‘No oral modification’ clauses are commonplace in contracts, but how effective are they?

July 24, 2018

In the recent UK decision of Rock Advertising Limited v MWB Business Exchange Centres Limit [2018] UKSC 24, the Supreme Court of the United Kingdom, on appeal from the England and Wales Court of Appeal, considered the validity of a ‘no oral modification’ clause which purported to preclude the parties from making any oral variations to the contract.

 

Rock Advertising Limited entered into a licence agreement (the Contract) with MWB Business Exchange Centres Limited to occupy MWB’s office premises. Clause 7.6 of the Contract required variations “be agreed, set out in writing and signed on behalf of both parties before they take effect”.

 

Rock failed to make its monthly payments and accumulated substantial arrears in licencing fees. To address the situation, Rock orally proposed a revised payment schedule to MWB’s credit controller. A dispute arose as to whether MWB had in fact agreed to Rock’s proposal. MWB subsequently denied Rock access to the premises and sued for recovery of the arrears. Rock countersued for wrongful exclusion. Central to both arguments was whether the revised schedule of payments which had been orally discussed formed part of the Contract.  

 

The Court, at first instance, decided in favour of MWB, with Moloney J finding that the variation was ineffective as it was not recorded in writing. The Court of Appeal found that the parties had reached a oral agreement as to the revised payment schedule, which amounted to an agreement to dispense with the ‘no oral modification’ clause in the Contract. MWB appealed, inviting the Supreme Court to reconsider contractual principles regarding the validity of no oral variation clauses.

 

The majority of the UK Supreme Court held that the law “should and does give effect to a contractual provision requiring specified formalities to be observed for a variation”. [1] In finding that the ‘no oral modification’ clause was effective, Lord Sumption, with whom the majority agreed, held that:

 

  • it is open to parties to agree to bind their future conduct, including as to the form of variations;

  • the commercial reasons for including ‘no oral modification’ clauses in contracts, such as to avoid misunderstandings as to scope of works, should not be ignored; and

  • in the appropriate circumstances, the enforcement of ‘no oral modification’ clauses will not bar a party who has relied on an oral agreement to its detriment from relying on the doctrine of estoppel as a “safeguard against injustice”.

 

The UK Supreme Court’s view on this issue is in marked contrast to the current Australian position which provides that ‘no oral modification’ clauses are ineffective in instances where the parties have entered into a subsequent oral or implied agreement to vary the contract.[2] It stands to be seen how Australian courts will treat this recent UK decision. Regardless, this case serves as a reminder to contracting parties to be mindful as to the form required when seeking to modify or vary a contract.

 

The full judgment can be found here.

 

 

[1] Rock Advertising Limited v MWB Business Exchange Centres Limit [2018] UKSC 24 at [10].

[2] See e.g., Liebe v Molloy (1906) 4 CLR 347, 353-355; Commonwealth v Crothall Hospital Services (Aust) Ltd (1981) 54 FLR 439, 447 and GEC Marconi Systems v BHP (2003) 128 FCR 1, 62-63.

 

 

Share on Facebook
Share on Twitter
Please reload

Featured Posts

Do Parent Company Guarantees create a pay now, argue later obligation?

Do Parent Company Guarantees create a pay now, argue later obligation?

June 28, 2019

1/8
Please reload

Recent Posts
Please reload

Archive