Supreme Court Ruling - What Parties Need to Know When Changing Contract Terms
Some recent cases have said that contracts could still be changed orally, even with a 'no oral modification clause' in place. But what is the decision by the Supreme Court?
When lawyers like me draft contracts for our clients, we like to draft to create contractual certainty. A lot of consternation has been felt in the last few years over cases that seemed to turn against what the contract actually said. This was particularly felt with 'no oral modification clauses' ("NOMs"). An NOM says that a change to the contract cannot be legally binding unless it is in writing and in a required format. Cases recently said that contracts could still be changed orally even with an NOM.
Now, in the case of Rock Advertising Ltd v MWB Business Exchange Centres Ltd, the Supreme Court - the highest court in the land - has reversed that. Once again, following this case, NOMs will be upheld.
Facts of the Case
MWB operated service offices. Rock signed up to a licence to occupy the office. The licence terms said, "All variations to this licence must be agreed, set out in writing and signed on behalf of both parties before they take effect." Rock got behind with its rental payments and suggested a revised schedule of payments, which was agreed in a telephone call with a representative of MWB. MWB's employee referred the matter to her manager, who rejected it. MWB terminated the licence and locked Rock out of the premises, claiming for the rent arrears. Rock claimed in return that this was a wrongful exclusion and that a change to the rent had been agreed on the phone.
Supreme Court Decision
Overturning the Court of Appeal's decision, the Supreme Court said that the parties were bound by the NOM, so anything agreed on the phone call was not legally effective. It cited the following justifications for upholding NOMs:
- They prevent attempts to undermine written agreements by informal means, which could open up abuse.
- Oral discussions can create misunderstandings and cross purposes. Restricting oral modifications avoids disputes not just as to whether there was a variation but the exact terms.
- Formality in recording changes allows businesses to police internal protocols for restricting authority for agreeing to changes.
Comment
It is good to see the courts back contractual certainty and to follow what the parties have agreed. Parties who enter into contracts would be well advised to have NOMs in their contracts; and if one exists then the parties should follow the form and not just assume that anything agreed informally is sufficient to change anything. Rather like serving notices, if the contract says something, it should be followed.
The case is in line with a recent trend for English courts to want to avoid departing from the natural wording in an agreement, following Arnold v Britton in 2015.
As an aside, another argument that MWB could have made was around whether it had provided any 'consideration' in return for the disadvantageous change in its contractual position. To be binding, an agreement would either need to be by deed or each party needs to give something in return. Here, the argument would have been that MWB had not received anything in return from Rock for agreeing to the changed terms. However, the case did not turn on this point, given the ruling that any change would have needed to have been agreed in writing anyway.