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DAVID LASCELLES WRITES ON SUPREME COURT DECISION: NO ORAL VARIATION CLAUSES ARE EFFECTIVE

The Supreme Court delivered judgment this morning in an important case for commercial practitioners, Rock Advertising Ltd v MWB Business Exchange Centres Ltd [2018] UKSC 24. 

The case arose out a licence of a property in Marble Arch.  The occupier licensee had run up arrears.  It orally agreed a payment schedule with the licensor that entailed the latter being paid less and later than the contract provided. 

The question which arose was whether this gave rise to a binding variation in the face of a clause providing that any variation had to be in writing and signed on behalf of both parties.

The Supreme Court unanimously held that there was no binding variation.   

In particular, the majority of the Supreme Court (Lord Sumption with whom Lady Hale and Lords Wilson and Lloyd-Jones agreed) held that effect will be given to contractual provisions which require specified formalities to be observed for a variation. 

For the majority, Lord Sumption’s reasoning was as follows (paragraphs 11 – 15):
  1. A decision not to uphold such a clause overrides the parties’ intentions.  The oft-cited argument that party autonomy favours allowing parties to agree an oral variation is fallacious; party autonomy operates up to the point where the contract is made but thereafter only to the extent the parties by their contract have allowed. 
  2. There are good reasons for business people to include such clauses and respect should generally be accorded to the legitimate intentions of such people. 
    1. They prevent attempts to undermine written agreements by informal means which is open to abuse for example when defences are raised to avoid summary judgment. 
    2. They avoid disputes about what was agreed with misunderstandings readily arising from oral discussions. 
    3. They make it easier for corporations to police internal rules restricting individuals’ authority to agree terms. 
    4. There is no mischief in such clauses and they do not frustrate or contravene any policy of the law.
  3. There is no conceptual inconsistency between a general rule allowing contracts to be made informally and a specific rule that effect will be given to a contract requiring writing for a variation.  The same point may be made in relation to entire agreement clauses which give rise to very similar issues and which will be enforced according to their terms.
  4. The obvious inference from the parties’ oral agreement was not that they intended to dispense with the agreed formal requirements but that they overlooked the no oral variation clause.

At paragraph 16, Lord Sumption noted that the possibility remains that a party could be stopped from relying on a no oral variation clause.   He declined to explore in detail the circumstances where a party could be so estopped.  He noted, however, his agreement with the Court of Appeal that the minimal steps taken by the occupier on the facts would not be enough to support any estoppel defence.  He further noted that the scope of estoppel cannot be so broad as to destroy the whole advantage of certainty for which the parties stipulated when they agreed upon terms including the no oral variation clause. At the very least, (i) there would have to be some words or conduct unequivocally representing that the variation was valid notwithstanding its informality; and (ii) something more would be required for this purpose than the informal promise itself. 

The decision on this point, whilst in line with certain recent academic writings, is contrary to the trend of recent Court of Appeal cases. Indeed in so deciding the case, the Supreme Court overturned the unanimous Court of Appeal decision in the case at hand that the oral variation had overridden the no oral variation clause.  The Supreme Court’s decision was also contrary to obiter dicta from the unanimous Court of Appeal in the earlier decision of Globe Motors Inc v TRW Lucas Variety [2016] 1 CLC 712.  Against this backdrop, Lord Briggs (whilst agreeing in the result on the facts) described as “radical” Lord Sumption’s position that the parties could not even orally agree to vary a no-variation clause (paragraph 32).

Finally, the case potentially gave rise to a second fundamental issue of contract law namely whether an agreement whose sole effect is to vary a contract to pay money by substituting an obligation to pay less money or the same money later is supported by consideration.  The Supreme Court unanimously held that in light of its decision on the first issue it would not be desirable to deal with this question of consideration.  This question raises the issue of whether the House of Lords was correct in Foakes v Beer (1884) 9 App Cas 605 (no consideration for agreement to accept less), whether the Court of Appeal was correct in Williams v Roffey Bros [1991] 1 QB 1 (expectation of commercial advantage good consideration) and whether the two decisions can both stand.  Whilst the Court acknowledged that this was an issue ripe for re-examination it held (at paragraph 18) that the issue should be determined in a case where the decision would be more than obiter dictum and before an enlarged panel of the Supreme Court.

The author of this summary, David Lascelles, specialises in commercial and company law.  He is highly recommended as a leading practitioner in those fields by Chambers & Partners and Legal 500.

Posted: 16.05.2018 at 12:09
Tags:  Cases  Commercial Law
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