Our clients are sometimes surprised that an oral representation, made in person or on the phone, by someone with authority, can bind their company. Of course most contracts are written down but it is certainly possible to start or alter a contractual relationship without a written agreement. For a contract to be valid there must be simply:
- an offer
- some valuable consideration
- the intention to create a binding agreement
And all of these contractual elements can arise during oral discussions.
THE PROBLEM WITH ORAL AGREEMENTS
For every business we have worked with, one thing matters above all others: certainty – around commercial commitments and contractual arrangements. This can be eroded when employees and other company representatives commit you to an unfavourable contractual agreement through discussions with suppliers, customers or other third parties.
You can safeguard your position by ensuring that you have a watertight ‘NOM’ (no oral modification) clause.
HOW DO NOM CLAUSES WORK?ROCK ADVERTISING v MWB BUSINESS EXCHANGE
The Supreme Court has recently clarified the law relating to NOM clauses in Rock Advertising v MWB Business Exchange. It upheld the validity of a standard NOM clause in a commercial rental agreement. This is a decision we welcome because it provides certainty to businesses entering commercial agreements. Previously there had been a degree of doubt over the enforceability of NOM clauses. Was it fair, critics of the clauses asked, to restrict the ability of parties to freely agree different terms to a contract in whatever way they wish?
ROCK ADVERTISING – THE FACTS
Rock agreed to rent office space from MWB Business Exchange in London for 12 months. A clause in the licence agreement stated the following:
All variations to this Licence must be agreed, set out in writing and signed on behalf of both parties before they take effect.
A classic NOM clause.
Once in occupation Rock fell into arrears of the sums owed under the agreement. Rock’s sole director then sought to change the payment schedule, effectively postponing payment of some of the monies owed. Rock argued that a credit controller of MWB had accepted the revised terms during a phone call. MWB disagreed, pointed to the NOM clause and terminated the licence. It then sued for monies due.
Initially the County Court agreed with MWB saying that because the variation had not been recorded in writing under the terms of the NOM clause it was ineffective. The Court of Appeal however disagreed saying the oral agreement effectively overruled the NOM clause. But the Supreme Court ultimately agreed with the County Court. In upholding the NOM clause the court pointed out that such clauses are justified because they:
- prevent attempts to undermine written agreements by informal means
- help avoid disputes about whether a variation of the contract was intended and the precise terms of the variation
- they enable companies to monitor their own internal rules restricting the authority of employees to agree variations.
So it now seems settled that if a contract has a NOM clause the contracting parties must follow its terms strictly if they wish to change the contact terms at a later date.
The ruling in Rock Advertisingprovides certainty on a central point of contract law. It shows the importance of businesses understanding ALL the terms of the agreements they sign. NOM clauses often appear toward the end of an agreement alongside other so-called ‘boiler plate’ terms like governing law and provisions about dispute resolution. But as this judgments shows these clauses are an integral part of the contract. They should never be overlooked.
NOM clauses should always be considered if your business employs a range of individuals who deal with third parties on a day-to-day basis.And you must ensure those representatives understand the significance of the NOM clause so they do not change contract terms informally. Such changes could be invalid and lead to costly disputes down the line. It’s worth pointing out that the Rock case involved a sum of just £12,000 and went all the way to the Supreme Court.
For advice on all aspects of commercial contracts please call us on +44 (0) 203 670 55405540 or contact us online .