Oral variations
Rock Advertising v MWB Business Exchanges (SC) [2018]
We reported on the Court of Appeal decision back in our September 2016 Update. The Court of Appeal had overturned the original decision of the County Court. Now the Supreme Court has in turn overruled the Court of Appeal, effectively giving legal effect to contractual clauses which prohibit oral variations to a commercial contract having effect.
Facts:
MWB is a provider of serviced offices. Their contract with Rock contained a clause in the following terms:-
"All variations to this Licence must be agreed, set out in writing and signed on behalf of both parties before they take effect".
Rock had accumulated arrears of fees and it proposed a revised schedule of payments. It was argued that an agreement had been reached during a telephone conversation between Rock’s sole director and MWB’s credit controller that part of the upcoming payments would be deferred and the arrears would be spread over the remainder of the licence term. Rock contended that MWB had orally agreed to vary the contract. MWB disagreed. It locked Rock out of the premises for failure to pay the arrears and terminated the contract. MWB sued for the arrears; Rock counterclaimed for damages for wrongful exclusion from the property.
The county court judge found that an oral agreement had been made to vary the contract in accordance with the revised schedule and that the variation was supported by consideration or benefit to MWB because it brought practical advantages to MWB. However, he found that the variation was ineffective because it had not been in writing, as the clause required.
Rock successfully appealed to the Court of Appeal which held that the oral agreement to vary the payments also amounted to an agreement to dispense with the no oral variation clause, meaning that MWB was bound by the variation. MWB appealed to the Supreme Court.
Decision:
The Supreme Court unanimously allowed the appeal and refused to allow the no oral variation clause to be ignored. Lord Sumption gave the lead judgment with which 3 law lords agreed. Lord Briggs agreed with the result but disagreed with the reasoning.
The Supreme Court held that the law gives effect to contractual provisions requiring specified formalities to be observed for a variation. Lord Sumption commented that such clauses:
- Prevent attempts to undermine written agreements by informal means..
- Avoid disputes about whether a variation had been intended and about its exact terms.
- Provide formality in recording variations, making it easier for companies to police internal rules restricting the authority of individuals to agree variations.
These were all recognised as legitimate commercial reasons for using such clauses. The court did however acknowledge that the enforcement of such clauses carried with it the risk that a party could act on the contract as varied and then find itself unable to enforce it. The safeguard against injustice in such circumstances lays in the doctrine of ‘estoppel’. For estoppel to apply there has to be some words or conduct unequivocally representing that the variation was valid notwithstanding its informality, and something more would be required for that purpose than just the informal promise itself.
Lord Sumption supported his conclusions by drawing analogies with so called ‘entire agreement’ clauses. He argued that if entire agreement clauses can have the effect of preventing a contract variation taking effect then clauses prohibiting oral variations should also be given effect. This analogy with entire agreement clauses is questionable. Entire agreement clauses are primarily backwards looking. Clauses prohibiting oral variations are, in direct contrast, forward looking.
Lord Briggs came to the same conclusion but for different reasons. He explicitly recognised that parties to a contract can together orally agree to remove a no oral variation clause from their contract. However, an agreement to remove a no oral variation clause would not be implied where the parties agreed orally upon a variation but without saying anything about the clause. In this instance, nothing had been said about the no oral variation clause and so it remained ‘in play’. He did however leave open the possibility that a no oral variation clause could be removed either expressly or by ‘strictly necessary implication’ i.e. not necessarily in writing. However, he did stress that such a test would be narrowly applied.
One of the issues which commonly arises in relation to variations is the question of the presence or absence of consideration or value flowing from each party to the other. Unilateral promises are not typically binding as contracts. Part payment of or agreement to pay a sum that is already owed is not normally regarded as good consideration. The decision that the Court reached on the variation clause made it unnecessary for the Supreme Court to deal with the issue of consideration. The only consideration MWB could have been given for accepting a less advantageous schedule of payments was the prospect that payments were more likely to be made if they were rescheduled. This was an expectation of practical value but not an additional contractual entitlement. Practical expectations have been held not to be adequate consideration ever since the case of Foakes v Beer dating from 1884. The Supreme Court said that any decision on that point was likely to involve the re-examination of Foakes. The Supreme Court explained that this should happen before an enlarged panel of the court and in a case where the decision would be than more than ‘obiter’ i.e. a comment said in passing which is not necessary to the judgment in issue.
Points to Note:
- The decision of the Supreme Court fundamentally turns the law ‘on its head’. It will now be much easier to argue that a variation has not occurred if the relevant formalities have not been obeyed. The judgment certainly promotes a degree of certainty and will make it much easier for contracting parties and their advisors to review their contractual rights and obligations.
- The decision recognises reality – namely that parties who agree oral variations overwhelmingly do not consciously intend to dispense with the clause but just overlook its impact (or are simply unaware of the clause entirely)
- We suspect it will be very rare indeed where the parties explicitly, during the course of an oral variation, agree to waive the prohibition upon oral variations.
- Lord Brigg’s test of ‘strictly necessary implication’ could apply in circumstances where the parties orally agree upon a variation and act upon it before a written record of the variation can be drawn up.
- There is likely to be much greater focus on when an amendment has been made ‘in writing’ and whether the amendment has been properly signed.
- It must be remembered that estoppel is generally just a ‘shield’ and not a ‘sword’. It is an equitable remedy which depends heavily on demonstrating reliance and detriment. Most estoppels will not give rise to a new cause of action and can only be raised as part of a defence to a claim. Indeed, Lord Sumption expressly acknowledged that the scope of estoppel cannot be so broad as to destroy the whole advantage of certainty created by the parties when they agreed the terms of the NOV clause. Quite how that balance will be struck going forward remains to be seen.