No oral modification clauses – rock solid?

Summary

In its recent judgment in Rock Advertising v MWB, the Supreme Court held that a ‘no oral modification’ clause (a NOM clause) precludes contracting parties from later orally varying an agreement.  In doing so, the Court confirmed that NOM clauses are valuable contractual protections, and parties wishing to vary contracts containing NOM clauses should do so in writing.  

Rock Advertising alleged that, having accrued rent arrears on its London offices, it had orally agreed a revised payment schedule with MWB, the landowner. MWB maintained that there had been no oral agreement and, in any event, that any oral variation was invalidated by the NOM clause in the contractual license between the parties. 

In 2016 the Court of Appeal ruled that, notwithstanding the NOM clause, the parties had validly orally varied the contract, and emphasised that contracting parties are free to agree whatever they like (subject only to the limits imposed by public policy).

The Supreme Court’s judgment 

The Supreme Court – or, more precisely, Lord Sumption’s lead judgment – saw things differently however, and held that a NOM clause does, in fact, invalidate any subsequent oral variation(s).  

In Lord Sumption’s view, the proper understanding of freedom of contract is not, contrary to the Court of Appeal’s judgment, that parties may later agree to vary an agreement despite a NOM clause, but rather that parties may agree to bind their future conduct using a NOM clause. Freedom of contract only operates up to the point the contract was made but thereafter only to the extent that the contract allows. 

Importantly, the Supreme Court also confirmed that the enforceability of NOM clauses is subject to the doctrine of estoppel, which may be used as a safety net to protect from any injustice a party which has relied upon an invalid oral variation of an agreement, in spite of a NOM clause.

Rocking the boat?

In his concurring judgment, Lord Briggs agreed – albeit for slightly different reasons – that NOM clauses are effective and the contract between the parties had not been validly varied.

Interestingly, however, Lord Briggs asserted that contracting parties can orally agree to remove a NOM clause, thereby varying the contract in itself but also, crucially, opening the door to further oral variations. Such oral agreements can, according to Lord Briggs, be either express or implied. Whilst the concept of an express oral agreement is relatively straight forward, the concept of an implied oral agreement is considerably less so. In Lord Briggs’ view, orally agreeing to vary the substantive terms of an agreement does not necessarily constitute an implied agreement to remove a NOM clause; instead, such an intention would have to be necessarily  implied from an oral agreement, and “[n]ecessity in this context is a strict test”.

Comment

The Supreme Court has confirmed that NOM clauses are effective and worthwhile contractual protections. Any variations to contracts containing NOM clauses should be undertaken in writing and signed by all parties.

The judgment goes to the very heart of the principle of freedom of contract and the conflicting interpretations of the Supreme Court and the Court of Appeal of that fundamental tenet will likely provoke legal and academic debate. 

The Supreme Court can perhaps be seen to have favoured contractual certainty over flexibility and, although both concepts have clear commercial benefit, whether or not parties will welcome this judgment will likely depend on their individual circumstances.

Lord Briggs’ comments will not be considered legally binding but may be revisited and reconsidered at some point, especially in a situation where a party alleges there was an express (or implied) oral agreement to dispense with a NOM clause. In the meantime, however, whilst perhaps not quite rock solid, NOM clauses can and should be relied upon.