The UK Supreme Court has held* that a “no oral modification” (NOM) clause is legally effective, overturning a Court of Appeal ruling that such a clause does not prevent an otherwise valid oral variation. This is not just about the sort of “boilerplate” so beloved of lawyers: it is a really important practical point in the commercial world.
A licence agreement for serviced office premises contained the following clause:
“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 fell into arrears and proposed a revised payment schedule, which it claimed the licensor agreed to. The licensor disputed that, locked the licensee out of the premises, terminated the licence and sued for the arrears. The licensee counterclaimed damages for wrongful exclusion, relying on the alleged oral variation. The first instance judge found that an oral variation had been agreed as claimed by the licensee: but because it was not in writing per the NOM clause it was ineffective. The CA held that the oral variation was valid: the parties must be taken to have agreed to dispense with the NOM clause. The licensor appealed to the SC.
By a majority of four to one the SC upheld the licensor’s appeal. The NOM clause prevented the parties from varying the contract in any way other than as expressly agreed.
Per Lord Sumption (who gave the majority judgment) it is an advantage of the common law that it enables agreements to be made quickly and informally, without the intervention of lawyers or legally drafted documents. But NOM clauses are frequently included in written agreements, which suggests that the common law’s flexibility is not always welcome. There are at least three legitimate commercial reasons for including such a clause:
- to prevent attempts to avoid enforcement of written agreements by alleging informal variations as defences (as in this case);
- since oral discussions can easily give rise to misunderstandings and crossed purposes, to avoid disputes not just about whether a variation was intended but also about its exact terms;
- to make it easier for businesses to police internal rules restricting the authority to make or vary agreements.
NOM clauses are recognised as effective in many legal codes around the world (eg the UN CISG and the UNIDROIT Principles of International Commercial Contracts). If businessmen decide to include an NOM clause in their contract, for the above or for other reasons, the law should give effect to that agreement. There might be circumstances in which it is inequitable to enforce an NOM clause, but for an estoppel to work there would have to be some words or conduct unequivocally representing that what was agreed orally was to be valid notwithstanding the NOM clause.
This is a controversial decision. The CA had accepted the argument that it is conceptually impossible for the parties to agree not to agree to vary their contract orally: agreements can be entered into orally, so provided all the necessary elements for a binding agreement are present, the original agreement must be overridden by the oral agreement to vary it notwithstanding the NOM clause. The majority in the SC rejected that argument. However, in his dissenting judgment Lord Briggs was unpersuaded by Lord Sumption’s solution to “a conceptual problem that has thus far proved insuperable in most common law jurisdictions”. In his view it is conceptually impossible for the parties to a contract to agree an NOM clause “but not be free, by further agreement, to vary or abandon it by any method, whether writing, spoken words or conduct, permitted by the general law.” He urged a more cautious recognition of the effect of an NOM clause, namely that it should continue to bind the parties until they have expressly or by (strictly necessary) implication agreed to do away with it. As that was not the case here, he agreed with the result. He added that this more cautious approach accorded more closely with the conceptual analysis adopted in most other common law jurisdictions, whereas Lord Sumption’s more radical solution “would involve a clean break with something approaching an international common law consensus.”
The practical implications
While the controversy may continue in legal and academic circles, rightly or not the majority decision of the SC settles the law on this point in the UK for the foreseeable future.
It will be welcomed by all institutions and large corporate entities who routinely include NOM clauses in contracts and depend on being able to rely on them. But it also enhances their attractiveness and usefulness in all important commercial contracts, mainly for the reasons stated above. A party looking for ways to avoid its obligations will often claim that something was said during a telephone conversation or at a meeting that amounted to an oral variation of a written agreement: that becomes a question of disputed fact and, even if considered spurious, may make it very difficult to enforce the letter of the agreement in a quick and cost-effective way. A well drafted NOM clause will make it difficult to get that sort of claim off the ground.
The drafting is important, and needs to be precise:
- if oral variations are to be expressly ruled out, consider ruling out oral waivers or relaxations of contractual obligations as well
- likewise oral agreements superseding or replacing the written agreement, wholly or partly
- is it enough to require that variations etc be “in writing”? An exchange of emails could constitute an agreement in writing for this purpose. Consider stricter formal requirements, eg that variations must be in writing and signed by one or more [named?] directors, or confirmed by signed hard copy document or fax, as in the case of formal notices – and should agreement by email alone be expressly excluded?
- what about when urgent variations are required and there may not be time to go through particular formalities – can that situation nevertheless be covered?
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