Supreme Court breathes new life into “no oral modification” clauses

The Supreme Court has overturned a decision that contractual clauses requiring amendments to be in writing would not preclude amendments subsequently being effected orally: Rock Advertising Ltd v MBB Business Exchange Centre Ltd [2018] UKSC 24.

This is an important judgment which means that “no oral modification” (or NOM) clauses will generally be given effect so as to prevent contracting parties being bound by a subsequent variation unless the specified formalities are complied with. The decision will be welcomed by commercial parties who agree NOM clauses in their contracts in the interests of commercial certainty.

The Supreme Court recognised that there is the risk of injustice where a party acts on the contract as varied and then finds that it is not binding, but said the law of estoppel would provide a safeguard, where the circumstances are such that the counterparty should be prevented from enforcing its strict contractual rights. The Supreme Court did not seek to define the circumstances in which such an estoppel would arise. However, it would require at the very least some words or conduct which unequivocally represented that the variation would be valid despite being agreed informally; the informal promise itself would not be sufficient for that purpose.

In light of its decision, the Supreme Court did not need to consider the Court of Appeal’s conclusion that an agreement to accept payment of an existing debt by instalments was supported by consideration in the form of a practical benefit received by the creditor. Interestingly, however, it noted that the long-standing rule in Foakes v Beer (that part payment of a debt is not good consideration for the release of the whole) “is probably ripe for re-examination”, but said that any departure from that rule should be a matter for an enlarged panel of the court where its decision would be more than obiter dictum.

Rachel Lidgate and Maura McIntosh consider the decision further below.

Background

The facts are summarised in our blog post on the Court of Appeal decision, here. Very briefly, the defendant (Rock) occupied office space owned by the claimant (MWB). When Rock fell into arrears on the licence fee, MWB excluded Rock from the premises and terminated the agreement. Rock counterclaimed damages for wrongful exclusion on the grounds that the licence agreement had been varied orally to revise the payment schedule (in a way which meant that Rock’s covenant to pay would be worth slightly less to MWB than the written licence).

The County Court found that an oral variation had been agreed but was ineffective due to a NOM clause in the agreement. It also found that, if the oral variation was effective, a £3,500 payment by Rock, and its agreement to comply with the other terms of the revised payment schedule, amounted to good consideration.

The Court of Appeal overturned that decision, finding that the oral amendment was effective despite the NOM clause. The Court of Appeal saw its decision as supporting the autonomy of commercial parties, which demanded that parties should be able to amend their contracts even in situations where they had previously agreed only to do so by specific means. The oral agreement to revise the schedule of payments also amounted to an agreement to dispense with the NOM clause.

On the question of whether there was adequate consideration to make the oral variation binding, the Court of Appeal agreed with the County Court. Although part payment of a sum already due is not normally good consideration, the Court of Appeal was satisfied that there was adequate consideration on the basis that MWB obtained an additional practical benefit, namely Rock’s continued occupation of the property.

Decision

The Supreme Court unanimously overturned the Court of Appeal’s decision, finding that the oral amendment was not effective. Lord Sumption gave the judgment for the majority (with which Lady Hale, Lord Wilson and Lord Lloyd-Jones agreed), which was based on the broad proposition that the law should and does give effect to contractual provisions requiring specified formalities to be observed for a variation, such as NOM clauses. Lord Briggs reached his conclusion on narrower grounds, namely that a NOM clause would bind the parties unless and until they had agreed to do away with it, either expressly or by “strictly necessary implication” – ie not necessarily in writing.

The majority reasoning

Lord Sumption took as his starting point that the effect of the rule applied by the Court of Appeal in this case was to override the parties’ intentions. It meant contracting parties could not validly bind themselves as to how future changes to their legal relations could be achieved, no matter how clearly they expressed their intention to do so. He described as a “fallacy” the Court of Appeal’s view that this promoted party autonomy, saying:

“Party autonomy operates up to the point when the contract is made, but thereafter only to the extent that the contract allows. Nearly all contracts bind the parties to some course of action, and to that extent restrict their autonomy. The real offence against party autonomy is the suggestion that they cannot bind themselves as to the form of any variation, even if that is what they have agreed.”

