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 had 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 schedule of 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.   

Initially, the law on NOM clauses appeared sufficiently certain when Sedley LJ refused leave to appeal in United Bank Limited v Asif [2000] on the ground that it was "incontestably right" that a clause providing that "no oral variation of the written terms could have effect". Over the following years however case law appeared more equivocal and, in 2013, Gloster LJ declined to decide the point in Energy Venture Partners v Malabu Oil and Gas Ltd, stating that he was "incline[d] to the view that such clauses were ineffective". Subsequently, in the 2016 case of Globe Motors Inc v TRW Lucas Varity Electric Steering Ltd Beatson LJ held (albeit obiter) that on the basis of party autonomy, a NOM clause should not prevent a party from later making, in effect, a new contract:

"in principle the fact that the parties' contract contains a [NOM] clause…does not prevent them from later making a new contract varying the contract by an oral agreement or by conduct."

This line was followed by the Court of Appeal decision in Rock who 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 has now provided clarity on the effectiveness of NOM clauses.

Lord Sumption determined that the Court of Appeal's interpretation of such a concept was a "fallacy" as it would, in effect, prevent parties from binding themselves as to the manner in which future changes in their legal relations would be achieved:

"Party autonomy operates up to the point when the contract is made, but thereafter only to the extent that the contract allows. Nearly all contracts bind the parties to some course of action, and to that extent restrict their autonomy. The real offence against party autonomy is the suggestion that they cannot bind themselves as to the form of any variation, even if that is what they have agreed. There are many cases in which a particular form of agreement is prescribed by statute: contracts for the sale of land, certain regulated consumer contracts, and so on. There is no principled reason why the parties should not adopt the same principle by agreement."

Lord Sumption went on to address the question of whether the parties must inherently have intended to dispense with the NOM clause by attempting to vary the contract orally:

"What the parties to such a clause 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. It is not difficult to record a variation in writing, except perhaps in cases where the variation is so complex that no sensible businessman would do anything else. The natural inference from the parties' failure to observe the formal requirements of a [NOM] clause is not that they intended to dispense with it but that they overlooked it. If, on the other hand, they had it in mind, then they were courting invalidity with their eyes open."

In other words, the Courts endorse that parties are entitled to agree whatever terms they wish (within the boundaries set by common law and statute) at the outset.  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 (including the NOM clause itself) orally.

As justification for his position, Lord Sumption set out three key practical reasons for including such clauses:

• to prevent attempts to undermine written agreements by informal means, which may be open to abuse;

• to prevent misunderstandings as to whether a variation is intended and the terms of the variation; 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.

It is notable that Lord Briggs provided a lone dissenting (in ratio if not result) judgment in the case and provides his own solution to the conceptual problem faced by NOM clauses serving to limit party autonomy. Though Lord Briggs notes that his differences in reasoning would not have any significant consequences for the application of common law "save perhaps on very unlikely facts" he concludes by stating ominously that Lord Sumption's approach "would involve a clean break with something approaching an international common law consensus, unsupported by any societal or other considerations peculiar to England and Wales".

The impact of the judgment and how adjudicators, and the courts, might interpret arguments over estoppel (which can only be used as a 'shield' and not a 'sword') and unjust enrichment in an apparent brave new world 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 accordingly.  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.