- In MWB v Rock, The Supreme Court has upheld the effectiveness of anti-oral variation clauses
In the shifting sands of the commercial world, matters governed by an executed commercial agreement often change necessitating a variation of the agreement. While parties are unlikely to be prohibited from agreeing a variation, the manner in which such variation may take place is frequently dictated by the terms of the contract—for example, the variation might need to be agreed in writing or by deed. It is, however, also not uncommon for parties to put aside legal niceties in the interests of resolving issues quickly and to overlook such strict contractual requirements.
Previously, a quick-fix variation agreed between the parties’ principals might have been acceptable to the court notwithstanding that the manner in which the variation was agreed did not comply with the contractual terms; for example, the principals might have agreed a variation orally despite a contractual prohibition against such variations.
Commercial realities versus legal requirements
The Court of Appeal decision in MWB Business Exchange Centres Ltd v Rock Advertising Ltd  EWCA Civ 553 (which endorsed earlier comments by the Court of Appeal in Globe Motors, Inc and others v TRW Lucas Varity Electric Steering Ltd and another  EWCA Civ 396,  All ER (D) 171 (Apr)) acknowledged that commercial realities often overtook strict legal requirements; the court made it clear that the mere existence of a non-oral variation clause in a written agreement did not automatically preclude variation of the agreement by other means (whether oral or otherwise).
This decision, albeit well-intended to reflect commercial reality, created scope for confusion and contradiction. Such a possibility has now been laid to rest by the Supreme Court.
In Rock Advertising Limited (Respondent) v MWB Business Exchange Centres Limited (Appellant)  UKSC 24,  All ER (D) 81 (May), the Supreme Court overturned these earlier Court of Appeal decisions and unanimously upheld the effectiveness of a ‘no oral modification’ clause (NOM clause). The Supreme Court held that the purported oral agreement or variation of the underlying contract was invalid for want of the writing and signatures required by the NOM clause.
"There are still circumstances where English law will recognise the commercial reality of the need to make decisions quickly"
The facts are relatively simple. The parties entered into a licence agreement under which Rock occupied office space for a fixed term of twelve months in return for the payment of licence fees. Rock fell into arrears of those fees and, in discussions between its principal and a senior credit controller of MWB, agreed a revised payment schedule. A more senior representative of MWB subsequently rejected this proposal, and sought to evict Rock and claim arrears of rent. The court was asked to determine, inter alia, whether the oral agreement to the payment plan varied the licence, despite the licence agreement containing a NOM clause.
The flexibility fallacy
In its judgment, the Supreme Court recognised the benefits of maintaining flexibility in enforcement of NOM clauses, saying that: ‘The advantages of the common law’s flexibility about formal validity are that it enables agreements to be made quickly, informally, and without the intervention of lawyers or legally drafted documents’. However, in the leading judgment, Lord Sumption asserted that flexibility was a fallacy and took the view that: ‘Party autonomy operates up to the point when the contract is made, but thereafter only to the extent that the contract allows. Nearly all contracts bind the parties to some course of action, and to that extent restrict their autonomy. The real offence against party autonomy is the suggestion that they cannot bind themselves as to the form of any variation, even if that is what they have agreed.’
The court went on to identify three reasons for upholding NOM clauses:
- Such clauses prevent attempts to undermine written agreements by informal means, a possibility which is open to abuse;
- Oral discussions can easily give rise to misunderstandings and crossed purposes; NOM clauses avoid disputes not just about whether a variation was intended but also about its precise terms; and
- A measure of formality in recording variations makes it easier for corporations to police internal rules restricting the authority to agree them.
It is therefore now settled law that the court will uphold terms by which parties have contractually agreed to prescribe a particular form of agreement by which amendments to their legal relationship are to be achieved. Informal agreements, which do not satisfy that form, will not be valid. Agreed formalities to variation will need to be satisfied.
The estoppel safeguard
What should not be overlooked, however, is that the judgment does not overrule or interfere with the doctrine of estoppel, which remains a valid defence. The Supreme Court expressly recognised that estoppel will remain a safeguard against improper reliance on clauses requiring certain formalities. Therefore, whereas parties on the wrong end of an argument as to the efficacy of a NOM clause may now find themselves without a Court of Appeal judgment upon which to rely, there are still circumstances where English law will recognise the commercial reality of the need to make decisions quickly, and will provide appropriate protections where there has been the requisite degree of reliance.
Sophia Purkis is a partner at Fladgate LLP and committee member of the London Solicitors Litigation Association (LSLA). Leigh Callaway is a senior associate at Fladgate LLP and former president and committee member of the Junior LSLA.
Sophia Purkis & Leigh Callaway delve into the implications for ‘no oral modifications’ clauses in the fallout from MWB v Rock.