Oral variations can leave you between a Rock and a hard place
Variations to contracts, whether the scope of the works or services to be performed or the terms under which those works/services are provided, are common place in the construction industry.
Often these variations are agreed on site, in a hurry and with little regard to any formalities that might be contained within the parties’ contract. The recent case of Rock Advertising Limited v MWB Business Exchange Centres Ltd provides an important reminder that the contract shouldn’t be ignored.
In Rock, the Supreme Court held that a “no oral modification” clause (or NOM clause) is effective to invalidate a variation to a contract made by oral agreement or by conduct. Whilst this ostensibly removes an all-too-common cause of dispute, the practical effects may be significant (particularly in the construction industry but by no means exclusively).
NOM clauses are contained in many construction contracts and are often added to standard forms by way of bespoke amendments (sometimes as a matter of course in the “boilerplate” section). Standard and bespoke forms often also contain prescriptive provisions for instruction to be issued changing the works/services. They are intended to obviate disputes which may arise from alleged oral variations to a contract, notably when a party embarks on work in the belief they have been instructed to undertake such, only to find that the terms are in dispute or that such an “agreed” variation was never agreed at all.
The matter of whether an oral variation was formally agreed between the parties formed the basis of the dispute in Rock. Rock Advertising Limited (Rock) had entered into a contractual licence with MWB Business Exchange Centres Limited (MWB) to occupy office space but soon fell into arrears with payment of its licence fee. Rock subsequently proposed a revised scheduleof payments to MWB. Following a telephone discussion between the parties, Rock treated the revised schedule of payments as accepted. However, MWB later formally rejected the offer and, a month later, locked Rock out of the premises and terminated the licence for non-payment. MWB sued for the arrears and Rock counterclaimed for wrongful exclusion from the premises. The matter turned on the effect of the NOM clause contained in the licence.
The Court of Appeal found on the evidence that the telephone discussion between the parties’ representatives had constituted not only an oral agreement to revise the schedule of payments but also an agreement to dispense with the NOM clause. The Supreme Court disagreed and provided clarity on the effectiveness of NOM clauses, with the Court endorsing a view that parties are entitled to agree whatever terms they wish (within the boundaries set by common law and statute) at the outset of a contract. Thereafter, the parties should follow what they have agreed and inserting a NOM clause has the effect of invalidating any later attempt to vary those terms orally (including the NOM clause itself).
As justification, the Court set out three key practical reasons for upholding NOM clauses:
- to prevent attempts to undermine written agreements by informal means
- to prevent misunderstandings as to whether a variation is intended, and its terms, and
- to provide a measure of formality which makes it easier for corporations to police internal rules, restricting who has authority to agree variations.
Nevertheless, as touched upon in the judgment, such a position causes difficulties for a party that carries out work it has been instructed verbally to undertake, only to subsequently find that this does not alter the contractual basis on which it is entitled to be paid. As set out at the outset of this note, despite inclusion of NOM provisions in the construction contracts governing parties’ conduct, oral variations are still a common feature of the majority of construction projects.
Whilst Lord Sumption noted that “the safeguard against injustice lies in the various doctrines of estoppel” he declined to explore the circumstances in which such doctrines would be applicable and estoppel can only even be used as a “shield” rather than a “sword” to bring a claim.
The impact of the judgment and how adjudicators and the courts, might interpret arguments over estoppel remains to be seen. Whilst Rock ostensibly provides welcome clarification of the law, it may open a Pandora’s box of new disputes (or newly framed disputes) in the construction industry if parties fail to alter their conduct. In the meantime, the advice remains check your contract and comply with the agreed variation procedure. Parties who complain about the other being “overly contractual” should be reminded of the procedure they have either set or consented to.