‘No Oral Modification’ clauses in contracts can be valid and enforceable

Parties to a contract may vary its terms by mutual agreement provided that (i) consideration is given (or the variation agreement is executed as a deed); and (ii) any necessary formalities are complied with.

A variation can be oral or in writing, however, an agreement may include an express clause setting out whether one or more of the parties to the agreement can amend its terms and what procedure (if any) must be followed to vary it.

Often an agreement will stipulate that variations to the agreement are only enforceable if they are agreed in writing by the parties to avoid the possibility of informal, and perhaps inadvertent, oral variations being made to an agreement; this is commonly referred to as a “no oral modification” clause.

There has recently been case law establishing the position on no oral modification clauses.

Background

The Claimant, MWB Business Exchange Centres Limited (“MWB”) is a company that operates serviced offices and the Defendant, Rock Advertising Limited (“Rock”) is a company that carries out management consultancy activities.

Rock entered into a licence agreement with MWB to occupy office space in London. The licence contained a clause requiring that any variation to the licence must be (i) set out in writing and (ii) signed on behalf of both parties before it will take effect.

By 27 February 2012 Rock had accumulated arrears of licence fees amounting to more than £12,000. Rock proposed a revised schedule of payments to MWB. The effect of the revised schedule was to defer part of the February and March payments, and to spread the accumulated arrears over the remainder of the licence term. Rock continued to operate on the basis that it believed MWB had accepted a variation to the licence agreement, however MWB believed the revised payment schedule was a proposal and shortly after rejected it.

On 30 March 2012 MWB locked Rock out of the premises on account of its failure to pay the arrears. MWB also terminated the licence with effect from 4 May 2012 and then sued Rock for the arrears. Rock counterclaimed damages for wrongful exclusion from the premises.

The fate of the counterclaim, and therefore of the claim, turned on whether the variation agreement was effective despite failing to meet the requirements of the no oral modification clause.

The County Court Decision

At first instance the Central London County Court held that an oral agreement had been made to vary the licence in accordance with the revised schedule but that the variation was ineffective because it was not recorded in writing signed on behalf of both parties, as required by the no oral modification. MWB were therefore entitled to claim the arrears. Rock appealed the decision.

The Court of Appeal Decision

The Court of Appeal overturned the decision in the Central London County Court and held that the oral agreement amounted to an agreement to dispense with the no oral modifications clause and the revised payment schedule therefore amounted to a valid variation of the licence agreement. The Court held that the principle of party autonomy freedom of contract entitles parties to agree whatever terms they choose, subject to certain limits imposed by public policy. The parties are therefore free to include terms regulating the manner in which the contract can be varied, but just as they can create obligations at will, so also can they discharge or vary them, at any rate where to do so would not affect the rights of third parties

MWB therefore were bound by the variation and were not entitled to claim the arrears at the time when they did. MWB appealed the Court of Appeal’s Decision to the Supreme Court.

The Supreme Court Decision

The Supreme Court led by Lord Sumption overturned the Court of Appeal decision and held that the oral variation in this case was not valid, because it did not comply with no oral modifications clause in the contract which required any variations to be in writing and signed.

Lord Sumption based his decision on the following reasoning:

• Making a no oral modifications clause ineffective on the basis of maintaining party autonomy was a fallacy. Lord Sumption stated that autonomy operated up to the point when the contract was made, but thereafter only to the extent that the contract allowed otherwise parties would be unable to validly bind themselves as to how future changes in their legal relations were to be achieved, however clearly they expressed their intention to do so.
• There are commercial advantages to allowing parties to bind themselves as to how variations can be made. Lord Sumption listed some of these advantages as (i) preventing attempts to undermine written agreements by informal means; (ii) avoiding disputes about whether a variation had been intended and about its exact terms; and (iii) providing formality in recording variations, making it easier for corporations to police internal rules and restrict the authority of their employees to agree them. Lord Sumption pointed out that the law does not usually obstruct the legitimate intentions of businessmen unless there is a public policy issue and as there is no such issue created by these types of clauses, there is no need to interfere with their operation.
• It is not correct to imply an agreement to remove a no oral modifications clause where parties agreed orally upon a variation without saying anything about the clause. Lord Sumption stated that what the parties have agreed is not that oral variations are forbidden, but that they will be invalid. The mere fact of agreeing to an oral variation is not therefore a contravention of the clause. It is simply the situation to which the clause applies and 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 overlooked it.
• Generally the various doctrines of estoppel are available to safeguard against any injustices caused by enforcing a no oral modifications clause (although in this case Rock had not taken sufficient steps to support any estoppel defences). Lord Sumption stated that in order to be protected by estoppel 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 for this purpose than the informal promise itself.

Conclusion

This decision by the Supreme Court means that going forward, providing that the contract is clear, the Court is likely to require that any agreed formalities are complied with before it will find that the contract has been varied. A failure to comply with the requirements of such a clause when varying a contract will not necessarily invalidate the change, but if the required contractual variation procedure has not been followed, it will be more difficult to prove the amendment effective.

If parties wish to amend an agreement, they must therefore check and follow the formal procedures set out in the contract to vary its terms. Consideration must also be given for the variation of the agreement or it should be executed as a deed.

On the other hand parties wishing to rely on the formalities set out in a no oral modifications clause to invalidate a variation should bear in mind that they may be estopped/prevented from doing so where the other party has acted in good faith on the varied form of contract.