Modern litigation rarely raises truly fundamental issues in the law of contract.
For decades the Law has recognised the need for parties to freely contract with one another and as such formal written requirements have frequently been dispensed with in favour of more informal ways of contracting. Verbal contracts, memos and emails have become common place in a world which strives for quick communication and faster results.
However, what happens when formal contractual arrangements are in direct conflict with informal ones? This was one of the fundamental issues in the recent case of Rock Advertising Limited v MWB Business Exchange Centres and it is clear that the Supreme Court has taken a more pragmatic approach to the informal variation of contracts.
Rock Advertising entered into a licence with MWB Business Exchange Centres to occupy office space. The licence entered into provided that all variations were to be agreed, set out in writing and signed on behalf of both parties.
Rock Advertising later fell into arrears and both parties agreed to vary the Licence over a telephone conversation to provide provisions for Rock Advertising to defer February and March payments and subsequently spread the accumulated arrears over the remainder of the Licence.
MWB later locked Rock Advertising out of the premises they were occupying, sued Rock Advertising for the arrears and terminated the licence.
The key issue being: Was the variation that took place over the telephone valid?
The Court of Appeal overturned the judgment at first instance in that the oral variation of the contract was valid despite the fact that there was a Non Oral Modification Clause in the agreement.
The Court of Appeal’s main reasoning being that, at common law, there are no formal requirements for the validity of a simple contract. They reasoned that No Oral Modification clauses are ineffective as (i) a variation of an existing contract is itself a contract; (ii) as common law imposes no requirements of form on the making of contracts, the parties may agree informally to dispense with an existing clause which imposes requirements of form; and (iii) it was the parties intention to amend the contract orally.
The Court of Appeal observed that the most powerful consideration in deciding this view was “party autonomy.”
The Supreme Court overturned the Court of Appeal’s decision with leading Judge Lord Sumption calling the Court of Appeal’s view on “party autonomy” a “fallacy.” He continued to explain that while party autonomy ran up to the point the contract was made, after such this only operated to the extent that the contract allowed. The inconsistences in the Court of Appeal’s approach to party autonomy was evident as Sumption explained that “the real offence against party autonomy is the suggestion that they cannot bind themselves as to the form of any variation.”
The above was notwithstanding the Supreme Court’s consideration of No Oral Modification in a wider and more practical context. The Supreme Court listed three reasons as to why No Oral Modification Clauses were important not just to the application of the law but the realities of business practice, these were:
- They prevent attempts to undermine written agreements by informal means;
- Oral discussions can easily give rise to misunderstandings and therefore creates uncertainties as to intentions and subsequent terms of variations; and
- Formally recording variations makes it easier for corporations to police internal rules restricting the authority to agree them.
The only way to overcome being on the “wrong end” of a decision of this nature is if the party acting up the oral variation did so to their detriment. It is at the courts absolute discretion to decide whether that not giving effect to the oral variation would be so unfair to the party suffering the detriment that it would be unjust for the parties to depart from their oral variation.
As one can infer from above, the Supreme Court has taken a more pragmatic approach to the informal variation of contracts. In an area of law that seldom sees such major developments, this is one that has the potential to cause ripple effects amongst businesses across the UK.
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