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ARTICLE UPDATED: LEGAL POSITION REVERSED - Nil by mouth - The enforceability of No Oral Modification clauses and what the MWB Business Exchange case means for construction

In July 2016, following a Court of Appeal Judgment handed down on 21 June 2016, I wrote an article reporting on the Court’s finding that anti-oral variation (or No Oral Modification) clauses were non-binding and considering the effect that could have on parties to construction contracts.  

On 16 May 2018, the Supreme Court over-turned the Court of Appeal decision, finding that No Oral Modification clauses are indeed binding.  Lord Sumption, in his leading Judgment, noted that the appeal was “exceptional”. 

As a reminder, the case concerned licence arrears owed by Rock Advertising to MWB Business Exchange Centres in respect of their occupation of premises in central London.  Rock alleged that they had agreed a revised schedule of payments with one of MWB’s credit controllers by way of a proposal sent by email by Rock’s sole director, which was subsequently (allegedly) agreed on the telephone by the credit controller.  MWB’s position was that the revised schedule was still in negotiation (i.e., not yet binding) when the credit controller’s boss rejected the proposal and MWB shut Rock out of the premises in May 2012 and sued for arrears. 

The original case and two subsequent appeals have turned on whether or not the parties could, as a matter of law, have varied the contract between them, notwithstanding the fact that clause 7.6 of that contract stated:

“All variations to this licence must be agreed, set out in writing and signed on behalf of both parties before they take effect.”

To the lay person and, indeed, to many lawyers without the experience of the esteemed Court of Appeal Judges, that clause may appear to be watertight.  Not so said the Court of Appeal.  Given that BPE blogs seek to concentrate on practical matters rather than the musings of the judiciary, I shall not rehearse the full judgment, but the bottom line is that the Court of Appeal gave careful consideration to a number of previous cases and the submissions of Counsel in the case before them.  They acknowledged that “difficulties of proof might arise whenever it is claimed that a contract has been made orally” and yet concluded that party autonomy is key – oral variations can stand, despite a ban on them in the written contract document.

As I noted back in 2016, the Court of Appeal Judgment appeared to take a sledgehammer to the variation procedures in construction contracts and permit oral variations, notwithstanding the thought that has gone into Section 5 of the JCT, Section 6 of the NEC3, Section 13 of FIDIC and the countless carefully negotiated amendments to those standard forms and, indeed, bespoke contracts.

And so to the Supreme Court decision handed down last month.  Lord Sumption acknowledged that Rock v MWB is a rare case in that it raises “truly fundamental issues in the law of contract”.  He was unequivocal in his conclusion that:

“In my opinion the law should and does give effect to a contractual provision requiring specified formalities to be observed for a variation… Party autonomy operates up to the point when the contract is made, but thereafter only to the extent that the contract allows.”

Lord Sumption’s criticism of the Court of Appeal was that they had overridden the parties’ intentions – an approach which is contrary to the key principal of contact law that the parties’ intentions always take precedence (so long as they do not contravene public policy, which Lord Sumption concluded “No Oral Modification” clauses do not).  He went on to acknowledge three key reasons for allowing No Oral Modification clauses, which can be summarised as:

  1. Such clauses prevent attempts to undermine written agreements by informal means which could be open to abuse.

  2. Oral discussions can easily give rise to misunderstandings: requiring variations to be recorded in writing provides for certainty not just of the existence of a variation but also of its detail.

  3. Such clauses help corporations to “police internal rules restricting the authority to agree [variations].”

Following the Court of Appeal decision, my original article noted:

As we regularly advise clients who have turned to the BPE Construction & Engineering Team for dispute advice, no matter what the law or the facts, evidence is the key to winning a case.  Given that most construction contracts contain a clear mechanism/procedure for variations (and further, many make agreement on price prior to the variation works being carried out a condition precedent to payment for the said variation works), we would strongly advise all parties to continue to adhere as closely as possible to the procedures laid out in the contracts before you.  Oral instructions on building projects should always be confirmed in writing as soon as possible by the EA/CA/Engineer.  More importantly though, the onus really is on the Employer and Contractor to help themselves by recording variations in writing to evidence the agreement and avoid costly disputes at final account stage.

It seems that this was sage advice as the Supreme Court said:

“The natural inference from the parties’ failure to observe the formal requirements of a No Oral Modification clause is not that they intended to dispense with it but that they overlooked it. If, on the other hand, they had it in mind, then they were courting invalidity with their eyes open.”

My original article also considered internal policies for agreeing variations to contracts:

One further practical point to note is the matter of authority to vary contracts.  The first instance Judge in MWB considered submissions regarding the ostensible authority of the individual at MWB who had conducted the discussions that, in the end, amounted to the oral variation.  An additional way to protect your business from unexpected variations to contracts is to put in place proper internal procedures to ensure that only those suitably trained/authorised to do so, ever place themselves in situations where your commercial contracts could be varied by their conduct. 

Again, this was a point picked up on by Lord Sumption as noted above in the third of his three key reasons for finding No Oral Modification clauses to be valid.

In conclusion therefore, although the Supreme Court has reversed an important Court of Appeal decision, our advice remains unchanged:

  1. It is critical to have policies in place to ensure that your team knows who does and does not have authority to sign contracts and variations.

  2. It is critical to communicate these policies to both your own team and to clients and suppliers.

  3. Whether or not your contract includes a No Oral Modification clause, as a matter of evidence it is always preferable to record variations in writing.  If you feel a variation may have been agreed during a telephone call or meeting, we recommend that you follow up immediately with an email or letter and ask the other party to the contract to confirm in writing.

 

These notes have been prepared for the purpose of an article only. They should not be regarded as a substitute for taking legal advice.