In a welcome move from the standpoint of contractual certainty, the United Kingdom's Supreme Court has overturned the Court of Appeal in its eagerly-awaited decision in Rock Advertising Ltd v MWB Business Exchange Centres Ltd. In doing so, the Supreme Court has unanimously confirmed that no oral variation (or modification) (NOM) clauses are valid and enforceable in contract law. The decision brings an end to decades of debate in the United Kingdom about the issues. Undoubtedly, it will also shape future New Zealand decisions.
An overview of the Supreme Court's decision and the key implications for drafters of and parties to commercial and other contracts follows below.
The background context to the case is that, in 2011, Rock Advertising and MWB entered into a contract which gave Rock Advertising a licence to occupy serviced office space in London. The contract included a NOM clause in the following terms:
This Licence sets out all of the terms as agreed between MWB and Licensee. No other representation or terms shall apply or form part of this Licence. All variations to this Licence must be agreed, set out in writing and signed on behalf of both parties before they take effect.
In 2012, Rock Advertising failed to pay various licence fees due under the contract. The parties discussed a revised payment schedule by telephone. But MWB ultimately rejected Rock Advertising's proposal. When Rock Advertising later failed to pay all of the outstanding licence fees, MWB excluded it from the premises, terminated the contract and sued for the arrears. Rock Advertising then counterclaimed damages for wrongful exclusion from the premises on the grounds that an oral variation of the contract had been agreed during the parties' telephone discussion and also amounted to an agreement to dispense with the NOM clause.
The County Court found that the parties had made an oral agreement about a revised payment schedule. It held, however, that the variation agreement was ineffective and MWB was thus entitled to recover the arrears because the variation did not comply with the NOM clause's requirements, i.e. it was not recorded in writing and signed on behalf of both parties.
The Court of Appeal overturned the County Court's decision. Relying on notions of party autonomy and a view that it required that parties should be able to amend their contracts notwithstanding an earlier agreement to do so only by specific means, it ruled that the oral variation was effective.
Whilst the Supreme Court also granted MWB permission to appeal other issues, the core NOM issue for determination by the Court was whether it is possible for a written contract containing a NOM clause to be varied other than in accordance with the particular terms of the relevant NOM clause.
The Supreme Court's decision and its reasoning
Ultimately, the Supreme Court unanimously allowed MWB's appeal. But the reasons for doing so under Lord Briggs' judgment are narrower than those set out in the majority judgment, which was given by Lord Sumption.
Essentially, the majority's core conclusion is that "the law should and does give effect to a contractual provision requiring specified formalities to be observed for a variation".
New Zealand position
Limited New Zealand case law exists about the validity and enforceability of NOM clauses. To date, the Supreme Court has not ruled definitively on the issues. Before the Supreme Court's Rock Advertising decision, some New Zealand authorities had suggested that the English approach would likely be applied in New Zealand. But the position was far from settled. Clearly, Rock Advertising will be of at least persuasive authority in future New Zealand cases. But whether New Zealand courts will follow the majority's approach remains to be seen.
Bell Gully comments
NOM clauses are a frequently-used and sensible provision in modern commercial and other contracts. As the Supreme Court's majority judgment records, NOM clauses:
prevent attempts to undermine written contracts by informal means, which may be open to abuse;
avoid misunderstandings and disputes about whether a variation was intended and the terms of any such variation; and
make it easier for companies to restrict authority to agree contractual variations.
In contrast to the Court of Appeal's approach, the Supreme Court's decision substantially restricts the potential for disputes and costly litigation about alleged oral variations (whether inadvertent or informal) where the contract includes a NOM clause, as well as the scope for relaxation of agreed contractual terms. In this sense the decision is consistent with the stricter/more robust approach which courts have taken in recent years towards notice provisions and contract interpretation generally.
The Supreme Court's decision is a timely reminder that parties to a contract need to take care in the administration of any variation after its signing. In particular, parties looking to effect any variation should check that the variation and their recording of the same comply with all specific contract terms (both in relation to any NOM clause and other contractual provisions). Sometimes signing of a variation may be required. In other cases, an exchange of emails will be sufficient.
The risk that contractual parties will be held to their bargains even if circumstances have changed or they have informally agreed to transact in a manner different to that initially agreed is underlined in the Court's decision. The case's outcome is a fair response to abusive disputes/litigation driven by opportunism. In this sense, the decision represents a welcome further development in the certainty of contractual arrangements. But businesses and individuals each need to be alive to the potential loss of flexibility (especially for smaller contracts) which the decision effects. Courts are now likely to be much less willing than previously to find an effective variation (whether alleged to have been effected orally or by conduct) if the requirements of the relevant contract's NOM clause have not been followed strictly in circumstances which do not raise any public policy issues.
The clear signal in the Supreme Court's decision is that it is the Court's job to uphold parties' bargains, as opposed to trying to find ways to undermine them. Accordingly, even if the other party to a contract appears willing to abide by an informal variation, it is important to check if the relevant contract allows informal changes and, if not, to document the agreed change in a manner consistent with the relevant NOM clause's requirements. For contract drafters and negotiators, the decision emphasises the need to include at the outset an appropriate variation mechanism which reflects the nature of the particular contract. Reliance on "boilerplate" provisions may not be appropriate in all cases. If oral variations are to be allowed, parties need to understand the uncertainty risks which attach to doing so. For material contracts, any allowing of an oral or conduct-based variation process ought to be exceptional.
Especially for contracts of any sizeable duration, it is prudent for individuals/businesses and their advisers to review regularly the way in which their contracts are being performed. If any departure from the terms initially agreed is found and has value for a party, recording a formal variation in a manner which is consistent with any NOM clause is advisable to give certainty about the change. Where it is not reasonable/realistic to document each change to a contract in writing, parties should give thought to whether alternative options exist and at least make sure that they are comfortable with the risk(s) they are assuming.
Whilst the estoppel doors have been left open for another day, it should not be assumed that the various estoppel doctrines will be allowed to spread their wings to cover all cases of perceived injustice. Each case will turn on its own facts and, among other things, the precise point in time at which an estoppel defence arises is often unclear.
Irrespective of the position ultimately applied in New Zealand, the safest way to avoid a dispute/litigation is to include an appropriate variation mechanism in the contract at the outset and thereafter to comply strictly with all formalities specified for its variation. Where parties wish to dispense temporarily or permanently with a NOM clause, the change should be agreed expressly and recorded in writing.
If you would like to discuss the Rock Advertising case's potential relevance to you or your business, please contact the lawyers featured or your usual Bell Gully adviser.