In Rock Advertising Limited v. MWB Business Exchange Centres Limited [2018] UKSC 24 the Supreme Court starts its judgment by commenting: “Modern litigation rarely raises truly fundamental issues in the law of contract.” This judgment has important ramifications for anyone involved in the construction industry whereby parties agree oral changes to a contract but in circumstances where the underlying contract contains a No Oral Modification Clause (“NOM’s”) which they often do.
In February 2012 Rock had rent arrears of some £12,000, which it owed to MWB, from whom it leased serviced offices in Central London.

One of Rock’s directors purportedly agreed a revised schedule of payments with MWB’s credit controller. The proposal was to defer February and March payments, and then spread the arrears over the remainder of the licence term with interest being accounted for.

These discussions took place over the telephone. Rock later asserted there had been an oral agreement to vary the licence agreement. In turn MWB argued that it was merely a proposal as part of a continuing negotiation.

Unfortunately, when the proposal was put to one of MWB’s directors it was rejected.

As a result, MWB took possession, locking Rock out of the premises thereby bringing the licence to an end. Rock counterclaimed for wrongful termination.

County Court

At first instance the Court found that an oral agreement had been made to vary the licence which was supported by the necessary legal consideration, but that the variation was ineffective due to clause 7.6 of the licence (the NOM clause) which stated:

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 the Licence. All variations to this Licence must be agreed, set out in writing and signed on behalf of both parties before they take effect.

The Court of Appeal

The Court of Appeal, somewhat surprisingly, overturned the County Court decision.

Whilst they agreed that the variation was properly supported by legal consideration, they considered that the oral agreement to revise the schedule of payments amounted to an agreement to dispense with the strict legal requirements of the NOM clause agreed between the parties under the terms of the licence.

As a result, MWB was bound by the variation; they were not entitled to claim arrears at the time when they did and had, therefore, entered into wrongful possession of the premises. Unsurprisingly, the Landlord appealed.

The Supreme Court

Having considered a number of different authorities (both UK and USA) Lord Sumption concluded the law should give effect to a contractual provision requiring specified formalities to be observed for a variation.

He acknowledged in general terms the common law’s flexibility about formal validity - in that flexibility enables agreements to be made quickly, informally and without the intervention of lawyers or legally drafted documents.

Despite this, NOM’s are commonly included in written agreements which suggests that such flexibility is found to be a mixed blessing by businessmen, and not always welcome.

Lord Sumption suggested three reasons for including NOM clauses:
  • It prevents attempts to undermine written agreements by informal means, a possibility which is open to abuse, for example raising defences to summary judgment;
  • In circumstances where oral discussions can easily give rise to misunderstandings and crossed purposes, it avoids disputes not just about whether a variation was intended but also about its exact terms; and
  • A measure of formality in recording variations makes it easier for corporations to police internal rules restricting the authority to agree them.

The Supreme Court have handed out a timely reminder that “Contract is King” and that failure to follow the terms agreed is at the peril of parties seeking to alter terms, other than in accordance with the requirements of the contract.

Given  the construction industry’s  propensity  to neglect the niceties of contract amendments to standard forms and even standard forms themselves in favour of perceived industry practice, parties would be well advised to take heed of  the presence of NOM’s in the majority of  standard form contracts.

There is no substitute for documentary evidence and it goes without saying that  the need for a proper paper trail recording any agreements to vary between the parties has once more been emphasised by the Supreme Court in their wrist slap of a Court of Appeal seeking to embrace the tendency in some quarters towards informality in their commercial dealings.

Whilst there was an acknowledgment in the decision that the law of estoppel might prove to be the only defence in face of a party relying on an oral variation, such a defence is going to be severely limited. Indeed, estoppel was an argument that Rock attempted to run, but failed as a last bastion to secure informal legal relations.
 CONTACT: Christopher Filor
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This publication is not intended to provide legal or other professional advice and should not be relied upon as such. Readers should take legal advice before applying the information contained in this briefing.
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