27 July, 2018
Business contracts commonly contain clauses prescribing that the terms of the contract may only be amended in writing. Such a clause, known as “No Oral Modification” provision (NOM Provision), can help avert disputes and remove any uncertainty regarding contract variations made informally, usually by oral means.
However, despite their perceived benefit of contractual certainty, case law suggests that the effectiveness of NOM Provisions may not be so certain. The legal debates over the effect of NOM Provisions revolve around whether the parties to a contract are free to unmake or vary it. Though parties to a contract may agree to forbid oral modification under a NOM Provision, they may later agree to vary or ignore such procedural requirement when they orally agree to a variation. On the other hand, it is argued that if parties to a contract express the intention that only variation made in a certain manner will be valid, there is no reason they cannot be so bound. After all, all contracts are intended to regulate the future behaviour of the parties.
UK Supreme Court decision
It is welcome news then that a definite ruling on this issue has recently been given by the highest appellate court of the United Kingdom. In its judgment in Rock Advertising Limited v MWB Business Exchange Centres Limited [2018] UKSC 24, the Supreme Court unanimously held that the oral amendment concerned was ineffective in revising the terms of a contract containing a NOM Provision. The case concerned a licence agreement for use of serviced offices, which contained a typical NOM Provision. After accumulating arrears of licence fees for some time, the licensee proposed to revise the payment schedule. The lower court found that an oral agreement was reached between the parties for such variation, but that the variation was ineffective as it was not in writing and signed by the parties (as required under the NOM Provision). The issue for the Supreme Court then was whether such an orally agreed variation could still be effective in light of the NOM Provision.
In his judgment, Lord Sumption opined that “the law should and does give effect to a contractual provision requiring specified formalities to be observed for a variation”. Lord Sumption reached such a conclusion based on several reasons.
The first is that parties should be able to validly bind themselves as to the manner in which future changes in their legal relations are to be achieved if they have such intention. To hold otherwise would be to override the parties’ intentions and an “offence against party autonomy”. Secondly, there are legitimate commercial reasons for businessmen to insert NOM Provisions in business contracts. Such clauses do not frustrate or contravene any policy of the law, and the law of contract should not obstruct such legitimate intentions.
Thirdly, Lord Sumption commented that the reasons cited for disregarding the effect of NOM Provisions are “entirely conceptual”. Drawing parallel with certain international codes and the treatment of “entire agreement” provisions, Lord Sumption opined that 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 writing for a variation. The NOM Provision was therefore upheld, and the oral variation was held to be invalid in the case.
In his concurring opinion, Lord Briggs reached the same conclusion but provided different reasoning. Lord Briggs was of the view that parties can orally agree to depart from the requirements of a NOM Provision. Nevertheless, such an agreed departure would not be lightly implied from the mere fact that the parties reached oral agreement to vary the contract.
The NOM Provision in the case was therefore still effective. The inference from Lord Briggs’ opinion is that, if the parties expressly refer to the NOM Provision when making an oral variation, such oral variation can be valid notwithstanding the NOM Provision.
It is not difficult to envisage that the court’s decision may cause hardship in certain cases where the parties have orally agreed to a variation, but have overlooked the requirements of a NOM Provision. The legal doctrine of estoppel (a defence stopping a party from relying on the NOM Provision if the other party has relied on the first party’s conduct) may provide the safeguard in appropriate cases. In this regard, Lord Sumption thought that, at the very least, “some words or conduct unequivocally representing that the variation was valid notwithstanding its informality’ and “something more … than the informal promise itself” would be required.
Conclusion and tips
The Supreme Court decision confirms that UK courts are willing to recognize the effect of NOM Provisions. However, it should be noted that although this case could be of highly persuasive value in Hong Kong, the issue has not yet been considered by Hong Kong courts.
Thus a degree of uncertainty still remains with NOM Provisions insofar as Hong Kong law is concerned.
In addition, there are some practical lessons that can be derived from this case:
- If any amendment to the terms of an agreement is contemplated, always check the contractual documentation first to see whether it contains a NOM Provision or other procedural requirements for varying the agreement.
- If the underlying contract contains a NOM Provision or other procedural requirements, follow them when agreeing on variations to the contract. Though the Hong Kong law position is not yet entirely settled, courts will be less likely than before to allow variations to be made informally (e.g. orally) and contrary to a NOM Provision. While the Supreme Court’s judgment may have opened the possibility for injustice caused by reliance on oral variation to be cured by estoppel, it is a doctrine that should not be too readily relied upon since it is only an exception to the rule. Moreover, raising the defence of estoppel is very case-specific.
- Remind the other side of the presence of the NOM Provision, so there will not be any confusion whether the parties are still having a continuing negotiation or whether a variation agreement has already been reached.
- Be aware of the NOM Provision when preparing a contract. NOM Provisions are often perceived as ‘boilerplate’ and little attention is paid to them. However, how a NOM Provision is drafted can have significant impact on how the parties can be bound in the future. Consideration should be given to the business model involved and the level of ongoing collaboration required between the contracting parties. For instance, if minor variations are often required and need to be handled by the parties swiftly when performing a contract, it may not be realistic to require every variation to be documented in writing beforehand. In such cases having a strict NOM Provision may make the working relationship between the parties inefficient. Businesses should consult with their lawyers so that tailor-made amendment clauses can be incorporated into their contracts.
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