UK: A Contract Does Not Always Mean What It Says...

Last Updated: 25 January 2017
Article by Saleem Fazal

MWB Business Exchange Limited v Rock Advertising Limited [2016] EWCA Civ 553

The Facts

Rock Advertising ("Rock") enjoyed a licence for serviced offices belonging to MWB Business Exchange Limited ("MWB"). Rock had in fact been in occupation for over seven years when it renegotiated its licence to take additional space at an increased fee.

The licence contained a clause which stated that all "variations to this licence must be agreed, set out in writing and signed on behalf of both parties before they take effect."

Unfortunately, Rock's business did not expand as anticipated and it fell into arrears.

Rock claimed that it orally agreed a payment plan (the "Payment Plan") with MWB's credit controller and then paid over £3500 on that same day. The Payment Plan involved making reduced payments initially but then making up the balance by the end of that year.

Subsequent to this, MWB denied that the Payment Plan had been agreed and terminated Rock's licence. MWB then brought these proceedings in respect of the arrears.

The law

This case involved an examination of the following principles:

The enforceability of "non-variation" clauses that say that contracts may only be varied in writing;

What constitutes "consideration" – all contracts must have an element of consideration given by both parties to be valid; and

Whether an estoppel arose – for an estoppel argument to succeed, the party must show that they acted to their detriment in reliance on a promise.

Rock's arguments

Rock defended the claim on the basis that:

(a) The Payment Plan constituted an oral contract which varied the payment provisions due pursuant to the licence;

(b) In the alternative, MWB was now estopped from enforcing the terms of the licence as Rock had acted to their detriment by paying £3500 when the alleged Payment Plan was made.

MWB's arguments

MWB argued that it was not possible for the licence to be varied as the terms of clause 7.6 were clear:

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

Consequently, even if an agreement was made, it was not enforceable.

In the alternative, MWB denied there could be a valid contract as there was no consideration provided by Rock for the variation as Rock had simply agreed to pay the same sums that were already due under the licence. No further consideration for the new oral contract had been provided.

Further, there could be no estoppel as Rock had simply agreed to pay an existing debt and therefore the initial payment of £3500 could not amount to detriment on Rock's part.

County Court decision

The Judge held

  • A contract had been made orally on 27 February 2012 as there had been adequate consideration. This took the form of Rock agreeing to remain in occupation of the offices which meant that MWB did not suffer a void. In addition, MWB could be sure of receiving payment.
  • However, the Judge upheld the enforceability of clause 7.6 and found that the licence had not been varied orally. For that reason, Rock's claim defence failed.
  • The Judge also rejected Rock's claim that MWB was estopped from enforcing any of its other rights under the terms of the licence.

Court of Appeal

Rock appealed, claiming that clause 7.6 of the licence was not enforceable despite what it said.

In turn, MWB argued that the Judge was wrong in holding that there had been adequate consideration for any variation.

The decision

It was clear that there was conflicting authority on the enforceability of clauses such as clause 7.6. On the one hand, there was authority to suggest that such clauses were properly enforceable as the parties had agreed to them from the outset. In addition, restrictions of this nature result in more certainty and avoid unmeritorious allegations of oral variations.

On the other hand, other case law suggested that such clauses were not enforceable as they prevented parties from entering into a subsequent contract in another way and that is against public policy. Parties should have the freedom to contract subsequently in any manner possible by law.

At the same time that this case was being heard, there was another case also in the Court of Appeal dealing with a similar issue. As it happens, the decision in both cases was the same. Essentially, clause 7.6 was not sufficient to stop the parties agreeing to vary the contract or entering into another contract on a subsequent date orally. The main reason given in both cases was that a party should enjoy autonomy in how they choose to contract. Consequently, the oral agreement between Rock and MWB was enforceable despite the clear terms of clause 7.6.

On the question of consideration, there was a detailed review of case law. Ultimately, the Court of Appeal held that payment to a creditor of sums pursuant to an instalment plan could amount to adequate consideration given that the alternative might be that no payments were received at all. However, an agreement to a payment plan will not always mean a creditor is estopped from enforcing other rights – it depends on the circumstances of each case.

For these reasons therefore the Court of Appeal overturned the first decision and found in favour of Rock.

Our comments

It might seem odd that an express term of a contract can be ignored by the Courts. However, it must make sense for the Courts to encourage the practice of parties entering into further contracts how they wish and that such freedoms should not be curtailed. Still it is usually best practice to record variations in writing to avoid this sort of dispute.

Similarly, it is difficult to see how a payment of a debt which is already due pursuant to an existing contract could be seen as consideration in respect of a new contract. However, it perhaps meets public policy demands that such agreements are held to be enforceable as otherwise there would be no incentive for the parties to agree them in the first place.

Certainly a pragmatic decision to ensure the commercial world works more smoothly. The case also demonstrates the need to be careful when interpreting contracts – they might not mean what they say.

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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