A variation to the law of variations: The Supreme Court gives judgment in Rock Advertising Ltd v MWB Business Exchange Centres Ltd

Summary:

In a case of potential relevance to anyone entering into a written contract, the Supreme Court has recently held that oral variations to such a contract may well be invalid. The case has wide reaching implications and changes the approach previously adopted by the courts.

In its Judgment in Rock Advertising Ltd v MWB Business Exchange Centres Ltd [2018] UKSC 24, the Court held that where a written contract contained an express provision that all variations were to be in writing (often referred to as a “no oral modification clause”), oral variations to that contract were unenforceable.

The Judgment heralds an important change in the law and overturns the previous approach, summarised by Moore-Bick LJ in the case of Globe Motors Inc v TRW [2016] EWCA Civ 396 as being that:

“The principle of freedom of contract entitles parties to agree whatever terms they choose, subject to certain limits imposed by public policy…”

The Case:

Rock Advertising was the licensee of serviced office premises in London. The licence 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”. Arrears of some £12,000 accrued and Rock orally agreed, with an employee of MWB, a payment plan to clear its debt. Unfortunately for Rock however, that employee was overruled by someone more senior who evicted Rock and then sued for the arrears.

Rock defended the claim (and counterclaimed for wrongful exclusion), relying upon the oral agreement to enter into the payment plan. MWB’s position was that the terms of the licence agreement were such that the oral agreement to vary the contract terms was invalid.

At first instance, in the Central London County Court, Judge Moloney QC found in favour of MWB. That decision was overturned by the Court of Appeal which followed its previous decision in Globe Motors.

The Supreme Court’s Decision:

The importance of this relatively low value case to the development of contract law was expressed by Lord Sumption who commented that

“Modern litigation rarely raises truly fundamental issues in the law of contract. This appeal is exceptional. It raises two of them”.

The second issue raised by the case was whether the oral variation had in fact had valid consideration (one of the fundamental requirements in contract formation). In the event the Supreme Court, having found that the variation was invalid, declined to comment on the issue of consideration.

What the Supreme Court did decide was that the principle of “party autonomy” operates up until the point that the contract is formed but that thereafter, the contractual provisions take priority and effectively define the limits of “party autonomy”. Therefore, if a contract makes provision for variations then variations can of course be made but only in a manner compliant with the original contract terms. It would be open to the parties to vary a no oral modification clause but in order to be valid that variation would itself have to be in writing.

The benefit of no oral modification clauses was explained by Lord Sumption as follows:

“There are at least three reasons for including such clauses. The first is that it prevents attempts to undermine written agreements by informal means, a possibility which is open to abuse, for example in raising defences to summary judgment. Secondly, in circumstances where oral discussions can easily give rise to misunderstandings and crossed purposes, it avoids disputes not just about whether a variation was intended but also about its exact terms. Thirdly, a measure of formality in recording variations makes it easier for corporations to police internal rules restricting the authority to agree them” (see paragraph 112 of the Judgment)

What this signifies is a variation to the law on variations. In future, contracting parties will need to be even more careful to adopt a “belt and braces” approach when drawing up contract terms. It will no longer be enough to assume that any changes to the contract can be informally agreed if and when they become necessary.

Parties seeking to rely on an oral variation may however have a get-out. The Supreme Court recognised that in some situations either an estoppel will have arisen preventing reliance on the no oral modification clause or the variation agreed between the parties will in fact amount to a collateral contract, i.e. a separate contract entirely with its own stand-alone contractual terms. However, establishing the existence of either estoppel or a collateral contract may well be a difficult and costly process.

Comment

The case of Rock Advertising Ltd brings into sharp focus the need for parties to agree contract terms clearly at the outset and crucially to understand what they actually mean. Many contracts contain no oral modification clauses, buried deep within the small print and hitherto overlooked. In future parties will ignore them at their peril.

When drawing up a contract parties need now, even more than previously, to be absolutely clear about the terms and how they will work in practice. Careful thought needs to be put into the drafting process and legal advice obtained if necessary.