Rock Advertising Ltd v MWB Business Exchange Centres Ltd [2018] UKSC 24

Rock Advertising orally agreed a revised payment schedule with MWB's credit controller, despite the licence containing a No Oral Modification clause. The Supreme Court held such clauses are legally effective, so the oral variation was invalid, restoring MWB's judgment.

Facts

MWB Business Exchange Centres Ltd operated serviced offices in central London. On 12 August 2011, Rock Advertising Ltd entered into a 12-month contractual licence to occupy office space at Marble Arch Tower, with fees of £3,500 per month rising to £4,333.34. Clause 7.6 of the licence was a ‘No Oral Modification’ (NOM) clause providing that all variations ‘must be agreed, set out in writing and signed on behalf of both parties before they take effect.’

By 27 February 2012, Rock Advertising had accrued arrears exceeding £12,000. Its sole director, Mr Idehen, proposed a revised payment schedule to Ms Evans, MWB’s credit controller, deferring part of the February and March payments and spreading arrears across the remainder of the term. Mr Idehen contended Ms Evans orally agreed to the variation; she denied this and treated it as a proposal, which her superior rejected. MWB locked Rock Advertising out, terminated the licence and sued for arrears. Rock counterclaimed for wrongful exclusion.

Judge Moloney QC found an oral variation had been agreed, that it was supported by consideration (the practical benefit of enhanced prospects of payment), but that it was ineffective for want of compliance with clause 7.6. The Court of Appeal reversed him, holding that the oral agreement also amounted to an agreement to dispense with clause 7.6.

Issues

The Supreme Court identified two fundamental issues:

1. Whether a contractual term prescribing that an agreement may not be amended save in writing signed by the parties (a No Oral Modification clause) is legally effective.
2. Whether an agreement whose sole effect is to vary a contract to pay money by substituting an obligation to pay less or later is supported by consideration.

Arguments

The arguments identifiable from the judgment focused on the conceptual problem articulated by Cardozo J in Beatty v Guggenheim Exploration Co (1919) 225 NY 380: that parties who agree informally to vary a contract must be taken to have intended to dispense with any clause requiring writing, because party autonomy means they can always ‘unmake’ what they have made. Rock Advertising relied on this conceptual line of authority and on the Court of Appeal’s reasoning that ‘party autonomy’ was the most powerful consideration. MWB argued that the NOM clause should be given effect according to its terms, denying the variation any binding force.

Judgment

Lord Sumption’s leading judgment (with whom Lady Hale, Lord Wilson and Lord Lloyd-Jones agreed)

Lord Sumption held that the law should, and does, give effect to a contractual provision requiring specified formalities for a variation. He rejected the view that enforcing NOM clauses offends party autonomy, observing that party autonomy operates up to the point the contract is made, and thereafter only to the extent the contract allows.

He identified three legitimate commercial reasons for NOM clauses: (i) preventing attempts to undermine written agreements by informal means open to abuse; (ii) avoiding disputes about whether a variation was intended and its exact terms; and (iii) making it easier for corporations to police internal rules on authority. There is no mischief in NOM clauses, nor do they contravene any policy of the law.

Addressing the conceptual objection, Lord Sumption pointed to international instruments which combine informal contract formation with effective NOM clauses, including article 29(2) of the Vienna Convention on Contracts for the International Sale of Goods (1980) and article 2.1.18 of the UNIDROIT Principles of International Commercial Contracts. These demonstrate there is no conceptual inconsistency between a general rule allowing informal contracts and a specific rule giving effect to a writing requirement for variation.

He drew an analogy with entire agreement clauses, which the courts routinely enforce, citing Longmore LJ in North Eastern Properties Ltd v Coleman:

if the parties agree that the written contract is to be the entire contract, it is no business of the courts to tell them that they do not mean what they have said.

Lord Sumption rejected the argument that parties who agree an oral variation despite a NOM clause must have intended to dispense with it. What the parties agreed was not that oral variations are forbidden, but that they will be invalid; the natural inference from non-compliance is that the parties overlooked the clause, not that they intended to abandon it.

He acknowledged the risk that a party may act on a varied contract and then be unable to enforce it, identifying estoppel as the safeguard, but stressed that its scope ‘cannot be so broad as to destroy the whole advantage of certainty’ for which the parties stipulated. At minimum, there must be words or conduct unequivocally representing that the variation was valid despite its informality, and something more than the informal promise itself.

On consideration, Lord Sumption declined to decide the issue, noting the tension between Williams v Roffey Bros & Nicholls (Contractors) Ltd [1991] 1 QB 1 (practical benefit as consideration) and Foakes v Beer (1884) 9 App Cas 605. He observed that Foakes v Beer is ‘probably ripe for re-examination’ but that any such reconsideration should be before an enlarged panel in a case where the decision would not be obiter.

Lord Briggs’s concurring judgment

Lord Briggs agreed that the appeal should be allowed but on narrower grounds. He held that parties can agree orally to remove a NOM clause, but such an agreement will not be implied merely from the fact of orally agreeing a substantive variation. The NOM clause continues to bind until the parties expressly, or by strictly necessary implication, agree to do away with it. He drew an analogy with negotiations conducted ‘subject to contract’. On the facts, as the parties said nothing about clause 7.6 and were probably unaware of it, the NOM clause was not dispensed with.

Implications

The decision settles, at the level of the Supreme Court, that No Oral Modification clauses are legally effective in English law. Where a contract requires variations to be in writing and signed, an oral variation will have no contractual effect, regardless of whether the parties intended to vary the contract.

The practical significance for commercial parties is substantial. Boilerplate NOM clauses, frequently included in commercial agreements, will now reliably perform their function of channelling variations into documented form, reducing litigation risk and assisting corporations in controlling the authority of employees to bind the company. Parties performing contracts must ensure variations are documented in accordance with contractual formalities, or risk finding agreed modifications unenforceable.

The decision leaves open a safeguard against injustice through estoppel, but Lord Sumption signalled a narrow scope: the estoppel must involve words or conduct unequivocally representing that the informal variation is valid, and something beyond the informal promise itself. The precise limits of such estoppel were expressly not explored.

The majority and Lord Briggs differ on the route by which a NOM clause may be dispensed with. Lord Sumption’s approach treats the clause as having binding effect that cannot be defeated by a mere oral variation of substance. Lord Briggs accepted that the clause could be removed orally but only by express agreement or strict necessary implication. Both approaches produce the same result in this case, and likely in most cases.

Importantly, the Court left the law on consideration for the variation of payment obligations unresolved. The tension between Williams v Roffey and Foakes v Beer remains unresolved and awaits a suitable case before an enlarged panel. Practitioners should note this unresolved area, particularly where variations involve accepting lesser or deferred payment.

More broadly, the judgment reflects a judicial preference for upholding the legitimate commercial expectations of parties who have deliberately stipulated formality requirements, and for resisting conceptual objections based on party autonomy where the contract itself has delimited how that autonomy may be exercised in the future.

Verdict: Appeal allowed. The Supreme Court restored the order of Judge Moloney QC, holding that the oral variation was invalid for want of compliance with the No Oral Modification clause (clause 7.6) of the licence agreement. MWB was accordingly entitled to claim the arrears.

Source: Rock Advertising Ltd v MWB Business Exchange Centres Ltd [2018] UKSC 24