Let’s assume that there is a written contract in place for the provision of office space. The licence fee payable is, of course, agreed. It’s a written contract and during its course the licensee falls into arrears and approaches the licensor’s credit controller to reduce the monthly fee and come to a repayment arrangement with respect to the debt which has built up. These negotiations are conducted over the ‘phone and a new ‘agreement’ is put in place to accommodate the licensee. However after the ‘agreement’ is struck the licensor terminates the license agreement arising from the licensees breach to pay the sums due under the original contract. Can the licensor renege on their credit controller’s oral revision of the contract?
‘No Oral Modification Clauses’
To answer this question one has to examine the contract’s terms and, in particular, whether there is a provision for a ‘no oral modification’ clause. (‘NOM’). In the absence of such a clause then an oral variation of the contract’s provisions may well be permissible. However if such a clause is contained in the contract then its oral variation may not be possible.
What is a ‘No Oral Modification Clause’?
Many commercial contracts contain a clause preventing any variation of its terms will be permissible unless that variation is agreed in writing. The intention is obvious – no attempt at oral variations will be effective – variations have to be agreed in writing. There are good commercial reasons why contracting parties would want a NOM clause to be in their contract, such as:
• It creates certainty by ensuring that any alterations to the contract must be committed to writing
• Oral variations could lead to uncertainty – written variations are less susceptible to misunderstanding.
How Does the Court View a NOM Clause?
Until recently the effectiveness of NOM clauses was uncertain. This was because the courts were prepared to uphold the principle of’ freedom of contract’. This entitles the contracting parties to agree the contract’s provisions as they wish. Accordingly, even a NOM may be orally varied if that’s what the parties agree. This will effectively make a NOM redundant. Judicial interpretation of the issue has been inconsistent with the English court of appeal in one case holding that no oral variation of a contract would be permitted if the agreement contained a NOM clause whilst in a latter case the court held that irrespective of a NOM forming part of the contract, parties should be allowed to orally vary its terms. In this scenario the parties were allowed the freedom to modify the contract.
Clarification of the Legal Position
The law has been clarified following the decision of the Supreme Court in MWB Business Exchange Centres Ltd v Rock Advertising Ltd. This litigation examined whether a contract could be informally varied notwithstanding that it contained a NOM clause.
The facts of the case were that MWB operated managed office space. Rock Advertising licensed property from them and fell into arrears with their license fee. MWB terminated the licence and sued for arrears and damages. Rock counterclaimed arguing that they had been wrongfully excluded from the premises. Rock’s argument focussed on an oral agreement which they had made with MWB’s credit controller to adjust the license fee payments which would have permitted the arrears to have been repaid over a period of time. Indeed, Rock paid an agreed amount of £3,500 on the day that the ‘agreement’ had been revised.
However, MWB denied that the agreement had been varied. Their position was that any variation of the contract had to be committed to writing. This was because the contract precluded its variation unless it had been committed to writing.
What Did the Court Decide?
The court decided that the NOM should prevail. The oral variation was held to be invalid simply because the attempted variation failed to accord with the contract’s provisions. However, and perhaps inevitably, the legal position is not quite as straightforward as the decision implies. This is because the court pointed out that the contracting parties who had agreed to orally vary a contract, irrespective of the NOM clause, may not have, in fact, dispensed with the clause and may have simply overlooked it. Accordingly later oral variations of a contract may still be possible. But to be valid and effective the parties should have expressly (or by implication) agreed to have dispensed with the NOM clause which had previously been agreed. Rock’s problem was that the oral variation made no reference at all to the NOM clause.
The Supreme Court’s decision clarifies that contracting parties should be able to agree how their future relationship should be governed with the inclusion of a Nom clause and that such a provision should not simply be disregarded. The court recognised that the benefit of such a clause creates ‘certainty’ between the parties and could well avoid disputes about the exact terms of the agreement.
‘Freedom of contract’ is maintained with the court holding that parties could expressly agree to remove the NOM clause and thus permit the contact’s oral variation.
A Word of Caution
Credit controllers should examine their contracts to establish whether a NOM clauses are incorporated. It can easily be overlooked. If it does exist and the parties want to orally vary the contract then they should carefully examine its provisions to establish in what way the contract may be orally varied notwithstanding the existence of the NOM clause. Indeed, such a variation itself may require to be reduced to writing.
For further infomation please contact Stephen Cowan on 0141 572 4251.