6 September 2018
Rock Advertising Limited (Rock) occupied offices as a licensee managed by MWB Business Exchange Centres Ltd (MWB). Rock was unable to meet its financial commitments and had incurred arrears of licence fees and other charges. MWB orally agreed with Rock’s credit controller to reschedule the licence fee payments to clear arrears by year end. An immediate lump sum payment was made, which MWB accepted. MWB then locked Rock out of the premises and in March 2012, commenced proceedings for rent arrears and other charges. MWB won in the High Court. Whilst the first instance judges agreed that it is possible to orally amend a contract, such a variation was ineffective on the facts. Rock then appealed to the Court of Appeal where Rock won. The Court of Appeal concluded the oral variation was supported by consideration and was therefore effective. MWB appealed to the Supreme Court.
The Supreme Court considered the legal effect of the anti-oral variation clause (the NOM clause) in the Rock/MWB contract and in particular whether the parties could impliedly dis-apply such a clause.
The Supreme Court considered how to balance commercial certainty with the doctrine of party autonomy and, on the specific facts, how to balance the ability for debtors to rely on a creditor's promises, whilst protecting creditors from debtors seeking to gain an unfair advantage.
Lord Sumption (with whom the majority of the judges agreed) first considered the reasons why NOM clauses could be considered ineffective. He referred to Cardozo J's judgment in Beatty v Guggenheim Exploration Co (1919) 225 NY 380 which stated that 'the prohibition of oral waiver, may itself be waived' i.e. the variation of an existing contract is itself a contract. Sumption LJJ went on to say that to suggest that parties cannot bind themselves as to the form of any contract variation is contrary to the principle of party autonomy.
However, tipping the scales, Sumption LJJ then reflected on the advantages of giving effect to NOM clauses, which:
The Supreme Court drew a useful distinction between agreeing to vary a contract orally and intending to dispense with NOM clauses. Briggs LJJ adopted a more flexible approach than Sumption LJJ and went as far as saying that in strictly necessary circumstances, it may be implied that a NOM clause is disapplied in order to give effect to an oral variation.
In this instance, the Supreme Court upheld the application of the NOM clause on the basis that the formalities required to effect such a variation were not followed and the circumstances were not such that it was necessary to imply disapplication of the NOM clause.
Undoubtedly there is value in NOM clauses. No party should assume that a NOM clause can be orally varied without making specific reference to it and even then there is no guarantee that the courts will give effect to the variation. The court continues to strike a balance between the competing principles of contractual freedom and contractual certainty. Clearly, whoever is managing the day-to-day implementation of contractual terms, particularly in the context of rental payments, should be alive to how the terms can be varied. If in doubt, follow the formalities provided for in the contract. The doctrine of estoppel can be a safeguard but not a definitive solution.