UK: No Oral Variation Clauses

Last Updated: 27 November 2018
Article by James Mullen

Like many commercial contracts, construction contracts often include what is commonly referred to as a "No Oral Modification"("NOM") clause. Such a clause is intended to prevent oral variations to a contract, instead requiring any variation to be agreed in writing by the parties.

As noted by Lord Sumption in Rock Advertising Limited v MWB Business Exchange Centre Limited, which we shall look at in more detail below, there are at least three commercial reasons for including a NOM clause in a contract:

  1. It prevents attempts to undermine written agreements by informal means;
  2. In circumstances where oral discussions can give rise to misunderstanding and cross-purposes, it avoids disputes not just about whether a variation was intended but also its exact terms; and
  3. A measure of formality in recording variations makes it easier for corporations to police internal rules restricting the authority to agree them.

However, whilst NOM clauses may be intended to create certainty, it may be surprising to learn that until recently the law on the effectiveness of NOM clauses was anything but certain.

The uncertainty surrounding the effectiveness of NOM clauses was due to a number of factors.

First, the principle of "freedom of contract" entitles parties to agree whatever terms they choose (subject to limits imposed by public policy) and it also entitles parties to discharge or vary those terms by agreement, including by consensual oral variation.

Secondly, at common law there are no formal requirements for the validity of a simple contract provided the essential elements of offer, acceptance and consideration are present, meaning a common law contract can be made orally as well as in writing. As noted by Lord Briggs in Rock, these matters are as applicable to the variation of an existing contract as they are to the making of a contract in the first place.

Thirdly, the uncertainty was due in some part to a couple of previous inconsistent decisions on NOM clauses by the Court of Appeal ("CA"). In United Bank 1 the CA had refused leave to appeal on the grounds that in the face of a NOM clause, no oral variation of written terms could have legal effect. The issue arose again two years later in World Online Telecom.2 In that case, the CA noted that the parties had made their own law by contracting and they could, in principle, unmake or remake it. However, and apparently in ignorance of the decision in United Bank,the Court went on to say that in the absence of decisive English authority, there was room for debate and movement on the issue. Therefore, the CA felt that it was a sufficient reason for refusing summary judgment that "the law on the topic is not settled".

In Rock, the Supreme Court has now finally clarified the position on the effectiveness of NOM clauses, deciding that such clauses are to be given effect so as to prevent oral variations to a contract.

Background

MWB Business Exchange Centres Ltd ("MWB") operated offices in Central London. Rock Advertising Ltd ("Rock") entered into a licence with MWB for office space ("the Contract"). Clause 7.6 of the Contract was a NOM clause and provided that:

"All variations to this Licence must be agreed, set out in writing and signed on behalf of both parties before they take effect."

Rock fell into arrears and proposed a revised payment schedule to a credit controller at MWB. There was then a telephone discussion between Rock's director and MWB's credit controller. Rock contended that the parties had agreed orally to vary the Contract in accordance with the revised payment schedule.

Soon after, MWB locked Rock out of the premises on account of failure to pay arrears and terminated the Contract. MWB sued Rock for the arrears and Rock counterclaimed damages for wrongful exclusion from the premises. The fate of Rock's counterclaim, and therefore the claim, turned on whether the oral variation was effective given the inclusion of the NOM clause in the Contract.

First instance

The claim was first considered by the Central London County Court which found in favour of MWB, giving effect to the NOM clause. The Judge decided that MWB's credit controller had agreed to vary the Contract in accordance with the revised payment schedule but the variation was ineffective because it did not comply with the requirements of clause 7.6.

Court of Appeal

Rock appealed the decision and the case was heard by the CA in March 2016.3 Between the CA hearing Rock's appeal and the handing down of its judgment in June 2016, a differently constituted CA handed down its judgment in Globe Motors Inc and Ors v TRW Lucas Varity 4 which also considered the effectiveness of a NOM clause.

In Globe, the CA's decision on another point meant it did not have to decide the effectiveness of the NOM clause. However, given the CA's previous inconsistent decisions the Court took the opportunity to give an obiter view on the issue. The CA did not give effect to a NOM clause, saying that parties could orally vary a contract even if it contained a NOM provision. Citing party autonomy, the CA reasoned thatas a matter of general principle, parties had the freedom to agree whatever terms they wished, and could do so in a document, by word of mouth or by conduct. It followed that in principle the fact that a contract included a NOM clause did not prevent the parties from later making a new contract varying the original contract by oral agreement or by conduct.

