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Mitchell Abbott, trainee in the dispute resolution team at CMS, offers comment on the decision of the Supreme Court in the matter of Rock Advertising Limited v MWB Business Exchange Centres Limited [2018] UKSC 24:

“Modern litigation rarely raises truly fundamental issues in the law of contract. This appeal is exceptional. It raises two of them.” – Per Lord Sumption

The Supreme Court has held that a clause in a contract, which required modifications to that contract to be in writing and signed by the parties, invalidated a subsequent oral agreement to vary the contract. However, the Supreme Court declined to rule on the second issue raised: whether the proposed variation had valid consideration and thus fulfilled one of the requirements to create a binding contract in English law.

The background

MWB Business Exchange Centres Limited (“MWB”) operated serviced offices in central London. Rock Advertising Limited (“Rock”) entered into a licence with MWB to occupy office space for a fixed term of 12 months, commencing on 11 November 2011. The licence contained a clause requiring that any variation to the licence must be (i) set out in writing and (ii) signed on behalf of both parties. Clauses such as this are commonly referred to as “no oral modification” clauses.

By 27 February 2012, Rock had accumulated arrears under the licence of over £12,000. The High Court at first instance previously held that an oral agreement was reached between Rock and MWB to vary the payment schedule under the licence. However, this variation was not put into writing and signed by both parties, as required under the terms of the licence.

MWB proceeded to treat the revised payment schedule as a proposal and ultimately rejected it. On 30 March 2012 MWB locked Rock out of the premises for a failure to pay the arrears and terminated the licence, with effect from 4 May 2012. MWB then sued Rock for the arrears under the licence. Rock counterclaimed for wrongful exclusion from the premises. The case turned on whether the agreement to vary the payment schedule was effective, despite being in breach of the requirements of the no oral modification clause.

The decision of the Court of Appeal

The Court of Appeal previously held that no oral modification clauses are essentially ineffectual. The Court of Appeal held that the principle of party autonomy dictates that parties are free to agree in breach of a no oral modification clause. It could be thought that, in situations where parties have not expressly waived the no oral modification clause, it was their intention to do so by reaching an agreement in breach of the clause.

For a contract to be enforceable under English law there must be consideration between the parties. The licence was to be worth slightly less to MWB with the revised payment schedule. However, Rock was more likely to be able to make the payments under the licence. Additionally, by keeping Rock as a tenant, MWB would be less likely to have a period in which the property was left vacant. There was conflicting authority as to whether these benefits were valid consideration. The Court of Appeal distinguished the principles in Foakes v Beer (1884) 9 App Cas 605 and in re Selectmove [1995] 1 WLR 474 and instead followed Williams v Roffey Bros & Nicholls (Contractors) Ltd [1991] 1 QB 1. They held the increased chance of payment and the property being occupied for longer was a practical benefit to MWB and thus valid consideration.

The first issue: was the oral variation valid?

The Supreme Court has overturned the Court of Appeal’s decision, holding the oral variation was not valid. Lord Sumption – with whom Lady Hale, Lord Wilson and Lord Lloyd-Jones agreed – found that the proper understanding of party autonomy is that parties may agree to bind their future conduct. After parties reach an agreement as to their future conduct that agreement sets the boundaries of party autonomy. The effect of this is that, should a contract require variations to the contract to be in writing, an oral variation of the contract will be invalid. However, parties are still free to vary a no oral modification clause in the form the contract specifies for variations, i.e. writing.

There is the possibility of a situation where parties agree orally to vary a contract and then a party acts on the variation. In this situation the doctrine of estoppel will act to prevent unfairness. Estoppel will prevent a party from relying on the no oral modification clause to invalidate the oral variation. However, estoppel did not arise on the facts of this case. The Supreme Court held that there had to be some words or conduct unequivocally representing the variation was valid and something more than the informal promise itself.

Lord Briggs gave a separate concurring judgment, agreeing that the no oral modification clause prevented the variation in this case from being valid. However, he did so on slightly different grounds: holding that a no oral modification clause could be varied orally by express reference to it.

The second issue: was there valid consideration between the parties?

In light their decision on the no oral modification clause, the Supreme Court declined to rule on whether the practical benefits of the varied licence amounted to valid consideration. The Supreme Court noted the conflicting authorities discussed by the Court of Appeal and noted that any examination of the issue was likely to involve a re-examination of Foakes v Beer (1884) 9 App Cas 605. The Supreme Court noted that the case was “probably ripe for re-examination” (per Lord Sumption, para 18) but should be heard before an enlarged panel of the court where the decision was more than obiter.

Comment

The decision means that parties can now be more certain that their written agreements fully reflect the terms of their agreement. This will be especially relevant for larger organisations who potentially have more than one person with authority to bind the organisation.

The Supreme Court also noted that the enforcement of no oral modification clauses will likely reduce future litigation. This is partially due to the increased certainty the enforcement of such clauses brings. Additionally, the number of cases in which parties can argue there has been an oral variation of a contract will be reduced as a result of this decision. We may now see fewer unscrupulous defences being raised. Equally, where such an argument is run in the face of a no oral modification clause, the potential for summary judgment will be greater, potentially leading to a reduction in litigation costs.