Background
MWB was the licensor and Rock the licensee of serviced office space. When Rock got into arrears, MWB terminated the licence, locked Rock out of the premises and sued for the money. Rock had paid the first instalment before they were evicted. Rock defended on the basis that the revised schedule of payments that they had proposed and discussed in a phone conversation with MWB’s credit controller, amounted to an agreed oral variation. The effect of the revised schedule was to spread the arrears over the remainder of the licence term but without any interest for late payment. That meant it was worth less overall to MWB.
The issues
The main point of contention for the Supreme Court was whether that informal variation was binding on the parties or not. The contract contained a clause that stated that all variations to the licence had to be agreed, set out in writing and signed before they took effect (also known as a No Oral Modification (“NOM”) clause). Is such a contractual term legally effective? In other words, can such a clause work to prevent informal variations?
The decision
The Supreme Court was emphatic; if a term is included in a written contract that requires variations to comply with certain formalities, they are legally effective and a non-compliant variation will be invalid. The alleged variation had, at best, been agreed orally, and was definitely not signed. It was therefore decided that it was invalid.
There are good business reasons for having such clauses:
- To prevent attempts to undermine written agreements by informal means.
- To avoid disputes over the terms of a variation. To make it easier for companies to police their own internal policies in relation to authority to agree variations.
By including a NOM, parties are to be taken to have decided to bind themselves as to their future conduct and restricted themselves in how they can vary the arrangement. As the law gives effect to the contractual requirements for formality in relation to changes (writing, signature and so on), if parties agree a variation that does not comply, it will be invalid. This does provide certainty that terms agreed at the outset in relation to formalities and process for contract changes have to be followed.
Therefore, if there is a NOM the parties cannot agree orally, even expressly, to dispense with the required formalities, it means that variations have to follow the contractual requirements until, in compliance with those formalities, the parties agree a different approach. A party trying to rely on an informal variation might be able to show estoppel but this will be the exception. This is because otherwise the whole advantage of certainty for which the parties stipulated when they agreed upon terms would be lost.
Following the Court of Appeal decision in this case, it was possible to argue that there was little value in including a NOM because if the parties got to the point where they intended to vary the contract, it would also be possible to find that they intended to waive any formalities. That is now no longer the position and there is definitely value in including formalities and processes which have to be followed for a valid contract change.
Practical points
- Include a NOM or other procedural requirements to provide certainty on how a contract may be varied.
- If there are formalities for variations, comply with them and follow all the steps in any agreed process.
- If there is a need to change or vary the formalities, do so in compliance with them.