Sally Hutchings, a Tax Litigation specialist in our Dispute Resolution department discusses a clause that The Supreme Court has upheld which means oral modification clauses are no longer valid.
The Supreme Court has upheld a clause in a contract that required all modifications to that contract to be in writing and signed by the parties, invalidating a subsequent oral variation.
MWB Business Exchange Centres Limited (MWB) operated serviced offices in central London. Rock Advertising Limited (Rock) entered into a licence with MWB to occupy office space for a fixed term of 12 months. The licence contained a clause requiring that any variation to the licence must be (i) set out in writing and (ii) signed on behalf of both parties. Clauses such as this are commonly referred to as “no oral modification” clauses.
Rock accumulated arrears under the licence and Rock’s director spoke to MWB’s credit controller in order to agree a revised schedule of payments. A dispute arose as to whether MWB had accepted Rock’s proposal.
MWB proceeded to lock Rock out of the premises for a failure to pay the arrears and terminated the licence. MWB then sued Rock for the arrears under the licence. Rock counterclaimed for wrongful exclusion from the premises. The case turned on whether the agreement to vary the payment schedule was effective, despite being in breach of the requirements of the no oral modification clause.
The Supreme Court held that the oral variation was not valid. Lord Sumption, (with whom Lady Hale, Lord Wilson and Lord Lloyd-Jones agreed) found that the proper understanding of party autonomy is that parties may agree to bind their future conduct. After parties reach an agreement as to their future conduct, that agreement sets the boundaries of party autonomy. The effect of this is that, should a contract require variations to the contract to be in writing, an oral variation of the contract will be invalid. However, parties are still free to vary a no oral modification clause in the form the contract specifies for variations, i.e. in writing.
There is the possibility of a situation where parties agree orally to vary a contract and then a party acts on the variation. In this situation the doctrine of estoppel may act to prevent unfairness. Estoppel may prevent a party from relying on the no oral modification clause to invalidate the oral variation but at the very least, (i) there would have to be some words or conduct unequivocally representing that the variation was valid notwithstanding its informality; and (ii) something more would be required for this purpose than the informal promise itself.