No oral modification or variation clauses is valid unless the oral agreement also modifies this clause.
https://www.nortonrosefulbright.com/en/knowledge/publications/faa7cea4/no-oral-modification-or-variation-clauses
No oral modification or variation clauses:
The case of Rock Advertising Limited v MWB Business Exchange Centres Limited [2018] UKSC 24
Global | Publication | August 2019
Content
Introduction
The Supreme Court in England recently reversed our understanding of the effectiveness of “no oral modification or variation” clauses (NOM clauses). Until the case of Rock Advertising Limited v MWB Business Exchange Centres Limited [2018] UKSC 24, it had always been assumed that NOM clauses were of limited effect, but that is no longer the case.
NOM clauses are common in most aviation contracts, from purchase agreements to leases. They provide that no variation to the contractual terms will be effective unless in writing. This encourages parties to ensure that any variations are documented, but the traditional approach to such clauses was that if the parties orally agreed to vary the terms of the contract, then they must have orally agreed to vary this restriction.
In deciding to break with tradition on this issue, the English court did consider other jurisdictions and so in this article we will look at the state of the law on NOM clauses both in England in light of this case and in New York, the two most likely governing laws for aviation contracts.
The position now is that parties are still free to vary the contract, but are required to do so in the form specified for variations in the contract.
Background to the case
MWB Business Exchange Centres Limited (MWB) operated serviced offices in central London and in 2011, entered into a contractual licence with Rock Advertising Limited (Rock) to occupy its office space.
The licence included a fairly common type of NOM clause which provided that the licence set out all of the terms as agreed between the parties and that all variations to the licence must be (a) formally set out in writing; and (b) signed by both parties before they take effect.
Within a few months of entering into the licence, Rock was in significant arrears and unable to meet its financial commitments. Rock’s sole director proposed a revised schedule of payments to a credit controller employed at MWB.
This revised schedule of payments would have the effect of deferring part of the payments due and to spread the outstanding accumulated arrears over the remainder of the licence term. On account of the interest costs of the deferral, this revised payment schedule would result in slightly less money being due to MWB.
Rock contended that MWB’s credit controller had orally agreed to this revised payment schedule and therefore to vary the licence during a telephone call. MWB denied it was agreed but in any event relied upon the NOM clause and asserted that, as a result, the original terms of the licence continued and that Rock was in breach of its payment obligations thereunder. Therefore, due to Rock’s failure to pay its arears, MWB locked out Rock from the premises and terminated the licence thereafter.
MWB sued Rock for the arrears and Rock brought a counterclaim for damages for wrongful exclusion from the premises on the basis that there was an agreed payment schedule which varied the licence.
As a matter of fact, the court determined that there had been an oral agreement but the question was whether or not that was effective in light of the NOM clause.
Commentary
The Supreme Court found in favour of MWB on the basis that parties can agree to bind their future conduct with NOM clauses and by doing so ensure commercial certainty between the parties.
It is notable that the history of the case shows the differing views which can be taken on this point. At the County Court, it was decided that although there had been an oral agreement between the credit controller at MWB and the sole director at Rock to proceed with the revised schedule of payments, this was not effective to vary the underlying licence as it was not in writing and signed on behalf of both parties as required by the NOM clause. This was despite a finding that the credit controller had ostensible authority to make such a decision.
Rock appealed this decision, and the Court of Appeal reversed the County Court decision, finding that the agreement between the sole director at Rock and the credit controller amounted to an agreement to dispense with the NOM clause and therefore the parties had varied the licence.
This decision was appealed to the Supreme Court which in turn overturned the Court of Appeal’s decision. It found in favour of commercial certainty. The Judgment begins by stating that “modern litigation rarely raises truly fundamental issues in the law of contract. This appeal is exceptional. It raises two of them.” Although the Judgment does not go on to consider the second fundamental issue in respect of consideration, the Supreme Court considered the reasoning behind why NOM clauses are disputed.
Lord Sumption’s judgment (which was supported by Lady Hale, Lord Wilson and Lord Lloyd-Jones) noted that these clauses had been found to be ineffective on the following basis
- a variation of an existing contract is itself a contract
- under common law there are no requirements of form for making of contracts and parties can agree to dispense with an existing clause which imposes requirements of form
- the parties must be taken to have intended to do so by the act of agreeing a variation informally when the agreement itself required writing.
