REUTERS | Rafael Marchante

No oral variation clauses are effective, Supreme Court clarifies

It isn’t often that a fight over £12,000 makes it all the way to Parliament Square and even less so that it leads to the resolution of a fundamental issue in the law of contract, not to mention the frequency with which a lead decision is delivered in fewer than 20 paragraphs. However, Rock Advertising Ltd v MWB Business Exchange Centres Limited was just such a case.

An agreement on the phone?

The dispute reflected an uncomplicated set of facts. Rock rented an office from MWB, pursuant to a contractual licence. The licence contained a bog standard entire agreement term, which required that any variations be signed and in writing. Rock fell into arrears and sought to negotiate a payment schedule, which Rock believed was agreed with MWB over the course of a phone call. MWB evidently did not share this understanding, changed the locks and brought a claim for the arrears. Rock counterclaimed for wrongful exclusion from the premises on the basis that the licence had been varied by the agreement reached on the phone call.

But is it enforceable?

The trial judge found that the variation had been agreed during the phone call. This gave rise to the question of whether this amendment was effective in light of the no oral variations term in the license. He found that it was not. The Court of Appeal disagreed and the matter was appealed to the Supreme Court.

The Lords say no.

Lord Sumption (with whom Lady Hale, Lord Wilson and Lord Lloyd-Jones agreed) could find no principled reason why parties could not bind themselves as to the manner in which changes in their relations are to be achieved in the future. He thus concluded that a contractual term, requiring that specified formalities be observed to amend the agreement, renders any subsequent variation that does not comport with those formalities unenforceable. Where parties act to their detriment on an agreed oral variation which is later found to be ineffectual, estoppel would step in to address any injustice, although he noted that there are limits to this as:

“… the scope of estoppel cannot be so broad as to destroy the whole advantage of certainty for which the parties stipulated”.

Finally, Lord Sumption was unimpressed by the argument (which had been accepted in a number of other jurisdictions) that parties are as free to agree to amend a term, which required variations to be made in writing, as any other term, and that there should thus be nothing to stop that agreement being made orally (save in some specific types of contracts which did not apply in this case, such as for the sale of land).

Lord Briggs agreed with the result, albeit on narrower grounds. In his view, the parties were entitled to reach an oral agreement to vary a contract, in spite of a no oral variations term, if they have the specific intention of orally varying the no oral variations term. However, they were not free to do so if they forgot about or did not consider that term at all. He did not consider Rock nor MWB to have had such an intention, nor did he think it likely that many other parties in comparable circumstances would. This resulted in an approach that, in his view, would lead to the same result as that set out by Lord Sumption in the vast majority of cases.

The case raised a second fundamental issue in the law of contract: whether an agreement, the sole effect of which 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 (that is, the rule in Pinnel’s Case). The court declined to address the matter; it was unnecessary in light of their conclusion on the first issue and, as it would require examination of a number of seemingly inconsistent authorities, they did not wish to render a conclusion in obiter.

What have we learned?

This decision puts to bed an important question in the law of contract. Many businesses will justifiably breathe a sigh of relief, knowing that the formalities that they intended to apply and to which they agreed will be respected. To the extent that commentators protested that the Court of Appeal’s decision would lead to a flood of opportunistic arguments and claims, those gates are now closed.

The key takeaway is that parties seeking to agree subsequent contractual variations must ensure that they comply fully with any conditions, restrictions or requirements for variation. The decision underscores the importance for businesses of paying close attention to the terms of their contracts, including the boilerplate often added by lawyers and usually paid little heed by the businesspeople agreeing those contracts. Businesses would be well advised also to take steps to ensure that any of their agents and representatives who may deal with contractual counterparties are made aware of all such restrictions and conduct themselves accordingly.

Finally, the decision highlights that the issue of whether an agreement is enforceable where the sole of effect is that one party shall pay a lesser amount is still very much undecided. Until this is resolved, parties that are wishing to enter into such an agreement should do so by deed (which does away with the requirement of consideration).

Kirkland & Ellis LLP Richard Boynton Noah Stewart-Ornstein

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