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Why a formal agreement to change contract terms is worth the paper it’s written on

12th June 2018

In the world of business, attempts to vary a contract through informal discussions happens regularly with the variation often not recorded in writing.

To counter this, contracts often include a clause providing in some form or another that any variations must be set out in writing and be signed by both parties.  These clauses are known as ‘No Oral Modification’ clauses (NOM clause).

Emma Benniston, a company and commercial lawyer at Ansons Solicitors in Staffordshire looks at this issue which has been the subject of a number of cases reviewed by the courts in recent years.

In particular, there has been a significant departure from previous authority in the case of Rock Advertising Limited v MWB Business Exchange Centres Limited.

So, what’s all the fuss about?

MWB operated serviced offices in London. Rock entered into a licence with MWB to occupy premises for 12 months but fell into arrears. Following a discussion between the parties, Rock proposed a revised payment schedule which MWB seemed to verbally agree. But then MWB locked Rock out of the premises, terminated the licence and sued for the arrears.

Rock counterclaimed for damages alleging that MWB had orally agreed to the revised payment schedule, whereas MWB stated that the schedule was just a proposal. The licence contained a clause which stated that ‘all variations to this licence must be agreed, set out in writing and signed on behalf of both parties before they take effect’.

The Court of Appeal found that the oral agreement made in relation to the revised schedule to vary the payments under the licence was not only valid but amounted to an agreement to dispense with the NOM clause.   MWB appealed to the Supreme Court.

The Supreme Court overturned the Court of Appeal’s decision and held that the NOM clause remained effective.  As a result, the informal discussion regarding the revised payment schedule did not vary the terms of the licence on the basis that:

  1. it would override the parties’ intentions.
  2. that their freedom in relation to the contract only operated up to when the contract was made.
  3. that afterwards, this freedom was restricted by the terms of the contract itself.

It commented that NOM clauses:

  • prevented attempts to undermine written agreements by informal means;
  • avoided disputes about whether a variation had been intended and about its exact terms; and
  • provided formality in recording variations, making it easier for companies to police their internal rules.

‘The Supreme Court’s decision highlights the importance of checking and following the formal procedures set out in a contract if you intend to subsequently try and vary its terms,’ explains Emma.

It also brings about a risk that if you have sought to vary a contract orally and believe you are acting on the varied terms, you may find yourself in a situation where you cannot enforce those varied terms unless you can clearly show that the other party acted on the contract as varied (therefore relying on doctrine of estoppel).

For this there would have to be some words or conduct which unequivocally represented that the variation was valid notwithstanding its informality and that this needs to be something more than just the informal promise to vary the contract.

If you would like advice in relation to varying the terms of a contract or reviewing the terms of an agreement, or any other company and commercial law matter contact Emma Benniston on 01543 431930 or by email at ebenniston@ansonssolicitors.com.

The contents of this article are for the purposes of general awareness only.  They do not purport to constitute legal or professional advice.  The law may have changed since this article was published.  Readers should not act on the basis of the information included and should take appropriate professional advice upon their own particular circumstances.