However, Lord Sumption went on to say that although parties have freedom to make contracts such autonomy operates up until the point the contract is made, and thereafter only to the extent that the contract allows it. He noted that there are many instances in which a particular form of agreement is prescribed by statute and that there is no reason why parties cannot adopt the same principle by agreement.
He recognised that NOM clauses are commonly included in written agreements and that there are at least three reasons for doing so
- first, such clauses prevent informal and possibly abusive attempts to undermine written contracts
- second, the requirement for written variation reduces misunderstandings which may arise during oral variation
- third, the requirement of formality makes it easier for corporations to police the variation of commercial agreements.
Furthermore, the inclusion of these clauses provides the parties with commercial certainty.
Lord Briggs also allowed the appeal on a narrower basis. He found that the critical questions were firstly, whether the parties can agree to remove a NOM clause from the contract orally, and secondly, if so, whether such an agreement will be implied where they agree orally upon a variation of the contract without reference to the NOM clause.
In this case, the alleged oral agreement to vary the licence said nothing about the NOM clause and so he would not treat it as having been done away with by necessary implication. As a result, the NOM clause would bind the parties unless they expressly agree to do away with it.
Impact of this judgment
Given the prevalence of NOM clauses in a wide range of contracts, this is a significant decision. It is common for parties to have discussions in relation to revised payment schedules or to modify aircraft return conditions at redelivery. Previously, if agreement was reached to vary existing written terms, that was considered to be effective. With no written evidence, this may lead to arguments as to whether or not agreement was reached (as was the case in Rock v MWB) or on what precise terms. The Supreme Court is therefore putting commercial certainty above the freedom of parties to “unmake” a contract.
It is unlikely to do away with all disputes where the parties have reached an agreement orally and one party tries to resile from the agreement, but relying on arguments such as estoppel will certainly make it harder for a party to enforce any such oral agreement. It emphasises the importance of documenting any agreement to vary the existing terms as quickly as possible.
Overview of New York law
The Supreme Court of England’s decision in Rock v MWB restricted contracting parties’ ability to alter a contract through oral modification. Generally, New York law is in accord with this decision. Under New York law, “[a] written agreement or other written instrument which contains a provision to the effect that it cannot be changed orally, cannot be changed by an executory agreement unless such executory agreement is in writing and signed by the party against whom enforcement of the change is sought or by his agent.” N.Y. Gen. Oblig. Law § 15-301.
However, New York courts can permit parties to overcome a no oral modification clause by showing either partial performance or equitable estoppel. Additionally, an oral modification will be enforced if it has been acted upon to completion.
To rely on the partial performance exception, the partial performance “must be unequivocally referable to the new contract.” In other words, the actions taken must be explainable only with reference to the oral agreement.
The other exception, equitable estoppel, applies “if one party to the written contract has induced another’s significant and substantial reliance upon an oral modification and if the conduct relied upon is not otherwise…compatible with the agreement as written.” EMI Music Mktg. v. Avatar Records, Inc., 317 F.Supp.2d 412, 421 (S.D.N.Y.2004) (internal citations omitted). Whenever equitable issues have to be determined, the court can take into account the conduct of the parties. In particular, the conduct of the party contending for the oral agreement would be a determining factor, although the conduct of both parties may be relevant. This is in order to “prevent a party from inducing full or partial performance from another and then claiming the sanctuary of the statute of frauds or section 15–301 when suit is brought.” Eujoy Realty Corp. v. Van Wagner Commc'ns, LLC, 22 N.Y.3d 413, 426, 4 N.E.3d 336, 344 (2013).
Thus, despite the general rule under New York law that parties to a contract containing a NOM cannot alter their agreements through oral modification, New York courts offer potential means of overcoming this restriction depending on whether the facts support the parties’ reliance or change in position as a result of such modification.
MWB Business Exchange Centres v Rock Advertising Limited
“Modern litigation rarely raises truly fundamental issues in the law of contract. This appeal is exceptional. It raises two of them”: MWB Business Exchange Centres v Rock Advertising Limited [2018] UKSC 24, [1] (Lord Sumption). Article written by Samantha Dawkins of Edward Harte LLP; Clifford Darton and Sally Blackmore from Ely Place Chambers represented the successful Appellant in this case.
