Hong Kong – England’s Supreme Court Clarifies Law In Respect Of No Oral Modification Clauses.

26 October, 2018

 

In Rock Advertising Ltd v MWB Business Exchange Centres Ltd [2018] UKSC 24, England’s Supreme Court had to consider a fundamental issue of contract law, namely whether a “No Oral Modification Clause” (NOM clause) i.e. a contractual term stating that an agreement may not be amended unless it is in writing and signed by parties, is legally effective.  The Supreme Court held that it is.

 

Background

 

By a written agreement, MWB granted Rock Advertising a contractual licence to occupy office space for a licence fee. Clause 7.6 of the agreement provided:

 

“This Licence sets out all of the terms as agreed between MWB and Licensee. No other representations or terms shall apply or form part of this Licence. All variations to this Licence must be agreed, set out in writing and signed on behalf of both parties before they take effect.”

 

Rock Advertising accumulated arrears of licence fees and its director proposed a revised schedule of payments to MWB’s credit controller. A dispute arose concerning whether MWB’s credit controller had orally accepted Rock Advertising’s proposal.

 

Decisions of the Courts below

 

At first instance, the trial judge held that an oral agreement was made to vary the licence in accordance with the revised schedule, but it was ineffective because it was not recorded in writing in accordance with clause 7.6. The Court of Appeal allowed Rock Advertising’s appeal, finding that the oral agreement to revise the schedule amounted to an agreement to dispense with the requirements of clause 7.6, so that MWB was bound by the variation. MWB appealed to the Supreme Court.

 

Supreme Court’s Decision

 

The Supreme Court unanimously allowed the appeal, holding that the NOM clause deprived the alleged oral agreement asserted by Rock Advertising of any binding force as a contractual variation. The oral variation was invalid because it was not in writing and not signed by the parties, as prescribed by clause 7.6 of the licence agreement.

 

Lord Sumption (with whom Lady Hale, Lord Wilson and Lord Lloyd-Jones agreed) said as follows:

 

• The law should and does give effect to a contractual provision requiring specified formalities to be observed for a variation. 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 Court of Appeal’s approach was to override the parties’ intentions to bind themselves as to the manner in which future changes in their legal relations were to be achieved. There are many cases in which a particular form of agreement is prescribed by statute (e.g. contracts for the sale of land and consumer contracts) and there was no principled reason why the parties should not adopt the same principle by agreement.
• The law of contract does not normally obstruct the legitimate intentions of businessmen, except for overriding reasons of public policy. There is no mischief in NOM clauses and they do not frustrate or contravene any policy of the law.
• There are at least 3 reasons for including NOM clauses in contracts, which were all legitimate commercial reasons for agreeing a clause like 7.6:
  • they prevent attempts  to undermine written agreements by informal means;
  • they avoid disputes not just about whether a variation was intended, but also about its exact terms;
  • a measure of formality in recording variations makes it easier for corporations to police internal rules restricting the authority to agree them.
• It did not follow that parties who agreed an oral variation despite there being a NOM clause must have intended to dispense with the clause. Parties to such a clause, agreed not that oral variations were forbidden, but that they were invalid. The mere fact of agreeing to an oral variation was not therefore a contravention of the clause.
• Since it is not difficult to record a variation in writing, the natural inference from the parties’ failure to observe the formal requirements of a NOM clause was not that they intended to dispense with it, but that they overlooked it.
• Although the enforcement of NOM clauses carries with it the risk that a party may act on the contract as varied, and then find itself unable to enforce it, the safeguard against injustice lies in the various doctrines of estoppel.

 

Lord Briggs came to the same conclusion and agreed that that the appeal should be allowed, but for different reasons.  He disagreed with Lord Sumption’s view that to refuse to recognize the effect of a NOM clause is to override the parties’ intentions, so as to make it impossible for them validly to bind themselves as to the manner in which a change in their legal relations is to be achieved in the future. Lord Brigg’s view was that, for as long as either party to a contract containing a NOM clause wishes that clause to remain in force, that party may so insist, and nothing less than a written variation of the substance will suffice to vary the rest of the contract (leaving aside estoppel).

 

The NOM clause will remain in force until they both agree to do away with it. In particular, it will deprive any oral terms for a variation of the substance of their obligations of any immediately binding force, unless and until they are reduced to writing, or the NOM clause is itself removed or suspended by agreement. Any agreed departure must also expressly refer to the NOM clause. That, Lord Briggs said, fully reflected the autonomy of parties to bind themselves as to their future conduct, while preserving their autonomy to agree to release themselves from that inhibition.

 

Comments

 

It is common to find NOM clauses in commercial agreements and this Supreme Court decision usefully clarifies the law in relation to such. As noted by the Supreme Court, there are legitimate commercial reasons for including NOM clauses in contracts.  The formality of recording variations in writing, provides certainty to the contracting parties and should reduce disputes about whether a contract has been orally varied.

 

It is common to provide in construction contracts that instructions by the architect/engineer must be issued in writing. The usual argument of the contractor is that strict compliance of such provision has been waived by the conduct of the parties. The above judgment may make such argument more difficult to succeed.