No Oral Modification Clauses - are they Legal?
Yes, ruled the Supreme Court when overturning the Court of Appeal's decision in Rock Advertising Ltd v MWB Business Exchange Centres Ltd.
The "No Oral Modification" (NOM) clause stated that "All variations to this Licence must be agreed, set out in writing and signed on behalf of both parties before they take effect". Rock was in arrears under the licence and proposed a revised payment schedule which was verbally agreed by MWB. The Court of Appeal concluded that the oral agreement to vary the payments was valid and amounted to an agreement to dispense with the NOM clause. However, the Supreme Court disagreed.
The Court explained that the law gave effect to contractual provisions requiring specified formalities to be observed for a variation and that there were legitimate commercial reasons for using NOM clauses as they:
- Prevented attempts to undermine written agreements by informal means.
- Avoided disputes about whether a variation had been intended and about its exact terms.
- Provided formality in recording variations, making it easier for corporations to police internal rules restricting the authority to agree them.
This decision provides welcome certainty to contracting parties as it clarifies the law in relation to NOM clauses. If parties wish to amend an agreement, it is important for them to follow the formal procedures set out in the contract in order to do so. If an agreement contains a NOM clause, an oral agreement to vary the contract may not be effective, even where the other party agrees to it. While establishing that NOM clauses are effective, this decision also recognised that they carry the risk that a party may perform the contract believing in a valid oral variation. It would not be "fair" in those circumstances to then seek to revert to the previous terms by seeking to enforce the NOM clause. This may result in arguments of personal bar being raised. The effectiveness of such arguments will await to be tested.