Charles Russell Speechlys comments on Supreme Court decision which may curtail flexibility of contracts used by small businesses and consumers

Charles Russell Speechlys today (16 May) commented on the Supreme Court’s judgment in MWB Business Exchange Centres Ltd v Rock Advertising Ltd.

The case examines whether a contract can be varied informally by the parties even where the contract says that oral variations are not permitted. In a decision which may be welcomed as having avoided the floodgates to uncertainty – but perhaps unnecessarily curtailing contracting parties’ flexibility - the Supreme Court has allowed MWB’s appeal and refused to allow the “no oral modification” clause (or “NOM” clause) to be ignored.

Although the case concerned a property licence agreement, it has wide ramifications for all types of contracts – and not just those made between commercial parties. Small businesses and consumers in particular should look out for this seemingly innocuous clause, which they might otherwise overlook.

Emma Humphreys, property litigation partner, says:

“The Supreme Court has avoided opening the floodgates to uncertainty by ensuring that people entering into a contract of any sort have a good level of assurance about their contractual relations, recognising that they can still follow the route required by the contract to achieve a variation and that there are other legal rules in place (such as estoppel) which protect them from broken promises.

“This Supreme Court decision is a welcome clarification of the law in this area and gives real meaning and support to “no oral modification” clauses within contracts. Although some will be concerned that it is too restrictive of parties’ contractual freedom and that commercial relations require greater flexibility when it comes to varying arrangements, any finding that the “no oral modification” clause was ineffective would have created the potential for significant uncertainty for contracting parties and those advising them.

“There may be concern arising from this judgment for those who agree to vary arrangements in good faith and subsequently find the other party trying to avoid the revised agreement on the basis of a ““no oral modification” clause. However, the Supreme Court recognised this and emphasised that the principle of estoppel still has a role to play in safeguarding against injustice in such situations.”

Tanya Wilkie, commercial lawyer, comments:

“This interesting decision confirms that relying on a spoken agreement to vary the terms of a contract may not be enough if the contract contains a “no oral modification” clause. Small businesses and consumers in particular should look out for this seemingly innocuous clause, which they might otherwise overlook.

“Even if the other party appears amenable and cooperative to changing the terms of the contract informally, it is important to double check the procedure set out in the contract as to how it can be varied as it may require the agreed position to be in writing and signed by the parties.

“In this case, the parties could have chosen to formally remove the “no oral modification” clause, allowing them the freedom going forward to vary the terms of the deal with nothing more than a spoken agreement. However, with such freedom would come added uncertainty.

“It does not seek to take emphasis away from the notion of party autonomy, but rather to place focus on the actual wording agreed in a contract. This is an important reminder to follow formal procedures in a contract to effectively vary the terms of the deal.

“This decision comes as a welcome clarification of the ways in which parties can agree to change the terms of their contracts.”