Lord Sumption referred to three reasons for including NOM clauses in commercial contracts: (i) they prevent attempts to undermine written agreements by informal means; (ii) given that oral discussions can easily give rise to misunderstanding, they avoid disputes about whether a variation was intended about about its exact terms; and (iii) they make it easier for corporations to police internal rules restricting authority to agree variations.

He noted that the law of contract “does not normally obstruct the legitimate intentions of businessmen, except for overriding reasons of public policy.” There were no such reasons to override NOM clauses, as they do not frustrate or contravene any policy of the law.

Lord Sumption said that the reasons cited against giving effect to NOM clauses are entirely conceptual, ie that it is impossible for parties to agree not to vary their contract orally, because any such agreement is automatically destroyed upon their doing so. He noted, however, that a number of legal systems impose no formal requirements for the validity of a commercial contract, but still give effect to NOM clauses, including the Vienna Convention on Contracts for the International Sale of Goods (1980) and the UNIDROIT Principles of International Commercial Contracts, 4th ed (2016). That, he said, suggested that there was no conceptual inconsistency. In support of the same point, he drew a parallel between NOM clauses and entire agreement clauses, in that both are intended to achieve contractual certainty about the terms agreed (in the case of entire agreement clauses by nullifying prior collateral agreements relating to the same subject-matter).

He also rejected the notion that parties who agree an oral variation in spite of a NOM clause must have intended to dispense with the clause. The natural inference was not that they intended to dispense with it but that they overlooked it. If, on the other hand, they had it in mind, they were “courting invalidity with their eyes open”.

Lord Sumption recognised that NOM clauses present the risk that a party may act on the contract as varied and then find itself unable to enforce it, but said there is a safeguard against injustice in the various doctrines of estoppel. He said that his judgment was not the place to explore the requirements for estoppel in this context, but pointed out that the scope of estoppel could not be so broad as to destroy the whole advantage of certainty the NOM clause was intended to provide. A finding of estoppel would require, at the very least, some words or conduct unequivocally representing that the variation was valid despite its informality; and something more would be required for this purpose than the informal promise itself.

The conclusion that the oral variation was invalid meant it was unnecessary to deal with the question of consideration, which Lord Sumption described as a difficult one. He noted that any decision on the issue was likely to involve a re-examination of the decision in Foakes v Beer, to the effect that prompt payment of a lesser sum is not good consideration for the release of the whole even if there is a practical benefit to the recipient. He commented that the decision is probably ripe for re-examination, but if it is to be overruled or its effect substantially modified, that should be before an enlarged panel of the court and not on an obiter basis.

Lord Briggs’s judgment

As noted above, Lord Briggs reached his conclusion on a narrower basis, though he commented that the difference in reasoning was unlikely to have significant consequences save perhaps on very unlikely facts.

In essence, Lord Briggs disagreed with Lord Sumption that the effect of a NOM clause is to invalidate any attempt to vary the contract, including the NOM clause, orally. In Lord Briggs’s view, a NOM clause will make oral variations invalid unless the NOM clause itself is removed or suspended by agreement.

He agreed with Lord Sumption, however, that parties who orally agree a variation do not thereby (and without more) impliedly agree to dispense with the NOM clause. Lord Briggs did not find Lord Sumption’s reference to entire agreement clauses a useful analogy. Instead, Lord Briggs drew an analogy with negotiations that are subject to contract. He noted that the abandonment of the subject to contract umbrella will not be implied merely because the parties have reached agreement on the terms; the qualification will be removed only if the parties expressly agree to do so or if such an agreement is necessarily implied.

In the same way, Lord Briggs said, parties should be held to a NOM clause unless they have agreed to do away with it expressly or by necessary implication. He noted that necessity is a strict test; there will be no implied term that a NOM clause was agreed to be treated as done away with simply where the persons charged with the day to day performance of a contract agree an oral variation whilst unaware of the existence of a NOM clause. However, if the orally agreed variation called for immediately different performance from that originally contracted for, before any written record of the variation could be drawn up, then necessity may lead to the implication of an agreed departure from the NOM clause. Lord Briggs noted, however, that the same scenario would be equally likely to give rise to an estoppel.

Rachel Lidgate
Rachel Lidgate
Partner
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+44 20 7466 2418
Maura McIntosh
Maura McIntosh
Professional support consultant
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+44 20 7466 2608

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