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Rocking the Boat: UK Supreme Court Changes Tack on Variation Clauses

AUTHOR(S): Garret Farrelly
PRACTICE AREA GROUP: Energy and Natural Resources, Projects
DATE: 21.06.2018

On 16 May 2018, the UK Supreme Court held in that ‘no oral modification’ clauses (“NOM clauses”) are valid and enforceable.  The effect of the decision in Rock Advertising Limited v MWB Business Exchange Centres Limited is that where a contract contains a provision expressly requiring that all variations be agreed in writing, oral modifications will not be enforceable.  This is a departure from the previous position which allowed contracting parties to effectively agree to not be bound by a written NOM clause.

The Case

Facts

Rock Advertising (“Rock”) entered into a licence with MWB Business Exchange Centres (“MWB”) to occupy office space in London for a fixed term of 12 months for an agreed monthly licence fee in August 2011.  The licence agreement contained the following NOM clause:

“This Licence sets out all of the terms as agreed between MWB and [Rock].  No other representations 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.”

Rock fell into arrears with its licence fee and proposed a revised payment schedule.  Rock contended that the credit controller had agreed to vary the licence agreement and accept this proposed payment schedule, a contention which MWB denied.  MWB ultimately rejected the proposed schedule, locked Rock out of the premises and terminated the agreement.  MWB then sued Rock for arrears.  Rock counterclaimed damages for wrongful exclusion claiming that MWB had orally agreed to vary the payment schedule in the original licence agreement.

The Court of First Instance held that the contended variation was ineffective as it did not meet the formal requirements set out in the NOM clause (the proposed variation was not recorded in writing and signed on behalf of both parties).  The Court of Appeal overturned this decision and held that MWB’s  acceptance of the revised payment schedule constituted an agreement to dispense with the NOM clause.  MWB appealed this decision to the Supreme Court.

Decision

The Supreme Court noted that, save for a number of statutory exceptions, such as contracts for the sale of land, there were no common law requirements regarding the formal structure of a contract which must be established for a contract to be valid.  Lord Sumption, delivering the majority judgment, noted that this lack of formal requirements for making a contract has resulted in NOM clauses being treated as ineffective as they are viewed as easily overridden.  Lord Sumption referred to previous jurisprudence where courts have held that contracting parties can make and ‘unmake’ a contract at will, which should enable parties to vary a contract in a way not provided for within an agreement. Notwithstanding this, Lord Sumption held that the law should give effect to contractual provisions which set out clear formal requirements for variation.  In response to the suggestion that contracting parties should retain the unfettered autonomy to alter a contract, the Court noted that party autonomy operates “up to the point when the contract is made, but thereafter only to the extent that the contract allows.”  Consequently, where parties have agreed to restrict their ability to vary a contract, they should be obliged to observe those restrictions.

The Court addressed the potential inequity which may arise from parties relying on purported oral variations which are unenforceable as a result of NOM clauses.  The Court noted that in cases such as these, the doctrine of estoppel will act as an equitable safeguard.

Conclusion

Although this case is only of persuasive authority in Ireland, it is likely to influence any future decision of the Irish courts given the absence of settled case law on the validity of NOM clauses in Ireland.  Therefore, when seeking to vary a contract, the parties to that contract should ensure that they strictly adhere to the variation requirements set out in an agreement otherwise they risk being in a position where they are unable to enforce such variations.

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