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Supreme Court addresses contractual clauses seeking to prevent oral modifications

"Modern litigation rarely raises truly fundamental issues in the law of contract.  This appeal is exceptional.  It raises two of them".  These were the words with which Lord Sumption recently began the leading judgment in Rock Advertising Limited v Business Exchange Centres Limited [2018] UKSC 24.  Whilst the second of these issues did not ultimately fall to be decided by the Court, the first of them - whether clauses commonly known as 'No Oral Modification' or 'NOM' clauses should be upheld - was decisively addressed by the Supreme Court.

Background

Rock Advertising Limited ("Rock") had entered into a licence with MWB Business Exchange Centres Limited ("MWB") for Rock to occupy an office building in London.  Rock got into arrears and there was a dispute as to whether an oral agreement had been reached between Rock and MWB to revise the payment schedule in the licence.  The licence itself contained a NOM clause which provided "All variations to this Licence must be agreed, set out in writing and signed on behalf of both parties before they take effect".

MWB didn't consider that a revised payment schedule had actually been agreed, locked Rock out of the premises and sued it for the arrears under the licence.  Rock counterclaimed for damages for wrongful exclusion.

At first instance, Judge Moloney QC found in favour of MWB (despite his finding that an oral agreement had been reached to revise the payment schedule) on the basis of the NOM clause. The Court of Appeal overturned this decision on the basis that it considered the NOM clause had been dispensed with by the revised payment schedule.

Decision

In a unanimous decision, the Supreme Court allowed the appeal and found in favour of MWB in view of the NOM clause.  Lord Sumption gave the leading judgment, and after considering the approach in a number of countries across the world, found that "In my opinion the law should and does give effect to a contractual provision requiring specified formalities to be observed for a variation".

Lord Sumption added that some protection against the risk of injustice that could arise in circumstances where a party might have acted on a contract as orally varied (i.e. by performance) but then found itself unable to enforce it, is provided by the concept of estoppel (albeit the indication being that this would only be available in specific circumstances).  On the facts of this case, the steps taken by Rock Advertising had been insufficient to support any estoppel defences.

Lord Briggs agreed with Lord Sumption's decision, but reached his conclusion on "different and rather narrower grounds".  Lord Briggs considered that parties could expressly agree to do away with a NOM clause orally but that, in circumstances where they had not said anything at all about the NOM clause, a purported oral variation of the contract would not be sufficient to impliedly dispense with the NOM clause, unless there was a strictly necessary implication of an agreed departure from it.

On the consideration issue - that is whether an agreement whose sole effect was to vary a contract to pay money by substituting an obligation to pay less money or the same money, is supported by consideration - Lord Sumption declined to address this obiter as it would likely involve reconsidering the House of Lords decision in Foakes v Beer (1884), and whilst it was "probably ripe for re-examination", he felt that it should be before an enlarged panel of the court and not just in an obiter dicta context.

Comment

The decision provides welcome clarification from the Supreme Court in an area which, as acknowledged by the Supreme Court itself, had been subject to equivocal recent authority.  The circumstances in which a party may now seek to rely on an oral variation where the contract contains a NOM clause are likely to be much more limited.  To avoid disputes, parties would be well advised to ensure that any NOM clauses in contracts are complied with precisely. 

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