The Supreme Court recently confirmed in Rock Advertising (“Rock”) v MWB Business Exchange (“MWB”) that a contract containing a clause requiring amendments to be made in writing (otherwise known as a “no oral variations clause”) can validly prohibit any subsequent oral variations, restoring the previous County Court judgement which had been overruled by the Court of Appeal.
Variation clauses in contracts restrict the modification of an agreement and are intended to exclude both informal and formal variations by requiring any amendments to be in writing and signed by all parties to the agreement to be effective. While these are commonplace, there is ongoing debate surrounding the certainty of how effectively they work in practice. This is because under English law there is no formal legal requirement for contracts to be agreed in writing.
The fundamental principle of contract law is a party’s freedom of contract, to provide for the terms and conditions that will govern their relationship and allows for a great deal of flexibility. This same principle applies when parties agree to vary a contract – as no formal requirements apply, the variation can be done in any way the parties see fit. Therefore, due to this uncertainty, many contracts include a no oral variation clause to ensure due process is followed regarding any modifications and to avoid any misunderstanding or unintentional oral variations being made to the agreement.
In Rock v MWB the effectiveness of an oral variation in a written contract that contained a no oral variation clause was challenged. Rock rented office space in London under a licence with MWB for a fixed term of 12 months. Rock fell behind in rent and claimed that the parties had agreed over the phone a revised payment plan, despite the no oral verification clause in the contract. The effect of the payment plan was to defer some of the payments and spread out accumulated arrears over the remainder of the year. However, one month later, MWB locked Rock out of their office for failure to pay under the terms of the written contract claiming no such deal was made, terminated the licence and sued for the arrears. The case centred on whether the oral agreement varied the licence, or whether this was not effective as the contract contained the following no oral variation clause:
“This Licence sets out all of the terms as agreed between MWB and Licensee. No other representations or terms shall apply or form part of this Licence. All variations to this Licence must be agreed, set out in writing and signed on behalf of both parties before they take effect.”
The Supreme Court found that an oral agreement had been made to vary the licence but the variation was ineffective as it had not been in writing per the requirements of the no oral variation clause. The court held that the law did give effect to contractual provisions requiring formalities to be followed for variations. Therefore, a no oral variation clause does not prevent a party from varying a contract, instead it provides for the method of variation. This is because the written contract represented the parties’ intentions at the time of signing and therefore the parties may validly bind themselves to any future conduct in their legal and commercial relations.
This is good news for businesses as it is clear that no oral variation clauses are effective. Parties now have certainty in both a legal and commercial context that their written agreement will reflect the terms of their agreement as no modifications or amendments can be made to the contract without following an agreed upon method. Parties should consider including a no oral variation clause in their commercial contracts as highlighted by the Supreme Court, as it prevents any informal agreements, avoids disputes in relation to any oral variations (not only as to whether one has been agreed but also as to what the exact terms are) and lastly provides for a formal method of variation to enable business to keep track of what has been agreed.
However, what this also means is that parties will need to pay careful attention when drafting variation clauses as to what specific formalities are agreed. Parties should consider who will be authorised to sign off on any variations and who this should be limited to, particularly relevant for any large organisations who have several authorised signatories. For example, should all authorised signatories be allowed to sign off or should this be limited to specific directors.
For more information on drafting commercial contracts, Cleveland & Co external in-house counsel, your specialist outsourced legal team are here to help.