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MARC DELEHANTY ON THE ENFORCEABILITY OF PROMISES MADE SUBSEQUENT TO WRITTEN CONTRACTS: NEW CASELAW

By Marc Delehanty

Commercial litigators regularly encounter disputes which arise from parties’ attempts to renegotiate obligations under written agreements in situations where one party is having difficulty performing as required under the contract.

The recent Court of Appeal decision in MWB Business Exchange Centres Ltd v Rock Advertising Ltd [2016] EWCA Civ 553 concerns such a dispute and it is particularly instructive case. This is because the judgments provide welcome clarity in respect of the following vexed questions:
  1. If a written agreement contains a clause providing that all variations to its terms must be agreed in writing, does this actually render variations agreed orally ineffective?
  2. If a payee under a contract agrees to a schedule for the payor to make part payments to cover arrears of sums owing under the contract, in what circumstances can this constitute a binding agreement (i.e., one supported by good consideration)?
  3. What is the scope for a party to invoke promissory estoppel to prevent a counterparty from reneging on a promise not to rely on the terms of the original agreement?
In this case Rock had occupied office space pursuant to a licence under a written agreement with MWB. It fell into arrears on the licence fee payments. Subsequently, MWB locked it out of the premises, gave notice to terminate the agreement and brought a claim for the arrears. In its Defence and Counterclaim, Rock alleged that there was an oral agreement to re-schedule licence fee payments to allow it make up the arrears over time. In response, MWB sought to rely on a clause in the written agreement which provided “[a]ll variations to this licence must be agreed, set out in writing and signed on behalf of both parties before they take effect”.

It had long been an open question as to whether or not a clause of that kind is effective at law. The arguments for and against had been thrashed out in another Court of Appeal case of earlier this year (Globe Motors Inc v TRW Lucas Varity Electric Steering Ltd [2016] EWCA Civ 396). Notwithstanding the certainty which such clauses seek to provide to commercial parties, in that case the Court concluded– that such clauses were ineffective – but only by way of obiter dicta. The Court of Appeal in MWB followed the reasoning in Globe Motors and held that clauses purporting to prohibit oral variations are not effective. Essentially, a clause that prohibits a change to a contract can itself be changed like any other; a prohibition on oral variation can itself be waived orally. So, the law in respect of ‘no oral variation’ clauses is finally clear.

MWB sought to argue that, in any event, Rock provided no good consideration for the former’s agreement to accept payment of arrears over an extended timeframe because Rock was already obliged to pay the licence fees in full. The Court examined the tensions between previous authorities in this area (e.g., Foakes v Beer, Williams v Roffey and Re Selectmove etc.). The Court explained that merely receiving a prompt payment of part of the sums owed from the payor or not having to go to the trouble of enforcing payment of the debt are not benefits capable of constituting good consideration. It held that there was a need to find an identifiable / practical benefit to the payee above and beyond this. In the absence of such a benefit, there would be no consideration and the payee could enforce the debt per the original agreement. On the facts of the MWB case, it was held that the oral variation did confer practical benefits on MWB in the form of keeping Rock in occupation of the premises over a longer period rather than having it standing empty.

Given that the Court had found that there was a binding contractual variation as regards the schedule for payments, it was not necessary to decide the question of whether Rock could rely upon promissory estoppel to keep MWB from enforcing its original right to recover all the arrears immediately (as per the written agreement). Nevertheless and very helpfully, Kitchin LJ reviewed the authorities in this area and put forward the following formulation for the principle underlying promissory estoppel:  “if one party to a contract makes a promise to the other that his legal rights under the contract will not be enforced or will be suspended and the other party in some way relies on that promise, whether by altering his position or in any other way, then the party who might otherwise have enforced those rights will not be permitted to do so where it would be inequitable having regard to all of the circumstances”. 

So, it is not a prescriptive doctrine and the circumstances are key. Indeed, Kitchin LJ noted that in some situations a party who promised not to enforce its rights might be able to enforce them after giving the counterparty reasonable notice while in other situations a party’s ability to enforce the rights could be extinguished altogether. On the facts of the MWB case, Rock would not have succeeded in invoking promissory estoppel as it had not suffered any prejudice by relying on the revised payment schedule.

Of course, whether via a binding variation or a promissory estoppel, holding a party to a promise made subsequent to a written agreement is only half the battle. There will still be the usual issue of the interpretation of the promise. On the facts of the MWB case, the oral variation agreement was construed such that it would remain binding for only so long as Rock kept up the payments towards the arrears. So, if Rock were to fail to pay an instalment, then MWB could pursue it immediately for the entirety of the arrears.
Posted: 26.01.2017 at 16:17
Tags:  Comments  Commercial Law
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