Contractual Interpretation - no oral modification clauses
Is a no oral modification clause legally effective?
MWB (an operator of serviced offices) provided office space to Rock under a written licence. The licence contained a no oral modification (NOM) clause that stated "all variations to this Licence must be agreed, set out in writing and signed on behalf of both parties before they take effect". Rock (the Licensee) accumulated arrears of licence fees and proposed a revised schedule of payments.
Rock asserted that MWB had orally agreed to vary the licence terms, but MWB considered the revised schedule simply a proposal. MWB then excluded Rock from the premises for failure to pay the arrears and terminated the licence.
MWB issued proceedings for payment of the arrears while Rock counterclaimed for damages and wrongful exclusion. The County Court held that as the variation had not taken place in accordance with the terms of the licence, it was ineffective. Rock appealed successfully to the Court of Appeal which held that the oral agreement to vary the payments was valid and amounted to an agreement to dispense with the NOM clause. MWB then appealed to the Supreme Court.
The Supreme Court upheld the decision of the trial judge and, although the overall outcome was agreed, Lord Briggs gave a dissenting judgment.
The Supreme Court concluded that the law gave effect to contractual provisions which obliged the parties to follow certain formalities for a variation to the contract to be effective. To have found otherwise would override the intentions of the parties at the time the contract was formed. Lord Sumption (who gave the leading judgment) summarised that NOM clauses:
- prevented attempts to undermine written agreements by more informal means;
- avoided disputes about whether a variation had been intended and about its exact terms; and
- provided a more formal process for recording variations, making it easier to police internal rules restricting the authority to agree to any variations.
Lord Sumption added that estoppel would act as a safeguard against potential injustice. However, he noted that estoppel could not be so broad as to destroy the advantage of certainty provided by contractual terms (including a NOM clause). There would need to be some words or conduct which unequivocally represented that the variation was valid notwithstanding its informality.
Lord Briggs, in his dissenting opinion, envisaged that parties could expressly (or by necessary implication) agree to disapply the NOM clause . However, that line of reasoning no longer appears available (except perhaps as the basis for an estoppel) given the 4-1 majority decision of the Supreme Court.
Why is this important?
If a contract contains an NOM clause, then any oral variation will likely be invalid. In a practical sense this means that the parties must strictly follow the contract formalities in order to be sure that any variation is effective. Typically this will mean a written document signed by both parties, although parties may agree to other terms that set out how the contract may be varied. For example, in larger outsourcing contracts a rigid change control procedure could be agreed that clearly sets out the process and steps that need to be taken in order for the parties to vary the terms of the contract.
Any practical tips?
Make sure any clause that states how a contract can be varied is clear and workable. It is also important to keep in mind the risk profile of the agreement. If relatively small, consider a simpler method for varying the contract. However, larger risk agreements could benefit from a well thought out procedure for varying the contract in order to maintain party certainty. The business should also be made aware of the limits of their power to vary an agreement orally (or not in accordance with agreed procedures).