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09 Jul 2018

Put it in writing: Supreme Court rules on validity of oral variations to written agreements

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What you need to know

The recent decision of the Supreme Court in Rock Advertising Ltd v MWB Business Exchange Centres Ltd has confirmed that oral variations to written agreements are not valid where a written agreement contains a "no oral modification" ("NOM") clause.

This is of significance to the construction sector where variations to contracts are common. The judgment underlines the importance for parties to have a detailed understanding of the terms contained in the contract, in particular in relation to variation procedure.

Background

MWB Business Exchange Centres Ltd ("MWB") and Rock Advertising Ltd ("Rock") entered into a licence relating to the occupation by Rock of office space in London.

The licence included the following NOM term:

"All variations to this Licence must be agreed, set out in writing and signed on behalf of both parties before they take effect."

Rock fell into arrears on its monthly payments under the licence. A telephone conversation took place between MWB's credit controller and Rock's managing director. Rock argued that it was agreed during the telephone conversation to reschedule the licence fee payments.

Upon being advised of the new payment schedule, MWB's finance director rejected the variation. MWB changed the locks to the premises and brought a claim against Rock for the arrears. MWB argued that the variation was invalid as a result of the NOM provision in the licence. Rock counterclaimed for wrongful exclusion arguing that the licence had been varied.

The Supreme Court ruled that the oral variation was invalid, overruling the Court of Appeal and agreeing with the first instance decision of the Central London County Court.

Lord Sumption stated that: "In my opinion the law should and does give effect to a contractual provision requiring specified formalities to be observed for a variation."

Autonomy v certainty

The case raises interesting questions about the balance between party autonomy and contractual certainty. Does party autonomy make it possible to enter into a contract that prevents parties from varying the contract in the future? If the answer to that question is "yes", does that very prevention not itself infringe upon the autonomy of the parties to do whatever they may agree in the future?

Lord Sumption's view was that almost all contracts restrict the autonomy of the parties in that contracts bind parties to some course of action. In considering the autonomy of the parties, Lord Sumption sought to look to the terms as agreed in the contract, stating that: "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 went on to state that: "Party autonomy operates up to the point when the contract is made, but thereafter only to the extent that the contract allows."

While reaching the same conclusion as Lord Sumption as to the invalidity of the variation, Lord Briggs had a different view on the question of party autonomy. As far as Lord Briggs was concerned, if the parties have a specific intention to do so, it is open to them to orally vary a NOM clause. However, if they forget about the NOM clause, or do not consider it at all, no oral variation to the agreement can take place. Lord Briggs' approach distinguishes variation of the underlying NOM clause from variations to other terms of the contract, with the latter category being restricted by the terms of the NOM clause itself. Lord Briggs was of the view that this more narrow approach "…fully reflects the autonomy of parties to bind themselves as to their future conduct, while preserving their autonomy to agree to release themselves from that inhibition."

Impact

The potential impact of the decision is very significant. As Lord Sumption noted in the opening paragraph of the judgment, the case raises "truly fundamental issues in the law of contract". Amongst those likely to be affected by the decision are parties operating in the construction sector as variations to contracts are regular occurrences on construction projects.

The judgment is a reminder that parties must comply with the terms of the written contract. In order to comply, it is crucial that those most closely involved with a project are aware of its terms, or the need to check them. Parties must be mindful of the increasingly strict approach of the courts to contractual interpretation. As Lord Sumption pointed out, "if the parties agree that the written contract is to be the entire contract, it is no business of the courts to tell them that they do not mean what they have said."

It is important to note that the Supreme Court acknowledged that, where the necessary circumstances arise, a party may still rely on estoppel as a safeguard against injustice. However, Lord Sumption cautioned that "the scope of estoppel cannot be so broad as to destroy the whole advantage of certainty for which the parties stipulated when they agreed upon terms...". While a failure to comply with the specified formalities for a variation under the contract is not necessarily fatal, estoppel only arises in limited circumstances, can be difficult to prove and the parties should not put themselves in a position where they have to rely on estoppel to save the day. The importance of understanding and following the terms of the contract cannot be overstated.

Conclusion

The Supreme Court's ruling is the latest example of a trend that has seen the courts take an increasingly strict approach to contractual interpretation.

While documenting agreed variations in writing has always been best practice so as to overcome any evidential issues in showing what has been agreed, Rock v MWB makes compliance with the variation requirements of the contract mandatory in order to ensure that the variation is valid.

Remember: when varying a contract that contains a NOM clause, put it in writing.

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