Caught between a rock and a hard place

Oral variations of contracts after Rock Advertising Ltd v MWB Business Exchange Centres Limited

Commercial contracts regularly include a clause along the lines of “all variations to this [contract] must be agreed, set out in writing and signed by both parties before they take effect.”

The Supreme Court has very recently upheld that such non-oral modification clauses (“NOMs”) are effective and mean exactly what they say. If a variation is not in writing as required by the terms of the contract, it will be of no effect and the contract will remain governed by its original terms.

The facts of Rock Advertising Ltd v MWB Business Exchange Centres Limited [2018} UKSC24 are not unusual.

Rock had a licence agreement with MWB to use serviced offices. Rock fell into arrears and MWB terminated the licence agreement. Rock argued that MWB was not entitled to do so terminate because of an oral agreement that it had reached with MWB’s credit controller to pay off the licence fee arrears. The licence agreement contains a NOM clause using the words set out above. MWB pointed this out and maintained it was therefore entitled to terminate because the variation was neither in writing nor signed by the parties.

The Supreme Court agreed with MWB and held that there had been no valid variation of the agreement. MWB were entitled to rely on the NOM clause. Therefore, as the alleged variation had not been made in writing or signed by the parties, it was of no effect and Rock could not rely upon it. This was the case even though the first revised payment had been made and accepted by MWB in accordance with the terms that its credit controller had accepted. The agreement had therefore been validly terminated by MWB for non-payment of the licence fee.

On the one hand, this decision makes perfect sense. If parties agree at the outset that any variations need to be in writing and signed by both sides, it is perfectly acceptable for both parties to adhere to this and to suffer the consequences if they fail to do so. Allowing only variations made in accordance with the NOM clause promotes certainty and avoids arguments not only about whether a contract has been varied but also about the scope of exactly what the parties’ new obligations are towards each other post variation.

On the other hand, the strict application of this rule could create unfairness, such as where both parties carry on for some time under the (mistaken) basis that they are bound by the oral variation, only for one party to then point to the NOM clause at some later point in time. In those circumstances, the party wishing to hold the other party to the variation may be able to argue that the other side is now estopped from denying the variation or relying upon the NOM clause if they have acted on it to their detriment. However, estoppel will not help to make good a variation that a party wishes to use to found a claim. Estoppel can only provide a defence to a claim.

The key points to take away from this decision are:

  • This is yet another example of the Court holding parties to the letter of what they originally agreed, certainly where both sides are commercial entities.
  • Don’t ignore or forget what your contract says once it has been signed and performance has begun. If the contract says variations must be in writing and signed, make sure that happens.
  • Bear in mind though that typing your name at the end of an email can amount to a valid signature. Care also needs to be taken to avoid inadvertently varying a contract through an exchange of emails.
  • It is not hard to record any variation in writing. Regardless of whether or not the contract contains a NOM clause, it is good practice to record any variation in writing to avoid disputes as to whether there was agreement to vary and if so, what the new varied terms are.

CONTACT CLARE

If you would like more information or advice relating to this article or a Commercial Litigation & Dispute Resolution law matter, please do not hesitate to contact Clare Mackay on 01727 798092.  

© SA LAW 2018

Every care is taken in the preparation of our articles. However, no responsibility can be accepted to any person who acts on the basis of information contained in them alone. You are recommended to obtain specific advice in respect of individual cases.