Food For Thought On NOM Clauses...

Rock Advertising Limited v MWB Business Exchange Centres Limited [2018] UKSC 24

Facts

Rock Advertising Ltd ("Rock") contracted with MWB Business Exchange Centres Ltd ("MWB") for a licence to occupy office space owned by MWB. The contract contained a "No Oral Modification" clause ("NOM clause") which provided that “All variations to this [contract] must be agreed, set out in writing and signed on behalf of both parties before they take effect”.

Rock subsequently accrued arrears on the contract and sought to agree a revised schedule of payments, which amounted to a variation of the contract, with MWB orally during a telephone call. MWB later denied that it had agreed to the purported variation, locked Rock out of the office space and issued a claim for the arrears. Rock counterclaimed for wrongful exclusion from the office space. Both the claim and counterclaim turned on whether the contract had been lawfully varied.

Judgement

The initial judgment was decided in favour of MWB on the basis that the purported variation was invalid as it did not meet the requirements of a valid variation under the NOM clause. The Court of Appeal reversed the judgment of the lower Court, finding that the NOM clause was ineffective to prevent a variation. MWB appealed to the Supreme Court.The Supreme Court restored the initial judgment. The purported variation had not been recorded in writing nor signed as prescribed by the NOM clause. The variation was therefore invalid.

Lord Sumption, delivering the lead judgment, recognised that NOM clauses are frequently deployed in contracts in order to: (i) prevent written contracts being undermined by informal means; (ii) avoid disputes about whether variations were intended, and the terms of such variations; and (iii) simplify internal processes for larger corporations in agreeing to variations. The use of such clauses was confirmed as both a lawful and legitimate method for contracting parties to minimise their risk under a contract.

There was found to be no inconsistency between a general rule that contracts may be made informally and a specific rule that requires variations to be made in writing (ie: formally). Where a NOM clause exists, a purported oral variation will not contravene the clause but instead be a situation to which the NOM clause applies. Such purported variations will therefore become invalid under the NOM clause, unless made in accordance with its requirements.

Comment

This judgment brings welcome clarity to a previously unsettled area of contract law. It confirms that, unless exceptional circumstances exist, variations made to a contract must be made in accordance with the NOM clause (or other clause governing variation of the contract). Variations made in contravention will, in light of this judgment, be invalid.

This will be of particular comfort to corporates or contracting parties with longer chains of authority, where the risk of informal variations being agreed by employees who do not have the required internal authority is significantly higher. However, some commentators have already expressed concern that this judgment will impinge on parties’ flexibility to make commercial variations “on the fly”, and will therefore result in an additional, and unnecessary, layer of administration.

Separately, there remains concern that a party which acts on a contract as purportedly varied, but is then unable to enforce it, will be unfairly prejudiced. The Supreme Court identified this risk and confirmed that estoppel remains a safeguard in this respect.

Practice Point

Ensure that your NOM clause clearly sets out the method in which a contract may (and may not) be varied. If you wish to agree to a variation, ensure that the variation is made in accordance with the NOM clause.