Judicial Recognition of No Oral Modification Clauses

Along with the recent run of fine weather we also appear to be enjoying a run of significant appellate cases in the area of contract law.  Indeed, as Lord Sumption noted in his 16 May judgment in Rock Advertising Limited v MWB Business Exchange Centres Limited [2018] UKSC 24: “Modern litigation rarely raises truly fundamental issues in the law of contract.  This appeal is exceptional.  It raises two of them”.

The first was whether a contractual term prescribing that an agreement might not be amended except in writing (commonly called a “no oral modification” or “NOM” clause) is legally effective.  The second was whether an agreement whose sole effect is to vary a contract to pay money by substituting an obligation to pay less money or to pay the same money but later, is supported by consideration.

The parties in this case had entered into a license agreement.  The agreement included an entire agreement clause but also stated: “All variations to this License must be agreed, set out in writing and signed on behalf of both parties before they take effect”.

Rock Advertising accumulated arrears.  Representatives of MWB purported to enter into an oral agreement varying the license agreement to provide that the schedule of payments would be deferred, and accumulated arrears spread over the remainder of the license term.  Rock Advertising defaulted and MWB eventually terminated the license and sued for arrears.  Rock Advertising claimed that the variation was ineffective as it was not in writing.

Lord Sumption, on behalf of the majority of the Court, noted the conceptual reasons invariably given for treating NOM clauses as ineffective. Variation of an existing contract is itself a contract and because the common law imposes no requirements of form on the making of contracts the parties may agree informally to dispense with an existing clause which imposes requirements of form - the mere act of agreeing a variation informally must be taken as an intention to do so.

Contrary to those objections the Court found that the law should give effect to a contractual provision requiring specific formalities to be followed for variation and so a NOM clause will be effective.

In making that finding, Lord Sumption recognised the commercial drivers for including such clauses in contracts.  The first was to prevent attempts to undermine written agreements by informal means.  Secondly, in circumstances where oral discussions can easily give rise to misunderstandings, NOM clauses avoid disputes not just about whether a variation was intended - but also about its terms.  Thirdly a measure of formality in recording variations makes it easier for corporations to police internal rules restricting the authority to agree them.

These were all legitimate commercial reasons for such clauses.  There was no mischief in NOM clauses and they did not frustrate or contravene any policy of the law.  The law does not normally obstruct the legitimate intentions of business persons.  By contrast, the reasons given for disregarding such clauses were entirely conceptual.

Recognition of NOM clauses was consistent with the Court’s acceptance of entire agreement clauses.  Both were intended to achieve contractual certainty about the terms agreed.

Having determined that the clause in question was valid, the Supreme Court declined to consider the question of whether or not consideration had been provided, preferring to leave that until a sustained consideration or re-examination of the decision in Foakes v Beer could be undertaken.  

https://www.supremecourt.uk/cases/docs/uksc-2016-0152-judgment.pdf