Background
MWB is a limited company which owns serviced office space in Central London. In August 2011, MWB entered into a licence agreement with Rock Advertising - another limited company – for Rock to share such office space and receive services from MWB for a monthly licence fee. Pursuant to clause 7.6 of the licence agreement, all variations of the licence agreement had to be agreed, set out in writing and signed by both parties before they would take effect. By clause 2.15, MWB was entitled to determine the licence agreement immediately upon any breach of the terms by Rock.
Rock quickly fell into arrears which, by February 2012, were more than £12,000. MWB exercised its right to determine under clause 2.15 by re-entering. Proceedings were issued to recover the arrears; Rock counterclaimed for damages for wrongful exclusion of the premises relying on their contention that the licence agreement had been varied by way of an oral agreement to alter the payment schedule, pursuant to which, Rock had made a payment of £3,500. The case turned on whether there had been any oral agreement and whether that agreement was effective in law.
At first instance, HH Judge Moloney decided that the parties had entered into an oral agreement whereby there was a revised payment schedule for the repayment of the arrears, and that there was consideration for that agreement (notably, he was not referred to Williams v Roffey Bros [1991] 1QB 1 or In re Selectmove [1995] 1 WLR 474. However, any purported variation was ineffective because of the operation of clause 7.6. Accordingly, MWB were not bound.
Further, he decided that the payment of £3,500.00 made by Rock Advertising to MWB was not a detriment because Rock Advertising was simply honouring its existing obligations and would have been liable to pay that sum in any event. Estoppel, accordingly, did not arise.
Rock appealed successfully (save as to the question of estoppel) to the Court of Appeal. Arden, Kitchin and McCombe LJJ were considerably influenced by the judgment of Beatson LJ in Globe Motors Inc v TRW Lucas Varity Electrical Steering Ltd [2016 1 CLC 712, which was handed down shortly after MWB was heard. Giving the lead judgment, with which both other judges agreed, Kitchin LJ placed great emphasis on the importance of “party autonomy” [34]. Arden LJ’s judgment is primarily concerned with whether Rock had given consideration for the purported variation.
MWB appealed to the Supreme Court and was granted permission in January 2017. The appeal raised two fundamental issues of contract law:
- whether a contractual term prescribing that an agreement may not be amended save in writing and signed on behalf of the parties is legally effective; and
- whether an agreement whose sole effect is to vary a contract to pay money by substituting an obligation to pay less money or the same money later, is supported by consideration.
Outcome
The appeal was heard on 01 February 2018 and was unanimously allowed by the five judge panel. Judgment was handed down on 16 May.
MWB’s arguments focused on the need for certainty in both a legal and commercial context, a certainty which no oral modification clauses go some way to provide. These clauses do not prevent parties from varying a contract; rather, they provide for the method by which any variation needs to follow in order to be effective. Rock relied – not surprisingly – on the Court of Appeal decision in Globe Motors Inc Ors v TWR Lucas Varity Electric Steering Ltd & Anor [2016] EWCA Civ 396 and concentrated on the importance of party autonomy in contending that the Court of Appeal’s decision should stand.
The leading judgment, given by Lord Sumption, is clearly commercial. He does not accept that a no oral modification clause prevents party autonomy and refers to the idea that they might as “a fallacy” ([11]). The real offence against party autonomy is the suggestion that parties may not “bind themselves as to the form of any variation, even if that is what they have agreed” ([11]).
Lord Briggs agreed with the result, but did not agree, in principle, that a contract which included a no oral modification clause could not be varied other than in writing. In his view, were the parties specifically to turn their minds to the question of the effect of the no oral modification clause – and decide that it should no longer pertain – they could orally vary the contract to this effect and, having done so, make other oral variations. What would not be implied, however, was that parties must have impliedly determined to waive or vary a no oral modification clause by an apparent decision orally to vary another term or other terms of the contract.
Because of the decision on the first issue (the no oral modification clause), any decision on the consideration point could have been no more than obiter. With that in mind, and in light of the complexity and importance of the issue, the Court declined to deal with it.
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