Supreme Court upholds requirement to record variations in writing

Rock has seen the Law Lords unanimously uphold the effect of a “no oral modification” (NOM) clause, overturning the earlier (also unanimous) Court of Appeal decision. The decision heralds a departure from previous authority and has potential to be of significant application in view of the prevalence of NOM clauses.

What is a NOM clause?

NOM clauses tend to form part of “boiler plate” provisions in commercial agreements. They seek to bring certainty by excluding informal variations to contracts. In some form or another, they stipulate that variations must be set out in writing, often coupled with a requirement for parties to sign the document.

In the world of commerce, business people often vary their arrangements. This means departing from terms of a document they may never study closely (if at all). Unsurprisingly, those same people may not pause to record changes in writing, still less sign them.

What happened in this case?

MWB operates serviced offices in Central London. Rock entered into an agreement to occupy space for 12 months. It fell behind on payments. There followed a discussion regarding a revised schedule of payments. Rock claimed this arrangement was agreed. MWB disagreed. It contended that negotiations were on-going and Rock’s proposal was rejected. At any rate, Rock was locked out and MWB terminated the license and sued for the arrears.

The underlying agreement had a NOM clause. So a question arose as to whether the variation contended for by Rock could be effective as a matter of law. MWB won at first instance on the basis that the clause withstood the alleged variation. That decision was reversed by the Court of Appeal but ultimately restored by the Supreme Court.

The reasoning

There are no formal requirements for simple contracts at common law. Traditionally this has meant NOM clauses are often ineffective on the basis that a variation of a contract is itself a contract. And parties may agree informally to dispense with a clause which seeks to impose requirements of form. Indeed, it has often been said that they must have intended to do so by the mere act of agreeing a variation informally in spite of a NOM clause.

However, the notion that “party autonomy” ought to prevent parties from being bound to the manner in which future changes are to be achieved was rejected. As Lord Sumption put it, the real offence against party autonomy was a suggestion that parties cannot bind themselves as to the form of a variation, even if that it is what they have agreed. So he determined that the law should give effect to prior agreements which require specific formalities to be observed for a variation.

The court went on to recognise as legitimate the commercial purposes behind NOM clauses: (i) they prevent attempts to undermine written agreements by informal means; (ii) oral discussions may easily give rise to misunderstandings and crossed purposes regarding exact terms; and (iii) formality in recording variations makes it easier to police internal rules by restricting the authority to agree them.

Entire Agreement Clauses

Closely related to the NOM clause is the Entire Agreement Clause. Sometimes they form part of the same clause (and did so in Rock). Typically these provide that the agreement sets out the entire agreement between the parties and supersedes all proposals and prior agreements, arrangements and understandings between the parties.

Yet whilst they seek to promote certainty, Entire Agreement Clauses have traditionally come under attack alongside NOM clauses for conceptual reasons similar to those mentioned above.

Back in 1979, in Brikom Investments Ltd v Carr, Lord Denning “brushed aside” an entire agreement clause, observing “the cases are legion in which such a clause is of no effect”. In fact, as Lord Sumption observed, at that time there was not a single case in which the courts had declined to give effect to an Entire Agreement Clause. So he rejected Lord Denning’s dictum as being a general statement of the law. The true position, as he put it, is that if a collateral arrangement is capable of standing as an independent agreement (with separate consideration in support), it will be effective. If not, the Entire Agreement Clause will intervene and the collateral arrangement will be ineffective.

Conclusion

So where does the decision in Rock leave those who adapt and amend agreements informally, perhaps without knowledge of a NOM clause: are the changes completely unenforceable?

The answer lies in the doctrine of estoppel. This will intervene to prevent injustice arising where a party to a change in behaviour seeks to row back and argue invalidity. But the Lords specifically cautioned that this cannot be so broad as to destroy the advantage of certainty flowing from NOM clauses. And for an estoppel to be effective as a minimum one would expect (a) words or conduct unequivocally representing the variation as valid notwithstanding its informality; and (b) this would require something more than the informal promise itself.

So the decision probably won’t prevent oral modifications in circumstances where the parties have proceeded to conduct themselves in accordance with an agreed change. But it does pose a problem for those who have a disagreement over whether such an agreement has been reached, before a change has been implemented (as in Rock).

In summary the decision promotes certainty by making informal changes to agreements more difficult to enforce. It also underlines the need for those operating contracts to be aware of their terms and, in appropriate circumstances, to document agreed changes formally to ensure they are effective. 

To read the entire judgment click here.