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Oral Variations to Commercial Contracts

June 2018 - Issue 2018

In the recent case of Rock Advertising Ltd v MWB Business Exchange Centres Ltd [2018] UKSC 24, the Supreme Court confirmed that a No Oral Modification (“NOM”) clause is legally effective.

The parties in this case were unable to agree orally that the contract should be varied; instead, only a written variation would suffice.

The Judge noted that NOM clauses are commonly used in commercial agreements for the following reasons –

  1. to prevent undermining written agreements via informal means;
  2. where oral discussions can easily give rise to misunderstandings; and
  3. through the requirement of formalities to allow corporations to maintain internal rules restricting the authority to give such variations.

In order to effectively enforce the contract, the parties should abide by the NOM clause and any other provisions contained within the contract.

In Rock Advertising, the Judge emphasised that when varying a contract, parties should note:

Where parties seek to dispute oral variations of contract that contain NOM clauses, the party relying on the oral variation will have to rely on the doctrine of estoppel. In summary, the doctrine of estoppel occurs when one party has been induced to act on the basis of another party’s proposition. If an estoppel is established, it acts to bind the other party to its original proposition. However, the degree to which the doctrine of estoppel can provide support is limited.

The Supreme Court did not identify a persuasive public policy rationale for not giving effect to NOM clauses. Whilst managing all variations in writing can be difficult, particularly with regard to construction contracts where lots of communications may occur on an informal basis, parties should carefully consider the implication of an NOM clause. There are often instances whereby commercial parties to a contract have agreed oral variations to a contract containing a NOM clause, only to put the variation in writing at a later date. The Supreme Court has made it clear that parties that adopt that approach will face the risk that such oral variations are not effective until they are amended to the contract. Whilst parties may be able to rely on estoppel, it may be difficult to establish an adequate basis for this, particularly in light of the fact that anyone seeking to rely on estoppel must have ‘clean hands’ and not have acted unconscionably.

The Rock Advertising decision of the Supreme Court represents a departure from previous case law and may have a significant impact on commercial parties that regularly seek to agree oral amendments to contracts which may then later be documented in writing.  Parties should be mindful of the risks of proceeding to perform under a contract on the basis of oral modification if the relevant contract has a NOM clause (as the construction contracts we review frequently do). Parties looking to amend their contracts should review the contract terms to determine whether they contain NOM provisions or other specific conditions relating to how amendments are to be carried out and take the appropriate action.

If you are seeking to vary a contract to which you are a party, call a member of our team to guide you through the process.

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