Variation (No Oral Modification) Clauses

Variation or No Oral Modification (NOM) Clauses appear regularly in commercial contracts. They are usually along the lines of:

‘No modification, alteration, variation or waiver of any provision of this agreement shall be effective unless made in writing and signed by or on behalf of each of the parties.’

The legal effectiveness of such clauses was raised in the Supreme Court case of Rock Advertising Limited v MWB Exchange Centres Limited. In the case Rock entered into a licence agreement with MWB to occupy its office space. The licence agreement included a NOM clause.

Rock fell into significant arrears within a few months owing more than £12,000. The sole director of Rock approached MWB’s credit controller and proposed a revised schedule of payments. This included deferring and spreading the payment of the accumulated arrears over the remainder of the licence term. This would result in MWB receiving slight less money.

There was a telephone discussion between Rock’s director and MWB’s credit controller. Rock argued that MWB’s credit controller had agreed to the revised schedule. This was denied by the credit controller who claimed the proposal was a continuing negotiation and took the proposal to her director. MWB’s director rejected the proposal. MWB then locked Rock out of the premises as they failed to pay the arrears. MWB then sued for the arrears and Rock counterclaimed for damages for wrongful exclusion from the premises on the basis that the variation to the licence had been agreed.

The main issue was whether the NOM clause was legally effective. The county court at first instance ruled it was and held that as the variation to the licence was not in accordance with the NOM clause (i.e. not recorded in writing signed on behalf of both parties) it was ineffective. MWB were therefore entitled to claim the arrears. This was despite the court determining that there had been an oral agreement.

The Court of Appeal overturned the ruling. They considered that the oral agreement to vary the payment schedule dispensed with the NOM clause. MWB therefore had to abide by the variation to the licence and revised payment schedule and were not allowed to claim the arrears when they did.

The matter was referred to the Supreme Court who overturned the Court of Appeal’s judgment and restored the order of the County Court. The oral variation was invalid.

The principal judgment of Lord Sumption made clear that this matter raised ‘truly fundamental issues in the law of contract’. He disagreed with the contention that if the parties agreed an oral variation to a contract, in spite of a NOM clause, they intended to dispense with the NOM clause.

In respect of party autonomy, he mentioned:

‘Party autonomy operates up to the point when the contract is made, but thereafter only to the extent that the contract allows. Nearly all contracts bind the parties to some course of action, and to that extent restrict their autonomy. 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 also set out three advantages of NOM clauses:

1. prevent attempts to undermine written agreements by informal means;
2. avoids disputes and misunderstanding which can happen from oral variations;
3. the formal recording of variations, makes it easier for organisations to police internal rules restricting the authority to agree them.

 

Lord Sumption accepted that the enforcement of NOM Clauses carried with it the risk that a party may act on the variation, but then not be able to enforce the varied contract against the other party. Given the concern, Lord Sumption mentioned in certain circumstances the other party, given its conduct, may be legally barred (estopped) from relying on contractual provisions to deny the validity of a variation (legally referred to as estoppel). Although, such a defence would not be so broad as to ‘destroy’ the advantages of certainty of the NOM clause, which the parties had agreed. You would also ‘at the very least’ expect:

(i) there 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.

The decision of the Supreme Court highlights the importance of commercial certainty and contractual formalities and the Court of Appeal judgment in Kabab-Ji SAL (Lebanon) v Kout Food Group (Kuwait)[1] has only confirmed the position.

If you are contemplating varying or have varied your agreement, it is important to consider:

• Does your agreement include a NOM clause?
• Have you orally varied your commercial agreement/lease?
• Have you kept records of any oral variation?
• Is the variation documented in accordance with your agreement?
• Is the clause unambiguous and clear?
• Have you varied the agreement in accordance with the clause?

 

The decisions of the courts have made clear that to reduce disputes in respect of oral variations to an agreement and enforceability, it is pertinent that all the changes are documented in accordance with the procedure and formalities set out in the agreement.

However, the courts still expect the NOM clause to be clear and unambiguous (see our update on Integral Petroleum S.A. v Bank GPB International S.A. by clicking here).

If you would like further information, advice or require assistance with commercial litigation or a dispute, please do not hesitate to get in touch and feel free to follow us on LinkedIn for further updates.

[1] [2020] EWCA Civ 6