16 May 2018 - Post by:Richard Farnhill
This morning the Supreme Court handed down its judgment in Rock Advertising v MWB Business. It reversed the Court of Appeal and found that clauses limiting the parties’ ability to vary their contract are binding. A purported variation to the contract that fails to comply with the clause will therefore be ineffective.
MWB had rented out serviced offices to Rock pursuant to a licence agreement. Over time, Rock built up significant arrears of rent. It contended that it had reached an oral agreement with MWB as to the terms on which those arrears would be repaid. MWB denied that any agreement had been reached but also relied on Clause 7.6 of the licence, which 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.” It was uncontroversial that no such written agreement existed. That, said MWB, was the end of the matter.
The judge at first instance agreed with MWB: the variation was of no effect. The Court of Appeal did not: such clauses were unenforceable – just as a party can make a contract, it can unmake it; a clause prohibiting change can be changed like any other.
The Supreme Court has restored the judge’s decision. No oral variation clauses are valid, meaning the alleged oral variation could not succeed because it did not comply with clause 7.6.
The reasoning underlying the Supreme Court’s decision is essentially pragmatic: (i) such clauses prevent attempts to undermine written agreements by informal means, which may be open to abuse; (ii) oral agreements can give rise to misunderstandings and crossed purposes both as to whether a variation was intended and as to its terms, something that such clauses avoid; and (iii) formality in recording variations makes it easier for corporations to police internal rules restricting the authority to agree them. The Supreme Court considered these to be legitimate commercial reasons for agreeing a term like clause 7.6; it was not the role of the law of contract to obstruct the legitimate intentions of businessmen.
What of the argument that had proved attractive to the Court of Appeal, that of party autonomy to make, unmake and remake their contract as they wished? The Supreme Court had two answers. First, the concept of party autonomy only truly exists up to the point of contracting. Thereafter, the contract restricts what the parties can do in all kinds of ways. That is the very point of the contract. Conceptually, no oral variation clauses are no more of a fetter on party autonomy than any other provision. Second, it does remain open to parties to vary their contracts; they simply need to follow the relevant provisions if they wish to do so. Most parties who fail to observe the no oral variation clause do not intend to dispense with it; they have simply forgotten about it. Those who had it in mind and chose to ignore its requirements “were courting invalidity with their eyes open”. The law of contract did not need to step in to help either of those groups.
The Supreme Court accepted that a purported oral variation might, on certain facts, give rise to an estoppel against the party seeking to rely on the no oral variation clause but those facts would be the exception, not the rule. At the very least there would have to be a clear representation that the variation was valid notwithstanding its informality and some evidence or reliance beyond the informal promise itself. The estoppel path is legally open, therefore, but practically narrow.
The decision will be a relief for many commercial parties. It grants greater certainty to their relationships if they can protect them against inadvertent or informal change, and limits the scope of disputes. Change is not always for the better, after all.