A 'no oral modification' (NOM) clause is a clause stating that a contract cannot be modified except in writing and subject to other formalities. When included in a contract it is binding on the parties to that contract.
This position has now been confirmed in the ruling handed down by the Supreme Court in the case of Rock Advertising Ltd v MWB Business Exchange Centres Ltd. The ruling confirmed that NOM clauses are legally effective and parties should ensure that they adhere to such clauses if they want a variation to stick.
Rock Advertising Ltd entered into a licence with MWB to occupy serviced office space. The licence included a NOM clause as follows: 'all variations to this Licence must be agreed, set out in writing and signed on behalf of both parties before they take effect.'
Rock Advertising had accumulated arrears and its sole director entered into discussions with a credit controller employed by MWB to propose a revised schedule of payments.
Rock Advertising argued that the credit controller had orally agreed to vary the licence agreement, whereas MWB maintained that there had merely been a verbal proposal as part of continuing negotiations.
At first instance, the county court judge decided that there had been an oral agreement but that it was ineffective as it had not been in writing.
The matter was referred to the Court of Appeal where it was held that the oral agreement constituted an agreement to dispense with the NOM clause and MWB were therefore bound by the variation. This decision focused on party autonomy.
However a different view again was taken by the Supreme Court. Lord Sumption in his judgment stated that 'party autonomy operates up to the point when the contract is made but thereafter only to the extent that the contract allows.' Where parties had failed to comply with a NOM clause, this did not demonstrate an intention to dispense with the clause but rather an indication that the clause had been overlooked.
NOM clauses can provide a number of benefits when included in a contract, some of which the Supreme Court highlighted. In particular, NOM clauses:
- prevent attempts to undermine written agreements by informal means
- avoid disputes where there is confusion in relation to whether there was a variation and the terms of any such variation
- provide a measure of formality in recording variations
It is therefore common to find a NOM clause in most contracts, irrelevant of their substance, in some form.
As the previous inconsistent approach of the courts has now been clarified, it is important for parties to a contract to be aware of the existence of a NOM clause and the need to comply strictly with it. This will be especially important for the party pushing for the variation.
When reviewing the terms of a contract and seeking to vary them, anyone with the authority to negotiate and amend a contract (whether that be an employee, trustee or volunteer) will need to revert back to the original contract terms to ensure any variation is carried out in the manner intended under the original contract.
If a NOM clause has not been complied with it is highly likely that the variation will not be legally enforceable.
If a party believes a valid oral variation took place and subsequently acts to their detriment in reliance on that variation the doctrine of estoppel may apply.
The doctrine of estoppel states that party B cannot subsequently seek to resile from a clear and unequivocal communication made to party A, upon which party B intended party A to rely and upon which party A reasonably did rely.
However any estoppel argument would depend on the facts of each case and success is not guaranteed. Equitable remedies such as this are a risk and something parties should seek to avoid.
The benefit of this ruling is that it gives contracting parties certainty as oral variations where a NOM clause exists are unlikely to be upheld.
The judgment is useful to those who find themselves in a contract with a party that seeks to use informal verbal conversations to avoid its contract obligations.
For further information, please contact:
Andrew Studd on 0208 394 6414, Andrew.Studd@russell-cooke.co.uk
Chris Rowse on 0208 394 6438, Chris.Rowse@russell-cooke.co.uk