The variation of contractual terms by agreement: update

Many contracts contain a clause purporting to impose conditions on the circumstances in which the parties can vary the terms of the contract, commonly requiring that any such variation must be in writing and signed by the parties.

In Rock Advertising Limited -v- MWB Business Exchange Centres Limited (2018) the Supreme Court was asked to consider a ‘no oral modification’ clause in a licence to occupy office space. The relevant clause read as follows:

“This licence sets out all the terms as agreed between MWB and Rock. No other representations or terms shall apply or form part of this licence. All variations to this licence must be agreed, set out in writing and signed on behalf of both parties before they take effect.”

Rock and MWB had agreed a schedule of payments to settle licence fee arrears, but this agreement was made between a director of Rock and the credit controller of MWB orally on the telephone; it was not committed to writing and/or signed by both parties. When MWB subsequently excluded Rock from the premises, the County Court was asked to determine whether the oral variation of the licence bound the parties. It decided that it did not, on the grounds of the ‘no oral modification’ clause set out above. On appeal, the Court of Appeal overturned this decision holding that the oral variation had the effect of not only reaching an agreement in relation to the licence fee arrears, but that it also evidenced an agreement to dispense with the ‘no oral modification’ clause. The decision appears to have been based more in intellectual gymnastics rather than in common sense.

Unsurprisingly MWB appealed to the Supreme Court which unanimously allowed the appeal, holding that the purported oral variation of the licence was invalid because it was not reduced to writing and signed in accordance with the ‘no oral modification’ clause. This decision is consistent with other authorities which emphasise that in interpreting a contract, a court will not usually obstruct the intention of the parties making it and will employ ‘commercial common sense’ in undertaking the exercise of contractual interpretation.

In view of the ‘no oral modification’ clause of the kind set out above it is reassuring that the Supreme Court should employ commercial common sense and conclude that, as Lord Sumption in giving the lead judgement put it “…the law should and does give effect to a contractual provision requiring specified formalities to be observed for a variation”.

Parties to a contract who negotiate variations (including variations of contractual payment terms) must ensure that any formalities in that contract are complied with. If they are not then, following the decision of the Supreme Court in Rock,  any purported variation is likely to be unenforceable.

The content of this article is for general information only. For further advice, please contact Matthew Atkins or another member of Birketts’ Commercial Litigation Team. Law covered as at June 2018.