The Supreme Court's landmark decision on No Oral Modification clauses

Published 12 June 2018

The Supreme Court recently handed down its judgment in Rock Advertising Limited v MWB Business Exchange Centres Limited [2018] UKSC 24, in which it examined whether what is commonly known as a "No Oral Modification" clause (or a "NOM") in a contract, was legally effective. The decision has important implications for financial institutions.

Factual background

MWB Business Exchange Centres Limited ("MWB") operates a number of serviced offices. In August 2011, Rock Advertising entered into a licence with MWB to occupy office space in London for a fixed term of 12 months commencing on 1 November 2011. The licence fee was £3,500 per month for the first three months and £4,333.34 for the rest of the term.

Clause 7.6 of the licence contained a NOM clause which provided:

"This licence sets out all of the terms as agreed between MWB and the 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 subsequently fell into arrears and made a payment proposal orally to MWB's credit controller, to the effect that payments would be rescheduled and paid over a period of time. A dispute then arose between the parties as to whether this proposed payment schedule had in fact been agreed by MWB.

When considering the issue, the Court of Appeal had decided that an oral agreement had been reached varying the terms of the original contract and that the revised payment schedule amounted to an agreement to dispense with the NOM clause. As such, MWB were bound by that agreement. MWB appealed against the Court of Appeal's decision to the Supreme Court, who disagreed with the Court of Appeal, unanimously deciding that the NOM clause was legally effective and had not been impliedly dispensed with by the subsequent oral discussions.

Decision

Lord Sumption, who gave the leading judgment, allowed the appeal on the ground that the NOM clause meant that the alleged oral agreement asserted by Rock Advertising was not an effective contractual variation. The other judges, save for Lord Briggs, agreed with Lord Sumption. Lord Briggs agreed that the appeal should be allowed but based his decision on different, and narrower, reasoning (see below).

Lord Sumption held that the oral variation was not effective because it lacked the writing and signatures required by the provisions of clause 7.6 of the licence.

He stated that in his view:

"The natural inference from the parties' failure to observe the formal requirements of a No Oral Modification clause is not that they intended to dispense with it but that they overlook it. If, on the other hand, they had it in mind, they were courting with invalidity with their eyes open".

The Court therefore concluded that any purported oral variation of a contract shall not have contractual effect if the underlying contract contained a No Oral Modification clause. In other words, from a contractual perspective, the parties will remain bound by the terms of the original contract unless it is varied in accordance with its own terms (i.e. in writing).

In reaching its decision, the Supreme Court acknowledged that there are often legitimate commercial reasons for including No Oral Modification clauses in contracts in that (i) they prevent attempts to undermine written agreements by informal means, (ii) they avoid disputes about the exact terms of any purported variations and (iii) they make it easier for commercial entities to police their own internal rules restricting authority to agree variations. The Court also confirmed that the law of contract does not normally obstruct the legitimate intentions of commercial contracting parties, unless there is a public policy reason to do so. There is no such reason in the case of No Oral Modification clauses, and they therefore disagreed with the Court of Appeal's decision, which allowed such clauses to effectively be ignored.

As stated above, Lord Briggs gave a concurring judgment, but with different reasoning. He concluded that a NOM clause "continues to bind until all parties have expressly (or by strictly necessary implication) agreed to do away with it".

In his view, the critical questions were (i) whether the parties can agree orally to remove a NOM clause from their bargain and (ii) if so, whether such an agreement will be implied where they agree orally upon a variation of the substance of the relationship without commenting on the NOM clause. In Lord Sumption's view the answer to the first question is no, so the second question does not arise. Lord Briggs approached things slightly differently, suggesting that the first question should be answered in the affirmative, but that the answer to the second question would, generally, be no - the parties could not orally agree to vary a contract without expressly commenting on the NOM clause.

This approach leaves open the possibility of oral variations to NOM clause in very limited circumstances, but would require a clear statement or conduct to demonstrate that the parties considered the NOM clause and intended to waive it. Any such argument would however inevitably face an uphill struggle in view of the view expressed by the majority of the court.

In this particular case, in purporting to vary the contract orally, the parties said nothing about the NOM clause and Lord Briggs stated that he would not treat it as having been "done away with" by implication.

Comment

Whilst the decision of the Supreme Court has the benefit of providing a strong framework against which to challenge a plea of an oral variation in the event that a contract contains a NOM clause, it is not without potential problems.

It creates the very real risk that a party may act to its detriment in reliance on a purported oral variation only for it to be subsequently held to the terms of the original bargain. The Supreme Court indicated that in some cases such injustice would be prevented (or corrected) by the doctrines of estoppel and unjust enrichment, but Lord Sumption made it clear that "the scope of estoppel cannot be so broad as to destroy the whole advantage of certainty for which the parties stipulated" when including a NOM clause in their contract.

What is clear from Supreme Court decision is that commercial entities, particularly financial institutions, should carefully consider the advantages and disadvantages of including NOM clauses when both (a) drafting the contract; and (b) agreeing to any variations. The failure to comply with a NOM clause could render the purported variation unenforceable.

Notwithstanding all of the above, had the Court of Appeal decisions been upheld there would have been a real risk of parties becoming embroiled in litigation about whether or not contracts had been varied by purported oral modifications. The certainty brought by the Supreme Court's position minimises this risk, and is to be welcomed.