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(Not, in fact) Futile Devices

Some 18 months ago, we wrote an article entitled 'Futile Devices', setting out the Court of Appeal's views on the vexed question of the effectiveness of 'No oral modification' ('NOM') clauses in contracts, in light of two recent decisions. At that point, the law of the land seemed fairly clear: NOM clauses, which purported to prevent parties from varying contracts unless codified in writing, were not worth the paper they were written on, as parties could agree, orally, to vary contracts containing such clauses.

It turns out this is one of the rare occasions where the law has been subject to swift revision. In a fairly comprehensive judgment in Rock Advertising Ltd v MWB Business Exchange Centres Ltd [2018] UKSC 24, the Supreme Court has rejected these decisions (and a number of others), finding that NOM clauses will be generally effective.

Background

The facts of the claim are fairly simple. MWB operated serviced offices in central London. Rock entered into a contractual licence with MWB to occupy office space at Marble Arch Tower for a fixed term of 12 months, commencing in November 2011. The licence contained a condition stating that "All variations to this Licence must be agreed, set out in writing and signed on behalf of both parties before they take effect.”

By February 2012, Rock had accumulated arrears of more than £12,000. Rock's sole director proposed a revised schedule of payments to a credit controller employed by MWB. There was a disagreement as to whether these terms had been agreed, and in the end Rock's proposal was rejected by a director of MWB. MWB subsequently locked Rock out of the premises, terminating the licence. MWB then sued for the arrears. Rock counterclaimed in damages for wrongful exclusion. The counterclaim, and therefore the claim, turned on whether the oral variation agreement was effective in law.

At first instance, the Judge found that there was an oral agreement to vary, but since the variation was not agreed in writing it fell foul of the NOM clause and therefore was ineffective. This decision was overturned at the Court of Appeal, where it was held that the oral agreement to revise the schedule of payments also amounted to an agreement to dispense with the NOM clause.

Supreme Court

In the Supreme Court, Lord Sumption, with whom three of the other Justices agreed, gave the leading judgment allowing the appeal. Lord Briggs also agreed that the appeal should be allowed, but for different reasons.

Lord Sumption noted that the case relied upon by the Court of Appeal was a famous New York case from 1919, Beatty v Guggenheim Exploration Co, in which it was held that those "who make a contract, may unmake it. The clause which forbids a change, may be changed like any other". The English case law, however, was more circumspect, and did not provide any real guidance.

In the absence of any specific authority, Lord Sumption found that the law will give effect to a contractual provision requiring specified formalities to be observed for a variation. As he went on to state, "the law of contract does not normally obstruct the legitimate intentions of businessmen, except for overriding reasons of public policy".

The concept of party autonomy had been used by the Court of Appeal to explain why a party was unable to bind its future actions; the real offence against party autonomy, said Lord Sumption, was the suggestion that they cannot bind themselves as to the form of any variation, even if that is what they have agreed.

Moreover, there are good reasons for such clauses to be given effect by the law:

a)       it will prevent attempts to undermine written agreements by informal means;

b)      where oral discussions can easily give rise to misunderstandings and crossed purposes, it can avoid disputes about whether a variation was intended, or its exact terms;

c)       requiring a measure of formality in recording variations makes it easier for corporations to police internal rules restricting where authority is granted to agree variations

Turning to the reasons why NOM clauses are sometimes treated as ineffective, Lord Sumption characterised the argument as "that it is conceptually impossible for two parties to agree not to vary their contract orally, because any such agreement would automatically be destroyed upon their doing so". Lord Sumption argues that other jurisdictions have squared this particular circle, with both The Vienna Convention on Contracts for the International Sale of Goods and the UNIDROIT Principles of International Commercial Contracts not requiring any specific form of contract, yet allowing the effect of NOM clauses.

As to a further argument, that parties who agree an oral variation in spite of a NOM clause must have intended to dispense with the clause, Lord Sumption did not find this convincing; it is not difficult to record a variation in writing, so the natural inference from the parties’ failure to observe the formal requirements of a NOM clause is not that they intended to dispense with it but that they overlooked it. If, on the other hand, they had it in mind, then they must have been aware that the clause might invalidate any variation.

The only recourse for parties who seek to rely on oral variations invalidated by a NOM clause will be estoppel; where one party relies on another's promise to its detriment it can argue that the other party is estopped from arguing that the variation is ineffective. Lord Sumption went on to qualify this potential defence as well, noting that (i) there would have to be some words or conduct unequivocally representing that the variation was valid notwithstanding its informality; and (ii) something more would be required for this purpose than the informal promise itself.

It is worth briefly considering the judgment of Lord Briggs, who, whilst agreeing with Lord Sumption's decision, differed noticeably in his reasoning. He found that the parties could mutually agree to remove the effect of a NOM clause, and then agree to oral variations. However, the latter did not necessarily imply that thought had been given to the former. This does seem to allow for some confusion as to which variation was agreed first, and in what manner, and in practice one might suspect that this would be fertile ground for litigation.

Comment

So what to draw from this judgment, then? The good news for parties and practitioners is that contractual certainty is back on the table. The risk of disagreement arising out of unclear or opaque contractual discussions will be reduced. The downside is that parties may not be afforded the flexibility offered by the previous regime; where contractual provisions agreed many years in the past are long since stale and forgotten, parties were afforded the ability to regularise the position without the need for formal agreements.

On balance, however, it seems to be a positive decision. If the parties do not want the certainty provided by a NOM clause, then one does not have to be agreed. Even if there is a NOM clause in the agreement, and if there is a desperate need to amend contractual provisions, even orally, this can be dealt with by agreeing a written variation removing the NOM clause, which would mean that any subsequent variations would not have to be in writing. But really, as Lord Sumption noted, it should not be overly difficult to ensure that substantive changes to contractual relationships are recorded in writing, to avoid any subsequent disputes.

If construction professionals take one point from this article, it should be the importance of agreeing contracts, and changes to contracts, in writing wherever possible. Any minor inconvenience in formalising matters in this way is more than outweighed by the benefit of not ending up in Court many years later arguing as to what had or had not been agreed.

Contact

For more information please contact, Robert Calnan Associate
Professional Indemnity D +44 20 7220 5217 robert.calnan@dwf.law

 

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This information is intended as a general discussion surrounding the topics covered and is for guidance purposes only. It does not constitute legal advice and should not be regarded as a substitute for taking legal advice. DWF is not responsible for any activity undertaken based on this information.

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