Oral Variations to contracts

Published 23 August 2018

Previous law

This case analyses a question that many thought was essentially settled law: whether a contractual clause purporting to prohibit oral variations – known as a “no oral modification” or NOM clause – can actually prevent the parties from subsequently agreeing such an oral variation.

Until this decision, it was thought that parties remained free at all times to agree whatever they like, including how they might vary the initial contract. This conclusion was reached on the detailed analysis provided by Beatson LJ in Globe Motors v TRW Lucas, which although obiter, was followed as part of the ratio by a differently constituted Court of Appeal in MWB Business Exchange Centres v Rock Advertising.

Background to the Case

On the facts, MWB occupied premises managed by Rock Advertising under a written licence agreement. The agreement contained a clause providing that all variations to the licence must be made in writing. The issue to be determined was whether a purported oral variation was effective.

Decision of the Supreme Court

The Supreme Court has upheld the validity of ‘no oral modification’ clauses. In Lord Sumption's judgment and the majority view, party autonomy only operates up to the point the contract is made but, thereafter, it is regulated by what the parties have agreed.

It was noted that there are sound commercial reasons for NOM clauses: these clauses (i) prevent attempts, including abusive attempts, to undermine written agreements by informal means; (ii) avoid disputes not just about whether a variation was intended but also about its exact terms; and (iii) make it easier for corporations to police their own internal rules restricting the authority to agree variations. What is more, these clauses do not frustrate or contravene any policy of the law.

MWB's counter argument was that parties who in fact agreed an oral variation, in spite of a NOM clause, must have intended to vary or dispense with that clause. The Court rejected this argument on the basis that what the parties agreed was that oral variations will be invalid, not that they are forbidden. The Court found that the natural inference from a failure to observe such a clause is not that the parties intended to dispense with it, but that they overlooked it.

In the majority’s view, the risk that a party may act on the varied contract but then find itself unable to enforce it is mitigated by various doctrines of estoppel.

It should be noted that Lord Briggs agreed with the overall result, but dissented on the rationale behind it. In particular, he was of the view that parties should be free to remove a NOM clause from their contract orally. He considered it “conceptually impossible” for the parties, by agreement, to impose a scheme which they could not, by agreement, vary or abandon. However, his view was that such an agreement should not be implied where the oral variation failed to acknowledge the NOM clause.

Impact for the construction industry

Construction projects are notorious for oral instructions and variations. Most standard forms have bespoke provisions as to how these are to operate, usually requiring oral instructions to be confirmed in writing before having effect.

Following this decision, there is a greater degree of certainty for contracting parties and NOM clauses may become more popular as parties attempt to exert more control over their contracts.

In practice, however, the demands of a construction project mean that it is not always practical or possible to confirm something in writing before it is carried out. As a result, it may be that construction cases find themselves relying on the “estoppel exception. The Supreme Court did not provide much guidance on this exception; save for warning that there would have to be some unequivocal representation that the variation was valid notwithstanding the NOM clause.