Supreme Court upholds need for variations to follow contractual process20/06/18
On 16 May 2018, the Supreme Court handed down its Judgment in Rock Advertising Limited v MWB Business Exchange Centres Limited  UKSC 24 (Rock Advertising).
The dispute, which had been appealed all the way to the highest Court in the UK, was narrow, uncomplicated and involved the modest sum of £12,000. Nevertheless, Rock Advertising will have big implications for all parties who use “No Oral Modification” (“NOM” clauses”). In the words of Lord Sumption, (who gave the lead judgment), “This appeal is exceptional”.
What are NOM clauses?
NOM clauses are common boilerplate clauses used in commercial contracts to prevent the contract being modified orally and to limit modifications to a certain form (normally in writing and signed by the parties). The NOM clause in Rock Advertising provided:
“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 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” (our emphasis).
Previous case law indicated that the existence of a NOM clause in a contract does not, always, prevent the parties from amending the contract orally. The Court of Appeal took this view in Rock Advertising and found that parties cannot validly bind themselves to the method in which future modifications can be effected: to do so would limit the parties’ autonomy.
Facts of Rock Advertising
In 2011, the Claimant, Rock Advertising Limited (“Rock”), entered into a contractual licence agreement with the defendant MWB (a company operating serviced offices). The agreement was for a fixed term of 12 months on the basis that Rock would pay a monthly licence fee. Rock accumulated more than £12,000 in arrears of licence fees. The sole director of Rock (Mr Idehen) proposed a revised schedule of payments in February 2012 under which part of the February and March payments would be deferred and the arrears would be distributed over the remainder of the licence term. A discussion took place between Mr Idehen and Natasha Evans (a credit controller) of MWB over the telephone after which Mr Idehen contended that Ms Evans had agreed to vary the schedule of payments as he’d proposed.
The trial judge found that an agreement had been reached but, in the light of the NOM clause in the contract, it was ineffective. The Court of Appeal disagreed and the matter was appealed to the Supreme Court.
Judgment of the Supreme Court
The judgment, which is remarkably short for an issue which has such significance for so many contracts, concluded that NOM clauses should not be exempt from the general rule that contract law should not obstruct the legitimate intentions of commercial parties. Lord Sumption gave the judgement for the majority and, in no uncertain terms, disagreed with the reasoning behind the Court of Appeal’s decision arguing that it is a “fallacy” to say that by declaring NOM clauses ineffective parties’ autonomy is being promoted.
The majority of the Supreme Court gave three commercial reasons for including NOM clauses within a contract:
- they prevent attempts to undermine written agreements;
- they avoid disputes about both whether a variation was intended and the terms of the variation; and
- they make it easier for corporations to police internal rules restricting the authority to agree variations.
Although Lord Biggs agreed with Lord Sumption he did so on narrower grounds. In essence, Lord Briggs’ view was that parties were free to amend a NOM clause orally provided they have the specific intention of orally varying the NOM as well as making the substantive variation. Lord Briggs noted that this distinction is unlikely to “have any significant consequences…save perhaps on very unlikely facts”.
Implications of Rock Advertising
The Supreme Court has clarified an important area of law and provided contracting parties with a degree of comfort: if you hold a contract which contains a NOM it is very likely that any subsequent oral modification to it is ineffective. With this in mind parties should review their contracts and make a record of those that contain a NOM clause. In order to modify contracts containing a NOM clause parties will need to follow any contractual requirements carefully in order for the modification to be effective.
How Capsticks can help
Capsticks regularly assists parties vary contracts and resolves contentious issues flowing from modifications to contracts.
If you would like to discuss this topic in more detail please contact Jane Barker, Hugh Wooster or Jade Woollett.