Put it in writing!

The Supreme Court ruled a clause in a contract that required any modifications to that contract be in writing and signed by the parties, invalidated a subsequent oral agreement to vary the contract.

The background

MWB operates serviced offices in central London.

Rock Advertising entered into a licence agreement with MWB to occupy office space for a fixed term of 12 months. Clause 7.6 of the agreement said —

“This Licence sets out all the terms as agreed between MWB and Rock. 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."

Fast forward a little, and Rock had accumulated licence fee arrears. The company’s director proposed a revised schedule of payments to an MWB credit controller, and a dispute arose as to whether this proposal had been accepted orally.

The judgement

Lord Sumption (in a judgement having the agreement of three of the other four justices) noted that such "no oral modification" clauses (NOM clauses) are commonly in written agreements for three reasons:

• they prevent attempts to undermine written agreements by informal means, a possibility which is open to abuse

• they avoid disputes not just about whether a variation was intended but also about its exact terms

• they make it easier for corporations to police their own internal rules restricting the authority to agree variations

He considered these to be legitimate reasons, and noted the law doesn’t normally obstruct the legitimate intentions of parties where they do not conflict with public policy. That being so, why should such clauses be disregarded?

The obvious argument is that the parties are free to agree something different.

The Court of Appeal, in fact, took that view. It considered the oral agreement to revise the schedule of payments also amounted to an (implied) agreement to dispense with clause 7.6.

However, the Supreme Court disagreed.

According to Lord Sumption, "what the parties to such a clause have agreed is not that oral variations are forbidden, but that they will be invalid.”

This might seem a rather unobvious conclusion. Why would parties claim to have agreed something that they know would not be upheld as valid were it to be tested?

But Lord Sumption was clear. In his view, "…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 were courting invalidity with their eyes open."

Thus, Lord Sumption would not subscribe to the theory that parties agreeing an oral variation would simply assume that their agreement of the variation would be conclusive and not in fact precluded by a prior agreement as to the form of any variation.

At the very least, this case should now steer others away from making such an assumption.

Need for certainty

In theory, parties to contracts incorporating NOM clauses should have more certainty that a contract's scope of work, for example, will not necessarily be regarded as varied by telephone where the original contract requires a variation order to be agreed in writing.

It also may be more difficult for a party to a contract which requires any waiver of any breach to be in writing to argue successfully that the parties orally agreed that its breach be waived.

In practice, though, there may still be room for doubt surrounding the validity of oral variations.

A party may be precluded by his conduct from relying on a NOM clause to the extent that the other party has relied (or reasonably relied) on that conduct — the doctrine of personal bar in Scots law (or "estoppel" in English law).

However, Lord Sumption did point out 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 including the NOM clause.

“At the very least, (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 to this purposes than the informal promise itself."

Put simply, parties should make sure all of their employees are aware that informal and oral variations of contracts containing NOM clauses may not be enforceable.

In addition, procedures should be put in place to ensure that as part of any variation proposal, the original contracting position regarding variations is checked.