Supreme Court refuses to allow an agreed contract variation
In a recent Supreme Court ruling, we are reminded that the Courts will strictly enforce any agreed contract terms, in this case refusing to allow an agreed contractual variation because the parties failed to follow the correct variation procedure stipulated in the initial contract.
It is common in commercial contracts to include a no variation clause, sometimes known as a no oral modifications (NOM) clause. A NOM clause states that the only variations that will be binding are those variations agreed in writing by the parties. The aim is to exclude the possibility of informal, and perhaps inadvertent, oral variations being made to an agreement. NOM clauses therefore provide a minimum procedure for the parties to follow if they want to vary the contract.
In a recent case of In Rock Advertising Ltd v MWB Business Exchange Centres Ltd , the Supreme Court held that a NOM clause is legally effective, overturning the Court of Appeal’s ruling that a NOM clause did not prevent a valid variation by oral agreement. In this case, MWB, an operator of serviced offices, appealed against the Court of Appeal decision that the oral variation of a contractual licence had been effective despite the presence of a NOM clause in the licence.
The clause had provided 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 licensee, Rock Advertising, accumulated arrears of licence fees, which it claimed MWB had verbally agreed could be spread over the remainder of the licence term. MWB disagreed and locked the licensee out of the premises for failure to pay the arrears and terminated the licence.
The county court judge found that an oral agreement had been made to vary the licence but the variation was ineffective because it had not been in writing, as the NOM clause required. Rock appealed successfully to the Court of Appeal which held that the oral agreement to vary the payments also amounted to an agreement to dispense with the NOM clause, meaning that the operator was bound by the variation. MWB appealed to the Supreme Court, which unanimously allowed the appeal and refused to allow the NOM clause to be ignored.
The Supreme Court held that the parties had complete autonomy to agree whatever contractual terms they wished but, having agreed those terms, including a NOM clause, they couldn’t later dispense with the requirement without undermining the initial contract (i.e. what is the point of agreeing to include a NOM clause if the parties go on to ignore it?).
Matthew Howat, Commercial & Dispute Partner, comments: “This decision remind us of the importance of ensuring that parties keep an eye on the underlying contract between them, as the Courts will strictly apply the terms, even where it appears unjust. It is a cute legal nicety that the Court found that a NOM clause doesn’t forbid an oral variation but does mean that the variation will be invalid. This does lead to the unenviable possibility that a party could act on the varied contract only to then find itself unable to enforce it”.
Howat Avraam Solicitors provide Commercial, Employment and Contract Dispute advice to companies and business owners. As business owners ourselves, we have a pragmatic in-house approach to resolving issues before they arise by working alongside our clients, often on monthly retainers. We are commercial, practical and entrepreneurial in our approach to legal services.
To discuss any commercial or legal matter on a no obligation basis, please contact Matthew Howat, Company and Disputes Partner, on 020 3735 6700 or email Matthew at Matthew.Howat@hasolicitors.co.uk. Alternatively, visit our website at www.howatavraamsolicitors.co.uk.
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