It is not uncommon for commercial contracts to contain a clause that requires all variations to be agreed in writing and signed by both parties. These are typically referred to as no oral modification clauses (“NOM clauses”). For many years, this has been a standard provision and is included in most commercial agreements. That said, the legal position of NOM clauses has been a hotly contested topic within the courts, where failing to follow NOM provisions puts a party seeking to rely on oral variations in a difficult position.
Rock Advertising Ltd v MWB Business Exchange Centres Ltd
The Supreme Court considered the enforceability of a NOM clause in the case of Rock Advertising Limited v MWB Business Exchange Centres Limited [2018] and whether, in the case, the attempt to orally vary an agreement had been successful.
Rock Advertising Limited (“Rock”) was a licensee under MWB Business Exchange Centres Limited (“MWB”). After falling into payment arrears, the director of Rock had a telephone call with an employee of MWB, where he proposed a revised payment schedule. However, the licence in place had a NOM clause and required all variations to be agreed in writing. Subsequently, Rock was evicted from the property as he failed to make payment according to the original licence agreement.
The Supreme Court decisively gave judgment in favour of MWB in that parties are entitled to bind future conduct through the inclusion of NOM clauses in their contracts. This position arguably serves to promote commercial certainty between the parties.
Oral agreements to vary an agreement, regardless of whether all parties believed it was binding at the time, will not be legally enforceable if it does not comply with the formalities of the contract itself. This was decided in the interests of protecting contracts from being undermined and avoiding disputes surrounding the clarity of the terms.
Therefore, to enforce an oral variation to an agreement containing a no oral modification (NOM) clause, the parties must clearly demonstrate through unequivocal words or conduct that they intended to depart from that clause. An informal understanding will not usually be sufficient.
The Possibility of Estoppel
In the event that parties orally agree upon a contract variation, and a party then acts in reliance on such variation, they may be able to use the doctrine of estoppel to prevent the other side from later relying on the NOM clause to invalidate the contract.
However, in practice, the threshold for using this defence is high. For example, there must be proof of something more than the informal promise itself, such as words or conduct that unequivocally validate the existence of this variation. The difficulty in successfully using such an argument discourages most parties from using it as a reliable defence. In most cases, it may be more proportionate to carefully draft and abide by the contract’s specific variation procedures instead.
Takeaways for Businesses
If your contract contains a NOM clause, it should be taken seriously. However good the relationship between parties is, or whether the parties are acting in good faith, does not validate oral or informal variations to agreements as long as a NOM clause is in place.
Any change in the terms of agreement, such as price, scope of work, or other main transactional areas should be put down in writing and documented in accordance with contract-specific requirements. This not only ensures the validity of the variations but also protects the parties against unexpected loss or disputes.
It is also important not to assume that any oral agreement can be relied upon, regardless of how clear the agreement may have been; spending time to follow up on it with written terms adhering to specific contract formalities will benefit contracting parties in the long run should any uncertainty or breach of contract arise.
If you require help with contract drafting or commercial disputes, please contact Nath Solicitors on 0203 983 8278 or get in touch with the firm online.