The CA in Rock agreed with the reasoning in Globe, citing party autonomy as the most powerful consideration. In support, the CA referred to the well-known words from an American judgment nearly 100 years ago:

"Those who make a contract, may unmake it. The clause which forbids a change, may be changed like any other. The prohibition of oral waiver, may itself be waived . . . What is excluded by one act, is restored by another. You may put it out by the door, it is back through the window. Whenever two men contract, no limitation self-imposed can destroy their power to contract again. . ." 5

The CA allowed Rock's appeal and found that the oral agreement to revise the schedule of payments also amounted to an agreement to dispense with the requirements of clause 7.6. It followed that MWB were bound by the oral variation.

The Supreme Court

MWB appealed and the dispute came before the Supreme Court in 2018, with the Court noting that the case raised "truly fundamental issues in the law of contract".

The lead judgment was given by Lord Sumption with which the majority of the Supreme Court judges agreed. Lord Briggs reached the same conclusion as Lord Sumption, albeit for different reasons. The Supreme Court overturned the CA's decision, giving effect to the NOM clause and deciding that the Contract had not been varied by oral agreement as it did not comply with the requirements of clause 7.6.

In his judgment, Lord Sumption said that to not give effect to a NOM clause was to override the parties' intentions. He considered the CA's reliance on party autonomy to be "a fallacy", saying that party autonomy operated up to the point when the contract was made, but thereafter only to the extent that the contract allowed.

Lord Sumption also dismissed the theory that parties who agreed an oral variation in spite of the NOM provision must have intended to dispense with the clause. What the parties to such a clause had agreed was not that oral variations were forbidden, but that they would be invalid. The mere fact of agreeing an oral variation did not contravene a NOM clause, it was simply the situation to which the NOM clause applied. It was not difficult to record a variation in writing, save for those cases where the variation was so complex that no sensible businessman would do anything but record it in writing.

In Lord Briggs' view, a NOM clause continued to bind the parties until they expressly (or by strictly necessary implication) agreed to do away with it, which they could do without following the requirements of the NOM clause.

Lord Sumption did recognise that enforcement of NOM clauses came with the risk that a party may act on the contract as varied and then find itself unable to enforce it. However, the Judge noted that the safeguard against such injustice lay within the various doctrines of estoppel, albeit the scope of estoppel could not be so broad as to destroy the whole advantage of certainty which the parties had stipulated when they agreed terms which included a NOM clause. At the very least, (i) there would need 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.

Comment

On construction projects, there are often informal discussions and/or oral instructions and variations between the parties. However, the reality is that most standard form building contracts already provide that oral instructions will be of no immediate effect until confirmed in writing (for example, see clause 3.12 of the JCT Standard Building Contract with Quantities). The decision in Rock confirms that the courts will give effect to these types of clauses and so if the requirements of a NOM clause are not followed, there is a very good chance that the instruction and/or variation will not be effective.

Lord Sumption acknowledged that giving effect to a NOM clause means there is a risk of parties undertaking work on the basis of an oral variation and then finding that they are unable to enforce it. In these circumstances, the doctrine of estoppel will hopefully protect a party against injustice although certain requirements would need to be met in order for the argument to succeed.

The practical message arising from Rock is really one of common sense and good practice: make sure you know and understand your building contract, ensure that any formal procedures to vary it are followed, and ensure that you maintain good records. We cannot stress enough the importance of maintaining good records during a construction project. If there is an oral instruction or variation, as a matter of good practice make sure that it is recorded in writing. Doing so will hopefully prevent disputes arising between parties in the future. Whilst they may not seem important at the time, these records could potentially become key documents in any subsequent dispute between the parties.

Footnotes

1. United Bank Ltd v Asif and Anor (11 February 2000, unreported).

2. World Online Telecom v I-Way Ltd [2002] EWCA Civ 413.

3. MWB Business Exchange Centres Ltd v Rock Advertising Ltd [2016].

4. [2016] EWCA Civ 396

5. Cardozo J, New York Court of Appeals in Alfred C Beatty v Guggenheim Exploration Company and Others (1919) 225 NY 380 (at pages 387 to 388).


This article is taken from Fenwick Elliott's 2017/2018 Annual Review. To read further articles go to Fenwick Elliott Annual Review 2018/2019


The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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