Written contracts often contain clauses saying that they can only be amended in writing — known as “No Oral Modification” or “NOM” clauses. It may come as a surprise to some, but until very recently the status of NOM clauses under English law was the subject of considerable uncertainty. Two different considerations pulled in opposite directions. The clause is usually clear and unequivocal freely agreed and beneficial from the point of view of commercial certainty — all good reasons to enforce it. But under English law persons with legal capacity to contract can, in general, make legally binding agreements that are purely oral. This in principle leads to the conclusion that if two people make an oral agreement that would otherwise be legally binding, it is not less binding because it varies an earlier written agreement, even if there is a NOM clause in the earlier agreement. To hold that they couldn’t make a fresh agreement varying the earlier one would be to reduce party autonomy in the law of contract.

In May 2018 the Supreme Court was faced with the need to decide whether to give priority to the commercial certainty by holding that NOM clauses do what they say or to party autonomy by holding that that a subsequent oral agreement overrides a NOM clause. In a short judgment handed down on in May 2018, the court in Rock Advertising Ltd v MWB Business Exchange Centres Ltd [2018] came down on the side of commercial certainty. NOM clauses now most definitely mean what they say.

Rock Advertising itself was about arrears of debt — license payments owed by Rock for office occupancy. The contract included a NOM clause at 7.6 as follows:

This Licence sets out all of the terms as agreed between MWB and Licensee. No other representations or terms shall apply or form part of this Licence. All variations to this Licence must be agreed, set out in writing and signed on behalf of both parties before they take effect.

Regular fees were payable under the license, but by February 2012, Rock had fallen into significant arrears on these payments. Rock proposed a revised schedule of payments, which was then discussed in a phone call between Rock’s sole director, and a credit controller of MWB. Rock’s director contended that this discussion constituted an oral variation of the contract, whereas the credit controller stated that it was simply a proposal which she intended to take to her boss.

The boss rejected the rescheduling arrangement. Relations between Rock and MWB then deteriorated. This resulted in MWB terminating the license, locking Rock out of the office, and commencing proceedings, with MWB claiming for arrears and Rock counterclaiming for wrongful exclusion from the offices.

The dispute turned on two questions. First, what was actually agreed in the disputed phone call? Secondly, what was the effect of clause 7.6 of the license? At first instance, the court found that there was an agreement on the telephone to reschedule, but decided that the agreement was legally ineffective because of the NOM clause in the written license agreement. Rock appealed and the Court of Appeal disagreed on the effect of the NOM clause: it did not prevent the parties agreeing whatever they wished about the payment schedule. In the view of the Court of Appeal it was legally ineffective, it did not do what it said.

When the matter came to the Supreme Court there was a clear majority for giving full effect to the NOM clause. Lord Jonathan Sumption who delivered the majority judgment, pointed to the benefit of commercial certainty that enforcing NOM clauses would bring and concluded that “party autonomy operates up to the point when the contract is made but thereafter only to the extent that a contract allows ….”

From an organizational perspective the decision has undoubted benefits. Legal rights whether they are contained in standard form written agreements or tailor made contracts are undermined if their enforcement is rendered uncertain. A NOM clause is intended to ensure that undocumented discussions whose content is disputed cannot prevail over the written word. NOM clauses also almost invariably require the written variation to be signed and this requirement will normally also be effective to ensure that the written variation is considered and sanctioned at an appropriate level of decision making within the organization. NOM clauses allow businesses to police variations to carefully prepared written terms.

The decision also means that parties who are unwilling to perform their contractual obligations are less able to resort to dubious and disputed conversations to resist enforcement of the written agreement. The scope for abuse through raising defenses to summary judgment application based on false, dubious or simply uncertain oral conversations is similarly reduced.

So far so good, but what about cases where there is a genuine oral agreement, clearly intended to be binding yet made by parties who are unaware that buried in the boiler plate there is a NOM clause? The decision means that ordinarily the genuine agreement cannot be enforced, regardless of the parties intend to create a binding variation. But there is a limited “get out” through the law of estoppel.

Lord Sumption explained that on the right facts a party may be precluded from relying on the NOM clause by their conduct, but while acknowledging the possibility, he was careful to emphasise that the doctrine of estoppel could not be allowed to destroy the commercial advantage of certainty that the NOM clause was designed to produce. In his view before an estoppel could prevent a NOM clause from being enforced there would need to be “At the very least, (i) … some words or conduct unequivocally representing that the variation was valid notwithstanding its informality; and (ii) something more would be required for this purpose than the informal promise itself.”

This part of the decision is potentially problematic as it requires those who agree the variation to have some awareness that the oral character of the variation is likely to be problematic because of its informality, for otherwise there is little cause for an unequivocal representation regarding informality and validity. Yet there may be cases (perhaps rare) where the variation is agreed between parties at a senior level on each side between people who are ignorant of the detailed terms of the contract and therefore agree something on a simple handshake that is fully intended to be binding. A party who then acts on the agreement as varied may suffer prejudice if the other party maintains that the variation was not effective because of the NOM clause.

The decision in Rock has reduced the uncertainty surrounding NOM clauses, but it has not eliminated it altogether.

Type

Insight

Locations

Cayman Islands

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