Author: Juli Lau and Alexandra Bellis
Following the appeal of the Rock Advertising Limited decision from the Court of Appeal in 2016, we analyse the judgment handed down on 16 May by the Supreme Court. This case is good news for employers and clients who are party to construction contracts – it provides protection against contracts being amended by contractors and consultants without written approval.
Background:
Lord Sumption, handing down the main judgment, recognised that the law on this matter had been equivocal for some time. The chronological evolution of the judiciary had started to shift, albeit non-bindingly, towards finding that “No Oral Modification” (‘NOM’) clauses were ineffective. In Energy Venture Partners Limited v Malabu Oil and Gas Limited [2013] EWHC 2118 (Comm), Lord Gloster refused to make any decisive findings on the validity of the NOM clause in question, but stated that he was personally inclined to the likelihood that NOM clauses were ineffective because they placed formalistic restrictions on the previously unencumbered law of contract formation. In Globe Motors Inc v TRW Lucas Varity Electric Steering Limited [2016] 1 CLC 712, Lord Beaston’s obiter comments indicated that NOM clauses were unlikely to be effective where implied conduct by other parties would vary the formal contract. It is important to consider the applicability of these clauses from a sector-specific perspective. While Globe Motors was not a construction case, it is nevertheless relevant when exploring the rationale that enforceability is dependent on negotiation processes, legitimate business interests and the demonstration of parties’ intentions.
The law as it stood after the decision in Globe Motors was incongruous and multi-lineal. At the Court of Appeal, the parties in MWB Business Exchange Centres Ltd v Rock Advertising Ltd [2016] EWCA Civ 553 sought to clarify the law as a ratio decidendi. The facts revolved around an oral variation of contractual payments on a property occupied by the licensee, Rock. Rock argued that any payments due under the terms of the agreement had been varied by oral agreement. MWB maintained that the NOM clause at 7.6 of the agreement prevented Rock from being able to rely on this. Two questions arose for the court to decide: 1) Whether the NOM clause was effective given that it imposed limitations on future form of contract, thereby rendering the variation to reschedule contractual payments ineffective, and 2) Whether there was any consideration in oral agreements which reduced or deferred the payment of a debt, thereby querying whether a contract had arisen.
The court considered whether the contract had been varied by the actions or conduct of the parties, despite the contract stating that any variation should be in writing, and found in favour of Rock that the agreement could be varied in spite of a NOM clause. The court recognised the obiter comments made in the Globe Motors case which affirmed that such a conclusion was consistent with the principle of party freedom and autonomy in the law of contract.
Decision:
The Supreme Court reversed the findings in the Court of Appeal and restored the order of Judge Moloney. Lord Sumption offered the main judgment, focusing on the following strands of argument:
- To hold a NOM clause as ineffective under the rule as applied by Kitchin LJ in the Court of Appeal’s judgment was to override the parties’ intentions. Kitchin LJ had focused on the concept of party autonomy, a fundamental principle of the common law of contract. Lord Sumption describes this as a “fallacy”, stating that “party autonomy applies only to the point when a contract is made and after that, only to the extent to which the contract will allow the parties”. The focus here is that contracts are precisely there to bind all parties to a prospective course of action and that all parties would have to agree, complying with its terms, to vary the framework for this course of action.
- The common law’s flexibility around formal validity is a mixed blessing, and in sectors and scenarios where projects are complex, attempts to undermine written agreements informally could open up the floodgate for abuse. Lord Sumption recognises the “legitimate commercial reasons” for which parties might wish to agree to a NOM clause, stating that the law of contract “will not obstruct the legitimate intentions of businessmen unless there are overriding reasons”, finding that, in this case, there were no public policy reasons for doing so.
- The reasons for disregarding NOM clauses are conceptual in nature, and other legal systems have been able to overcome these arguments to give effect to NOM clauses for commercial benefit. Lord Briggs, giving a separate judgment, did not fully agree with Lord Sumption on this point, reaching the conclusion that there are narrow grounds which could make a NOM clause ineffective. He disagreed with the concept that to allow a NOM clause to be effective was to fetter the parties’ autonomy and future intention, focusing instead on the fact that most contractual provisions, when entered into, need to be complied with and remain in force until both parties decide to do away with it. Therefore insistence that an oral variation was ineffective until placed in writing, or that both parties had to agree to suspend or waive the NOM clause in writing in order for an oral variation to be effective, respects both the parties’ autonomy to bind themselves to formal requirements for future contract as well as their autonomy to release themselves from these requirements.
That the argument that a NOM clause could be vitiated or held ineffective from estoppel was unconvincing. The scope of estoppel is not so broad as to destroy the certainty that a NOM clause could provide. Estoppel would only be relevant where the party seeking to rely on it could demonstrate an unequivocal representation that the variation would be valid, notwithstanding its lack of form, because of words or conduct amounting to more than the informal promise itself.
Implications:
This Supreme Court judgment provides much-needed clarity, confirming that a NOM clause can be held to apply without breaching the common law principle of autonomy in future contracting, depending on the parties’ intentions to be bound, thus bringing the law in England and Wales into line with other legal systems.
It also adds weight in this debate to the value of legitimate commercial interests. This indicates sectors such as construction or public procurement are in a strong position to use NOM clauses, on the basis that in these types of contracts there is a realistic risk that written agreements are undermined through informal means, a risk of disputes about the exact terms of variation, and the need for Employers to be able to police their internal rules on authority to contract because of the measure of formality required. Unlike previous decisions on NOM clauses, the court held that it is within the parties’ own power and autonomy to decide and agree to such terms.
However, this is caveated by the fact that Lord Sumption’s and Lord Briggs’s judgments did not completely align, and there could in the future be a divergence of legal opinion in cases which different material facts, such as where the parties’ intention as to future variation of the contract is mutually exclusive with the NOM clause, or in sectors where the legitimate commercial reasons for agreeing a NOM clause are considered less powerful.
Practical Tips
- NOM clauses in a contract are enforceable – these are often found towards the end of contract documents as “boilerplate” or standard clauses. Parties must ensure that they understand and wish to be bound by such clauses before executing the contract.
- It may be useful to give consideration to the legitimate commercial reasons that a NOM clause is agreed in a particular contract. This can be sector and fact-specific and might be of use in the event of a dispute over the validity of a NOM clause.
- Where a contract contains a NOM clause, the parties should ensure that their contract management personnel are alive to the need to record variations in writing and not take action on them until this is done. While the Supreme Court judgment lends much strength to the position that a contract with a NOM clause cannot be varied by oral agreement or conduct, there is still an element of conceptual uncertainty as to whether and in what circumstances the parties might be able to dispense with the NOM clause through common intention and conduct.
We have extensive experience advising on construction and commercial contracts and would be happy to advise further on the use of no oral modification clauses and other contract variation issues
This article is for general awareness only and does not constitute legal or professional advice. The law may have changed since this page was first published.
