Post by congregatio on Jun 28, 2018 11:03:18 GMT 4
Contracts frequently provide that they may not be amended, unless in writing and signed by both parties. But how does that fit with the principle of freedom of contract and the idea that parties should be able to make (or unmake) whatever bargain they wish?
If a contract therefore prohibits subsequent oral modification, can the parties nevertheless orally agree to do away with that prohibition? In Rock Advertising Limited v. MWB Business Exchange Centres Limited [2018] UKSC 24, the Supreme Court recently provided welcome clarity to what Lord Sumption described as a "truly fundamental issue in the law of contract".
The case involved the occupancy of office space under licence. Rock was due to pay a set licence fee every month. The licence 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."
Rock had accumulated arrears of licence fees of £12,000. It proposed a schedule of revised payments to MWB. It was alleged that, over a telephone conversation, it had been agreed that the licence would be varied in accordance with the revised schedule.
The question arose as to whether the alleged oral variation was effective. Did any variation to the licence still require to be in writing – or was it competent for the parties to orally agree to do away with that requirement?
Lord Sumption considered the arguments most commonly made in support of parties orally agreeing to do away with the requirement to be neatly expressed in a passage from a judgment of Cardozo J in the New York Court of Appeals in Beatty v. Guggenheim Exploration Co in 1919:
"Those who make a contract, may unmake it. The clause which forbids a change, may be changed like any other."
Lord Sumption, however, observed that the more recent English cases on the subject were more equivocal. He identified three particular reasons for including no oral modification clauses in agreements:
first, they prevent attempts to undermine written agreements by informal means, a possibility that he considered to be open to abuse (e.g. dishonestly alleging an oral variation);
secondly, oral discussions can give rise to misunderstandings and no oral variation clauses avoid disagreements about the exact terms of the oral variation; and
thirdly, no oral modification clauses make it easier for companies to police internal restrictions on who has authority to bind the company.
Lord Sumption ultimately concluded that:
"... the law should and does give effect to a contractual provision requiring specified formalities to be observed for a variation."
He did not consider that to be inconsistent with the idea that parties are free to make informal contracts on the basis that, when parties enter into a no oral modification clause, they haven't agreed that oral variations are forbidden. Rather they have agreed that they will be invalid.
Moreover, Lord Sumption did not consider that it necessarily followed that parties who agreed an oral variation to a contract (in circumstances where oral variations are prohibited) must have agreed to dispense with the no oral modification clause. Rather the more natural inference was that they had simply overlooked it.
The Supreme Court unanimously held (albeit Lord Briggs differed in reasoning) that the no oral modification clause in the licence held good. The alleged oral agreement was deprived of any binding force as a contractual variation.
The decision certainly has the attraction of legal certainty to it. The whole point of no oral modification clauses is to avoid protracted disputes in circumstances where one party denies the fact or extent of the alleged modification (as in Rock). Such disputes will inevitably require evidence of what was said and therefore be expensive and time consuming.
On the other hand, one cannot help but continue to have a nagging feeling that, if parties have, as a matter of fact, both agreed to vary an existing contract and to dispense with the need for writing, why should that agreement not be respected? The Supreme Court did recognise that the principle of estoppel (or personal bar in Scotland) might prevent a party who has acted according to an oral variation to a contract, as if it is valid, to subsequently seek to avoid the consequences of the variation. However, on the facts of Rock, that issue did not arise.
The message in Rock is clear. Many contracts require certain formalities to be complied with before a variation will be valid. It is important that contracting parties remember to check their contracts and follow these requirements every time an agreement is reached to vary the terms. Going forward, the courts will likely insist on compliance with such provisions.
If a contract therefore prohibits subsequent oral modification, can the parties nevertheless orally agree to do away with that prohibition? In Rock Advertising Limited v. MWB Business Exchange Centres Limited [2018] UKSC 24, the Supreme Court recently provided welcome clarity to what Lord Sumption described as a "truly fundamental issue in the law of contract".
The case involved the occupancy of office space under licence. Rock was due to pay a set licence fee every month. The licence 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."
Rock had accumulated arrears of licence fees of £12,000. It proposed a schedule of revised payments to MWB. It was alleged that, over a telephone conversation, it had been agreed that the licence would be varied in accordance with the revised schedule.
The question arose as to whether the alleged oral variation was effective. Did any variation to the licence still require to be in writing – or was it competent for the parties to orally agree to do away with that requirement?
Lord Sumption considered the arguments most commonly made in support of parties orally agreeing to do away with the requirement to be neatly expressed in a passage from a judgment of Cardozo J in the New York Court of Appeals in Beatty v. Guggenheim Exploration Co in 1919:
"Those who make a contract, may unmake it. The clause which forbids a change, may be changed like any other."
Lord Sumption, however, observed that the more recent English cases on the subject were more equivocal. He identified three particular reasons for including no oral modification clauses in agreements:
first, they prevent attempts to undermine written agreements by informal means, a possibility that he considered to be open to abuse (e.g. dishonestly alleging an oral variation);
secondly, oral discussions can give rise to misunderstandings and no oral variation clauses avoid disagreements about the exact terms of the oral variation; and
thirdly, no oral modification clauses make it easier for companies to police internal restrictions on who has authority to bind the company.
Lord Sumption ultimately concluded that:
"... the law should and does give effect to a contractual provision requiring specified formalities to be observed for a variation."
He did not consider that to be inconsistent with the idea that parties are free to make informal contracts on the basis that, when parties enter into a no oral modification clause, they haven't agreed that oral variations are forbidden. Rather they have agreed that they will be invalid.
Moreover, Lord Sumption did not consider that it necessarily followed that parties who agreed an oral variation to a contract (in circumstances where oral variations are prohibited) must have agreed to dispense with the no oral modification clause. Rather the more natural inference was that they had simply overlooked it.
The Supreme Court unanimously held (albeit Lord Briggs differed in reasoning) that the no oral modification clause in the licence held good. The alleged oral agreement was deprived of any binding force as a contractual variation.
The decision certainly has the attraction of legal certainty to it. The whole point of no oral modification clauses is to avoid protracted disputes in circumstances where one party denies the fact or extent of the alleged modification (as in Rock). Such disputes will inevitably require evidence of what was said and therefore be expensive and time consuming.
On the other hand, one cannot help but continue to have a nagging feeling that, if parties have, as a matter of fact, both agreed to vary an existing contract and to dispense with the need for writing, why should that agreement not be respected? The Supreme Court did recognise that the principle of estoppel (or personal bar in Scotland) might prevent a party who has acted according to an oral variation to a contract, as if it is valid, to subsequently seek to avoid the consequences of the variation. However, on the facts of Rock, that issue did not arise.
The message in Rock is clear. Many contracts require certain formalities to be complied with before a variation will be valid. It is important that contracting parties remember to check their contracts and follow these requirements every time an agreement is reached to vary the terms. Going forward, the courts will likely insist on compliance with such provisions.