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Facts

Rock Advertising (Rock) entered into a contract to occupy office space operated by MWB Business Exchange Centres Ltd (MWB) for a fixed term of 12 months.  The contract contained a no oral modification clause (“NOM”) which said that “All variations to this Licence must be agreed, set out in writing and signed on behalf of both parties before they take effect.”

Rock were in arrears of over £12,000.  Rock’s sole director and a credit controller at MWB discussed a revised payment schedule.  Rock argued that a variation had been agreed.  MWB rejected that.  MWB locked Rock out of the premises for failing to pay its arrears and terminated Rock’s licence.  MWB sued for arrears and Rock counterclaimed for wrongful exclusion.  The question for the Supreme Court was whether the NOM clause applied to exclude the alleged oral variation.

The Supreme Court Decision

The Court considered that the concept of party autonomy (the principle that parties are free to enter into contracts with whom they wish and to determine the contents of such contracts) did not prevent the parties from binding themselves as to their future relations.  The contract could still be amended, but only by the method previously agreed in that contract.

The judgment confirmed:

“[T]he law should and does give effect to a contractual provision requiring specified formalities to be observed for a variation.”

The Court set out three reasons why NOM clauses are used:

  1. They prevent the undermining of the written agreement by informal means;
  2. They avoid misunderstandings and misinterpretations; and
  3. The formality of recording variations makes such variations easier to police internally within a company.

The Court noted that neither The Vienna Convention on Contracts for the International Sale of Goods, nor the UNIDROIT Principles of International Contracts, require a contract to have any particular form.  However, the Court also noted that both instruments still allow for there to be no variation except in writing if that is what the parties have agreed.

The Supreme Court concluded that the intention of such clauses is contractual certainty, and that this was more important than conceptual arguments about whether party autonomy meant the parties could bind themselves as to their future legal relations.

If a party acted in reliance on an oral ‘variation’, and was then unable to enforce the contract, the doctrine of estoppel may be open to the parties to prevent injustice.  Rock had not taken enough steps to support a defence of estoppel. For estopped to apply, the Court held that there would need to be some conduct or words which unequivocally represented that the variation was valid despite its informality – and something more than an informal promise was needed for this purpose.  However, the judgment made clear that estoppel would not be allowed to become a means of destroying the certainty of NOMs.

Read the full judgment here.

Comment

Whilst this decision was in the area of property law, it has consequences for commercial contracts generally.

There are many types of contract which may be impacted by a NOM.  Construction, energy, shipbuilding, offshore construction contracts, and generally all commercial contracts may contain a NOM.  The clear message is that if your contract has a NOM, and you want to vary a term of the contract, do it in writing, comply with all the requirements set out in the NOM,  and make sure it is signed by all parties to the contract.  Subject to confidentiality, it is also good practice to formally notify all relevant persons (even if not required for the change), in writing, of the change, once it has been written down and signed. Leave no room for doubt.

Actual and ostensible authority

Parties should be cautious around who in their organisation has ostensible as opposed to actual authority to make any variations to the contract.  Actual authority is where an agent (of a party to the contract) has actual authority to make changes to the contract on behalf of one of the parties to it, for example, possibly a senior officer of the organisation.  Generally, few problems will arise with this.  The issue lies in ostensible authority – that is where it may appear to others who are parties to the contract that the agent they are dealing with has authority to make changes.

In many situations, parties are entitled to assume that an agent has the authority he/she appears to have, whether or not the principal party has, in fact, conferred actual authority.  In these circumstances it is even more imperative that any oral modifications are written down and agreed by the party with actual authority. For instance, with a shipbuilding contract, if you do not want the project manager to be able to agree changes, make sure the shipyard is aware that the manager does not have authority to authorise changes.  In scenarios such as this there are practical implications to consider. Often variations are made on-site and are informal and no problems arise.  But in light of the judgement in Rock, unless the doctrine of estoppel can come to the rescue, informal changes made where there is a NOM may lead to very significant problems for the party acting on the informal variation.

It is not difficult to imagine some of the practical difficulties that may arise, such as a matter of the time difference, between, for example, a shipyard in Asia and a shipowner client in Europe when pressure is on to complete a stage in the building contract.  It is much easier for parties on site to see a problem and agree a solution there and then rather than waiting for input from technical managers back in Europe on a different time zone and who are not there physically looking at the actual problem.  What, locally, might be decided in a matter of a few hours, may take days with a potential knock-on effect into the length of the build.

Entire agreement clauses

It is important to understand that a NOM is different from an ‘Entire Agreement’ clause.  An entire agreement clause excludes liability for statements other than those set out in the contract.  In effect it deals with the contract and past negotiations, not future ones.  An entire agreement clause does not, unless it specifically says so, bind the parties as to their future relations.  A good contract will include both a NOM and an entire agreement clause, and a good contract will make all parties aware of who does, and who does not have authority to agree any changes and that, regardless of actual or apparent authority, every oral modification must be reduced to writing, and signed by both parties (or specific persons), to be enforceable.  Time taken to ensure a proper modification to the contract at this stage will save much future time, stress and expense if a modification is acted upon without having been agreed in accordance with the contract’s terms.

Collateral agreements

Entire agreement clauses aim to prevent the parties sifting through many pre-contractual documents for statements to base a claim for a collateral contract on.  However, if a clause is a true collateral agreement, that is able to stand on its own, separate from the main contract, and it is supported by consideration, then a NOM will not prevent its enforcement.

Comparison with agreements which are ‘subject to contract’

Where agreements are made ‘subject to contract’ they are normally regarded as incomplete until the parties have agreed a settled, formal contract.  The parties may remove the words ‘subject to contract’ thereby possibly signalling their intention to be bound by the terms of the contract.  All will depend on the wording used, however, they could do this by agreement that the contract is now legally binding, i.e., it is no longer ‘subject to contract’.

Estoppel

Estoppel is an equitable doctrine which aims to prevent injustice.  A party is prevented or ‘estopped’ from going back on a representation they have made that they will not enforce their strict legal rights, intending the other party to rely on that statement, this is done in circumstances where the other party has in fact relied on it, and finally that it is equitable to apply the doctrine.

Estoppel may, in certain circumstances, rescue a party who has relied on an oral modification to the contract, despite the existence of the NOM, from injustice, but it is not a basis on which to ignore the NOM.  The Court in Rock made it clear that the doctrine of estoppel will not be allowed to easily undermine the purpose of a NOM.  To allow estoppel to undermine the use of NOMs would destroy the certainty that the parties intended to create by the use of the NOM.  That said, the doctrine of estoppel clearly places limits on the effectiveness of NOMS.

[1][2018] EWHC 2915 (Comm)