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Are ‘no oral modification’ clauses effective in the event of a dispute?

As a general rule the courts try not to interfere in commercial contracts when a dispute arises as they rightly believe that businesses are best placed to negotiate the terms on which they will deal with each other and, save for in very limited circumstances, that they should be bound by the deal they have struck.

Following the Supreme Court decision in Rock v MWB in May 2018, it is clear that this general rule extends to 'no oral modification' clauses which oblige contracting parties to comply with certain formalities if they want to vary the terms of their contractual arrangements - typically by requiring them to set out proposed variations in writing which both parties then sign to signify their agreement.

The difficulty with the Supreme Court decision is that the court also made it clear that there may be circumstances where a compelling reason exists to justify departing from the general rule which means that there is still huge scope for disputes to arise.

Rock v MWB: a brief overview of the case

Under the terms of a property licence, Rock was given permission to occupy office space owned by MWB for a fixed period of one year provided they paid a set licence fee each month.  If the fee was not paid when due MWB would be entitled to terminate the licence and force Rock out.  Within three months of taking up occupation Rock had fallen behind with their payments.

Proposals to clear the arrears were made by the company's director during a telephone conversation with a credit controller employed by MWB.  Rock alleged that during the course of this telephone conversation those proposals were agreed and as a result the terms of the licence were varied.  MWB denied acceptance of the proposals and in any event pointed to a no oral modification clause within the licence which required variations to be set out in writing and signed by both parties in order to have legal effect.

Supporting MWB's right to rely on the no oral modification clause, the court said that where two commercial parties have specifically agreed that to validly vary the terms of a contract between them certain prescribed steps must be taken, the court will give effect to this agreement and refuse to recognise a variation agreed in any other way unless there are compelling reasons why this should not be the case.

Such reasons might include where there was evidence of:

  • something having been said or done by the party seeking to rely on the clause which unequivocally represented to the party seeking to depart from it that an oral variation would be acceptable;
  • both parties having agreed to 'do away with' the requirements of the clause so that it was clear that the clause was no longer intended to apply; or
  • an oral variation having been agreed which called for an immediately different approach to performance of the contract than was originally contemplated and which needed to be actioned before any written record of the variation could be made and signed off.

Implications

While the decision of the Supreme Court provides a welcome boost for businesses in dispute about the legal effect of alleged verbal variations where a no oral modification clause exists, it is important that you do not let the decision in this case lull you into a false sense of security.

There is still ample scope for your right to rely on this type of provision to be called into question, particularly where those responsible for the day to day management of a matter are not familiar with your contractual arrangements and may therefore inadvertently do or say things which could give rise to an oral variation being alleged, or where any other circumstances exist which might lead a court to conclude that it would be appropriate to depart from the general rule in your particular case.

In view of this you should seek immediate legal advice whenever the enforceability of a no oral modification clause is called into question.  You should also ensure, as a matter of best practice, that all employees within your business who may come into contact with customers on contractual matters are advised where a no oral modification clause exists and of the need to ensure proposed variations are dealt with according to the prescribed procedure.

For further advice on any of the issues raised in this article, or for commercial law advice more generally, please contact JPP Law on 020 3468 3064 or email info@jpplaw.co.uk.

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