Supreme Court Clarifies the Law on ‘No Oral Modification Clauses’ In Contracts
Summary: The Supreme Court recently decided that a clause in a contract excluding later oral modification of the contract (a ‘no oral modification clause’) can be legally effective, overruling a previous judgment by the Court of Appeal that it could not. This confirms the effectiveness of these clauses in law, which was previously in doubt.
The Facts: The appellant, MWB Business Exchange Centres Ltd (‘MWB’), was the operator of a serviced office which the defendant, Rock Advertising Ltd (‘Rock’) occupied under a license. The license required that any amendments were agreed in writing between the parties. Rock accumulated considerable arrears in license fees and orally agreed with MWB to vary the payment schedule. Nevertheless, MWB subsequently locked Rock out of the premises and sued for damages. Rock, arguing that the original license had been altered by the oral agreement, countersued for wrongful exclusion from the offices. The Court of Appeal initially found that the oral agreement was binding on the parties notwithstanding the ‘no oral modification clause’ in the original license.
The Judgment: The Supreme Court disagreed with the Court of Appeal, holding that the ‘no oral modification clause’ did bind the parties and that the later oral agreement was therefore not enforceable. The Court held that such a clause will, in practise, limit the ability of the parties to enter into subsequent oral agreements. However, the Court also recognised that this limitation was justified by the legitimate commercial reasons for using this type of clause, not least the confusion that might be caused where multiple people in an organisation have the power to enter into a contract.
Lord Sumption suggested that in some circumstances, the doctrine of estoppel may provide a ‘safeguard against injustice’, but that this did not apply in this case and that such a claim would require at a minimum that:
there would have to be some words or conduct unequivocally representing that the variation was valid notwithstanding its informality; and
something more would be required for this purpose than the informal promise itself
Analysis: This judgment has a number of benefits for organisations, a number of which are addressed in the judgment itself. Firstly, it gives the parties a tool to ensure that any variations to the contract are clear, avoiding the ambiguity inherent in an oral agreement. Secondly, it reduces the scope for confusion where there are multiple persons within an organisation with the power to enter into a contract. Thirdly, it prevents attempts to undermine the original written agreement through the establishment of a subsequent oral agreement. However, organisations should still be alert to the fact that, under certain circumstances, an oral agreement may still give rise to a claim in estoppel even where there is a ‘no oral modification clause’ in place.