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Supreme Court backs commercial use of 'no oral modification' clauses


The Supreme Court has backed the use of a 'no oral modification' (NOM) clause in a licence agreement, finding that there are often "legitimate commercial reasons" for their inclusion in contracts.

Its decision restores that of the county court, which had found that an oral agreement made to vary the sums payable under the licence was ineffective as it did not comply with the NOM clause. The Court of Appeal later reversed this decision, holding that a NOM clause was no different from any other term and could be varied, orally, at a later date if both parties agreed to this.

Property disputes expert Siobhan Cross of Pinsent Masons, the law firm behind Out-Law.com, said that the decision was a "welcome" one, which "provides parties with contractual certainty about the terms agreed and upholds the parties' intentions when they entered into the agreement".

"As recognised by the Supreme Court, there are sound commercial reasons for including a NOM clause in an agreement," she said. "For example, oral agreements notoriously give rise to misunderstandings and crossed purposes and a NOM clause avoids disputes not just about whether a variation was intended but also about its exact terms. Also, having a formal procedure to record variations makes it easier for corporations to put in place, and police, internal rules restricting the authority to agree them."

"The decision does not prevent the parties from changing their minds in the future and agreeing to remove a NOM clause. They simply need to comply with the NOM clause in recording that agreement," she said.

Rock Advertising Ltd (Rock), a marketing company, entered into a licence agreement to occupy serviced office premises managed by MWB Business Exchange Centres Ltd (MWB) for a fixed term of 12 months. After Rock fell behind on its payments under the licence its sole director, a Mr Idehen, proposed a revised schedule of payments including a small immediate payment to MWB's credit control department. This revised schedule was ultimately worth slightly less to MWB than the original terms, because of the interest cost associated with certain deferred payments.

MWB subsequently locked Rock out of the premises, terminated the licence and sued for the arrears. Rock counterclaimed, seeking damages for wrongful exclusion from the premises and arguing that MWB had agreed orally to Rock's revised payment schedule. The county court found in favour of MWB, finding that as the parties had not complied with a NOM clause, which required variations to the agreement to be in writing and signed by both parties, the oral variation was ineffective. The Court of Appeal disagreed, finding that the parties were entitled to agree orally to dispense with the NOM clause provided that there was still some 'consideration', or payment, on the part of Rock.

Lord Sumption, giving the unanimous judgment of the court, suggested that NOM clauses were "very commonly included" in written agreements for a number of reasons. These clauses prevent attempts to undermine written agreements by informal means; avoid disputes "in circumstances where oral discussions can easily give rise to misunderstandings and crossed purposes"; and make it easier for commercial parties to "police internal rules" around agreeing to variations.

"These are all legitimate commercial reasons for agreeing a clause like [the one used in this case]," the judge said.

"I make these points because the law of contract does not normally obstruct the legitimate intentions of businessmen, except for overriding reasons of public policy. Yet there is no mischief in No Oral Modification clauses, nor do they frustrate or contravene any policy of the law," he said.

None of the arguments advanced by Rock based on case law were enough to justify the courts interfering with the bargain struck between the parties, the judge said.

Property disputes expert Rhiannon Saunders of Pinsent Masons said that the case was "a further example of the Supreme Court not wishing to depart from the natural wording in an agreed document", following Lord Neuberger's comments in the influential 2015 Arnold v Britton Supreme Court decision on contractual interpretation.

The Supreme Court's decision on the first point also meant that it did not have to deal with a secondary issue in the case: whether the fact that MWB secured a practical commercial advantage from the variation in the form of continued repayments could be considered 'adequate consideration', Saunders said.

"The court could have made an 'obiter' comment on the point, but chose not to do so as it considered that any decision on this issue is likely to involve a re-examination of the House of Lords decision in the 1884 case of Foakes v Beer, which had held that a practical expectation of benefit did not constitute adequate consideration," she said.

"Lord Sumption went so far as to comment that the Foakes v Beer decision is 'probably ripe for re-examination', but considered that, if it is to be overruled or its effect substantially modified, it should be before an enlarged panel of the court and in a case where the decision would be more than 'obiter dictum'," she said.

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