing could amount to good consideration, as is required for a contractual variation.

Unfortunately, since the upholding of the NOM clause was enough to determine this particular case, the court did not need to, and declined to, answer this question.

This must be seen as a missed opportunity to consider an issue that Lord Sumption acknowledged was "probably ripe for re-examination". This is particularly so given that, as he acknowledged, it is a rarity for cases raising such fundamental issues to end up in the Supreme Court.

Osborne Clarke comment

This judgment answers clearly and unequivocally an issue that has in recent years proven problematic. It will be welcomed by lawyers and businesses, who use NOM clauses to maintain an element of control over how contracts are operated on the ground.

Nevertheless, where the parties have gone further and acted on the basis of oral variations, there is a risk that these may still in practical terms be effective, on the basis of estoppel. This is a particular risk in industries where written contracts often need to flex to meet the realities of the situation.

A few simple, practical measures can help to ensure that NOM clauses operate as intended. These include having in place written change management procedures and template forms for requesting and granting variations. Equally important is ensuring that these are understood by those administering the contracts on the ground, as well as contract counterparties.