The Supreme Court’s landmark decision on “No Oral Modification” Clauses
Introduction
It is common for parties to a commercial contract to insert a clause stating that “all variations to the contract must be agreed, set out in writing and signed on behalf of both parties before they take effect” (commonly known as a “No Oral Modification” or “NOM” clause). If the parties subsequently have a purported oral agreement to vary a particular term of the contract but do not say anything about the NOM clause, will such a variation be effective?
In the recent decision of Rock Advertising Limited (Respondent) v MWB Business Exchange Centres Limited (Appellant) [2018] UKSC 24, the Supreme Court held that such a NOM clause is effective in defeating a subsequent oral variation of a contract.
At first blush, a court’s decision to uphold such a NOM clause may not come as a surprise. However, on a closer examination, the Supreme Court was split on the reasoning behind the decision, and there remains uncertainty as to whether and in what circumstances the parties might be able to do away with a NOM clause.
The Supreme Court’s Decision
Against the backdrop of previous decisions (including that of the Court of Appeal in the present case, which held that a NOM clause does not prevent the parties from later making a new oral contract to vary the original contract), the Supreme Court unanimously allowed the appeal.
Lord Sumption (with whom Lady Hale, Lord Wilson and Lord Lloyd-Jones agree) held that:-
- the law should and does give effect to a contractual provision requiring specified formalities to be observed for a variation;
- there are at least three legitimate reasons for including NOM clauses in business agreements, and the law of contract does not normally obstruct the legitimate intentions of businessmen:a. they prevent attempts, including abusive attempts, to undermine written agreements by informal means;
b. they avoid disputes not just about whether a variation was intended but also about its exact terms; and
c. they make it easier for corporations to police their own internal rules restricting the authority to agree variations. - making such a clause ineffective on the basis of maintaining party autonomy was a fallacy: autonomy operated up to the point when the contract was made, but thereafter only to the extent that the contract allowed;
- the enforcement of NOM clauses involves the risk that a party may act on contract as varied but then find itself unable to enforce it. The safeguard against injustice lies in the various doctrines of estoppel. However, Lord Sumption cautioned that reliance on an estoppel would require at the very least some words or conduct unequivocally representing that the variation was valid despite it not being in writing. Contrary to the Court of Appeal’s decision, the wording of the informal promise itself would not be sufficient for this purpose.
Lord Briggs (dissenting as to reasoning but not as to result) held that:-
- The basic concept that parties had complete freedom by further agreement to “unbind” themselves as to their future conduct is applicable both to substantive obligations and to any procedural restraints, including restraints as to how they could vary their existing relationship.
- Parties can agree to remove a NOM clause from their bargain orally. The NOM clause “continues to bind until all parties have expressly (or by strictly necessary implication) agreed to do away with it“. That fully reflected the parties’ autonomy.
- However, an agreement to remove a NOM clause would not be implied where parties agreed orally upon a variation without saying anything about the clause. In the present case, nothing had been said about the NOM clause, therefore the NOM remains effective.
Practical implications
As a result, the majority’s decision highlights the importance of considering the advantages and disadvantages of including a NOM clause and getting the drafting right in the first place, because any subsequent variation is bound by the NOM clause (if there is one) in the original contract.
The minority’s decision leaves open the possibility of oral variations to do away with a NOM clause in limited circumstances. This appears to provide for a more flexible approach to parties where rigid adherence to a NOM clause may not be practical. But in view of the majority’s decision, the safest approach is to comply with the NOM clause.
Afterall, the Supreme Court’s decision to overturn the Court of Appeal’s ruling is to be welcomed, as it has narrowed the floodgates to parties seeking relief through purported oral variations of contracts.
Although the decisions of the courts of England and Wales delivered after 1 July 1997 are no longer binding, the Hong Kong courts often seek guidance from them, especially those of the Privy Council and the Supreme Court. It should not be a surprise that Rock Advertising Limited will soon be considered by or even applied in the Hong Kong Courts.
The relevant judgment (handed down on 16 May 2018) for reference can be found here:
https://www.supremecourt.uk/cases/docs/uksc-2016-0152-judgment.pdf
For further information on NOM clauses and other commercial contract related matters, please do not hesitate to contact our solicitors.
Contacts:
Nick Gall, Senior Partner
+852 3405 7688
nickgall@gallhk.com
Vincent Lee, Associate
+852 3405 7680
vincentlee@gallhk.com
All material contained in this article are provided for general information purposes only and should not be construed as legal, accounting, financial or tax advice or opinion on any specific facts or circumstances and should not be relied upon in that regard. Gall accepts no responsibility for any loss or damage arising directly or indirectly from action taken, or not taken, which may arise from reliance on information contained in this article. You are urged to seek legal advice concerning your own situation and any specific legal question that you may have.
