Judgment confirms the effectiveness of contractual provisions that prevent the parties from varying their contract orally.
The Supreme Court of the United Kingdom recently held that an oral variation of a contract was invalid due to a No Oral Modification (NOM) clause contained in the contract. This clause required any variations to be provided in writing and signed on behalf of both parties. The judgment, which was handed down on 16 May 2018, cements the effectiveness and importance of NOM clauses for the foreseeable future.
MWB Business Exchange Centers Ltd (MWB) operated serviced offices in central London. Rock Advertising Ltd (Rock) entered into a contractual license with MWB to occupy office space. Their contract contained an NOM clause as follows: “All variations to this Licence must be agreed, set out in writing and signed on behalf of both parties before they take effect.”
Rock accumulated arrears of license fees and agreed orally to a revised payment schedule with MWB over the phone. MWB later locked Rock out of the premises for failure to pay arrears and terminated the license. MWB sued for the arrears and Rock counterclaimed for wrongful exclusion from the premises. The case turned on whether the oral variation was effective.
Judge Moloney QC, at first instance, held that the parties had entered an oral agreement to vary the contract, but that the variation was ineffective as it was not in writing and signed as required by the NOM clause. The Court of Appeal (Arden, Kitchin, and McCombe LJJ) overturned the decision at first instance, holding that the oral agreement to revise the payment schedule amounted to an agreement to dispense with the NOM clause and was therefore effective as an agreement in its own right.
Lord Sumption in the Supreme Court (with whom Lady Hale, Lord Wilson, and Lord Lloyd-Jones agreed) held that the law should and does give effect to a contractual provision requiring specified formalities to be observed for the variation of a contract. He considered that the oral variation made in spite of the NOM clause did not imply that the parties intended to dispense with the NOM clause, but rather that the parties overlooked it. The oral variation was therefore invalid by virtue of the NOM clause unless the doctrine of estoppel applied (which, on the facts, it did not). Accordingly, he restored the order of Judge Moloney QC.
Lord Briggs agreed with Lord Sumption’s discussion about the benefits of an NOM clause, particularly as the clause relates to promoting contractual certainty. However, he disagreed that the existence of an NOM clause would invalidate any attempt to vary a contract orally. Lord Briggs considered that, conceptually, parties can still agree orally to remove an NOM clause, although he remarked that in most circumstances a judge would be highly unlikely to accept such an argument. However, Lord Briggs did consider that situations could arise in which an oral variation to a contract would necessarily imply that the parties had dispensed with the NOM clause, and that such situations would be equally likely to give rise to an estoppel.
It is not uncommon for commercial parties, whose relationship is governed by a contract containing an NOM clause, to agree to an oral variation to the contract that is only later put into writing. In the meantime, parties often act on the basis that the variation is valid. Based on Lord Sumption’s judgment however, such an oral variation would clearly be invalid unless an estoppel arises. The parties would be, in Lord Sumption’s words, “courting invalidity with their eyes open”.
But Lord Sumption’s analysis also casts doubt on whether estoppel would effectively mitigate the risk that an oral variation is found to be invalid. Such an oral agreement is in danger of not waiving the terms of the NOM clause with sufficient clarity to provide the representation or conduct necessary to found an estoppel. Further, in certain circumstances, parties may have difficulty demonstrating that they have acted in reliance on the variation.
In light of the judgment, parties should take particular care to check the terms of their contracts for NOM clauses and other formalities that are required for a valid amendment. In the future, it will be a greater risk for parties to agree to vary their contract, proceed on the basis of the variation, and only later reduce their variation to writing in accordance with the NOM clause. The counterparty might backtrack from the oral variation before it is formally documented, leaving the party wishing to rely on the variation in a difficult position.
This post was prepared with the assistance of Benjamin Xie in the London office of Latham & Watkins.