Black Box Tips: No Oral Modification Clauses In Commercial Contracts



This week: Doug Blyth takes a look at No Oral Modification Clauses

Life's greatest learning opportunities often come from things that go wrong. Only businesses that are properly vested in learning from mistakes are truly positioned to maximise their potential.

The aviation industry has this down to a fine art. When things go wrong, the black box flight recorder ensures that their errors are "data rich". That industry's ability to learn from its mistakes has taken it from one of the most dangerous forms of transport to one of the safest.

The law is no different. As part of the world's largest law firm, our disputes team is also "data rich": so here we use our knowledge of why things go wrong to help you to either avoid disputes in the first place, or to identify opportunities for fighting your client's corner.

No oral modification clauses in commercial contracts

Contracts frequently provide that they may not be amended, unless in writing, signed by both parties. But can the parties nevertheless orally agree to do away with that prohibition?

In other words, can the parties' joint, oral agreement over a variation supersede their previous written agreement, or does the written agreement hold good?

Rock Advertising Limited v. MWB Business Exchange Centres Limited ([2018] UKSC 24) involved the occupancy of office space under licence. Rock was due to pay a set licence fee every month. The licence provided that:

"All variations to this Licence must be agreed, set out in writing and signed on behalf of both parties before they take effect."

Rock had accumulated arrears of licence fees. They proposed a schedule of revised payments to MWB. It was alleged that, over a telephone conversation, it had been agreed that the licence would be varied in accordance with the revised schedule.

The question arose as to whether the alleged oral variation was effective.

Lord Sumption identified three particular reasons for including no oral modification clauses in agreements:

  1. Firstly, they prevent attempts to undermine written agreements by informal means, a possibility that he considered to be open to abuse (e.g. dishonestly alleging an oral variation);
  2. Secondly, oral discussions can give rise to misunderstandings and no oral variation clauses avoid disagreements about the exact terms of the oral variation; and
  3. Thirdly, no oral modification clauses made it easier for companies to police internal restrictions on who has authority to bind the company.

Lord Sumption ultimately concluded that:

"…the law should and does give effect to a contractual provision requiring specified formalities to be observed for a variation."

He added:

"There are many cases in which a particular form of agreement is prescribed by statute: contracts for the sale of land, certain regulated consumer contracts, and so on. There is no principled reason why the parties should not adopt the same principle by agreement."

Lord Sumption considered that when parties seek to orally agree a variation to a contract notwithstanding a no oral modification clause, the natural inference is not that parties had jointly agreed to dispense with it, but rather that they had simply overlooked it. It is not difficult to record a variation in writing. If, however, as a matter of fact, the parties had the no oral modification clause in mind when reaching their oral agreement, then he had little sympathy and considered them to be courting invalidity with their eyes open.

The Supreme Court unanimously held (albeit Lord Briggs differed in reasoning) that the "no oral modification" clause in the licence held good. The alleged oral agreement did not work – it was deprived of any binding force as a contractual variation by the provision of the licence that prohibited oral variations.

The judgment arises from an English appeal (and is not therefore, strictly speaking, binding on the Scottish courts). It is, however, likely to be considered as persuasive in Scotland.

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DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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