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It's All Just Talk: No Oral Modification Clauses in MWB v Rock

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About The Author

Jamil Mustafa (Private Law Editor)

Jamil is currently studying the BPTC at BPP University. His main legal interests are contract, tort and equity. Before the law, Jamil graduated with an MPhil in American History with Distinction from Clare College, Cambridge, and with First Class Honours in Government and History from the LSE. Outside academia, Jamil enjoys cricket, rugby and rowing and is a staunch supporter of Manchester United FC.

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©Linnaea Mallette

The way to get started is to quit talking and begin doing.

Walt Disney

On 18 May 2018, the Supreme Court handed down its judgment in MWB Business Exchange v Rock Advertising [2018]. This represents an important contract case law: as this author argued previously for Keep Calm Talk Law, the Court of Appeal’s decision in MWB Business Exchange v Rock Advertising [2016] espoused a problematic view of consideration which needed reconsideration by the Supreme Court.

The facts of MWB v Rock [2018] are straightforward. A licensor (MWB) and licensee (Rock) of office premises had orally agreed to vary a license agreement, so that Rock – now suffering financial difficulties – could pay off the license fees it owed under a revised schedule. However, an additional detail not previously mentioned – and which played a larger role in the Supreme Court’s judgment, – was the existence of Clause 7.6 (the Clause) in the licence agreement. It provided that:

This Licence sets out all of the terms as agreed between MWB and Licensee. No other representations or terms shall apply or form part of this Licence. All variation to this Licence must be agreed, set out in writing and signed on behalf of both parties before they take effect.

The Clause would prove crucial. Because of it, the Supreme Court did not even engage with the issue previously discussed by this author for Keep Calm Talk Law: whether the rule in Williams v Roffey [1989], that a benefit in practice is capable of being good consideration in law, should be extended to an agreement to reschedule the repayment of a debt.

In MWB v Rock [2018], Lord Sumption and Lord Briggs found that the parties’ oral variation of the contract was invalid in any event because it fell foul of the Clause; any such variation had to be made in writing. Accordingly, the issue of consideration did not even arise because the Clause prevented there being a valid agreement to reschedule Rock’s licence fee payments.

The Clause represents a stellar example of a ‘no oral modification’ clause (a NOM clause): an increasingly common provision in modern commercial contracts. NOM clauses seem to put the fundamental principles of English contract law of freedom and sanctity of contract upon a collision course.

With the legal efficacy of NOM clauses having been previously skirted over in this author’s past Keep Calm Talk Law article, this article examines the issue. It concludes that the Supreme Court’s decision to uphold NOM clauses is the correct one.

Previous Case Law: Sorry I Didn’t Quite Catch That

Despite being fairly common in commercial contracts, NOM clauses have received relatively little attention in the English courts. Indeed, they were only properly addressed for the first time in the unreported case of United Bank Ltd v Asif (2000), in which a bank was seeking to recover money from the defendants. The agreement between the parties contained a provision stipulating that no variation of it was valid unless made in writing. The Court of Appeal dismissed the defendant’s attempts to rely on variations that did not comply with that provision, on the grounds that the provision meant no oral variation could have any legal effect.

Subsequently, the Court of Appeal heard World Online Telecom v I-Way [2002]. Here, a claimant sought to tackle a defendant’s counterclaim by relying on an alleged oral variation of the parties’ original agreement, which the defendant argued was invalid because of a clause in their original agreement that held that no variation was valid unless in writing.

Sedley LJ found against the defendant on the basis that ‘the law on [NOM clauses] is not settled’. However, he did opine that the parties to a contract, having made their own law by contracting, ought in principle to be able to remake said law; in other words, NOM clauses ought to be capable of being overridden by the agreement of the parties.

Next came Globe Motors v TRW [2016], which delivered the most decisive (yet strictly obiter) judicial remarks on NOM clauses prior to MWB v Rock [2018]. Given the previous conflicting decisions in Asif (2000) and World Online Telecom [2002], the Court of Appeal held that it was bound by neither and could choose which case to follow.  

Beatson LJ, with whom Moore-Bick LJ concurred, upheld Sedley LJ’s tentative approach in World Online Telecom [2002] that recognised that, in principle, any contract containing a NOM clause could be varied orally or by conduct. The basis of this conclusion – as made clear by Moore-Bick LJ – was that the courts ought to respect party autonomy and that ‘the principle of freedom of contract entitles parties to agree whatever terms they choose’, subject to public policy limitations (for example, the Unfair Contract Terms Act 1977 (UCTA 1977) or the Consumer Rights Act 2015 (CRA 2015)).

However, Underhill LJ – although reaching the same result on the case at hand – disagreed with the majority’s view on NOM clauses, arguing it was:

[E]ntirely legitimate that the parties to a formal written agreement should wish to insist that any subsequent variation should be agreed in writing… as a protection against the raising of subsequent ill-founded allegations that its terms have been varied by oral agreement or by conduct.

Nevertheless, Underhill LJ conceded that the arguments in favour of the ‘flexible approach’ were strong, and that he could not find a ‘doctrinally satisfactory way’ of entrenching NOM clauses. However, in a final twist, Underhill LJ opined that this did not make NOM clauses valueless as:

In many cases parties intending to rely on informal communications and/or a course of conduct to modify their obligations under a formally agreed contract will encounter difficulties in showing that both parties intended that what was said or done should alter their legal relations…

MWB v Rock: The Court of Appeal and NOM clauses

In MWB v Rock [2016], Kitchin LJ – giving the only judgment that addressed the Clause – dealt with it in much the same way as the court in Globe Motors [2016]. He reviewed the past authorities and concluded that the Clause was ineffective to prevent an oral variation. Kitchin LJ, like Moore-Bick LJ in Globe Motors [2016], thought the most powerful consideration was that of party autonomy, a concept  best captured by Cardozo J of the New York Court of Appeals in Beatty v Guggenheim Exploration [1919] 225 NY 380:

Those who make a contract, may unmake it. The clause which forbids a change, may be changed like any other. The prohibition of oral waiver, may itself be waived… What is excluded by one act, is restored by another. You may put it out by the door, it is back through the window. Whenever two men contract, no limitation self-imposed can destroy their power to contract again…

Thus, the Court of Appeal in MWB v Rock [2016] sought to settle the law on NOM clauses by holding such clauses as contrary to the principle of freedom of contract and therefore legally ineffective. Crucially, unlike in Globe Motors [2016], the Court of Appeal’s reasoning on NOM clauses in MWB v Rock [2016] was not mere obiter dictum.

MWB v Rock: The Supreme Court and NOM Clauses

In MWB v Rock [2018], the crucial question was whether the Supreme Court would be equally staunch in its defence of the seemingly absolutist approach to freedom of contract that had been adopted by the Court of Appeal in MWB v Rock [2016].

In short, the answer was no. The Supreme Court in MWB v Rock [2018] held that the Clause was legally effective and precluded the validity of any oral variation. Both Lord Sumption and Briggs reached the same conclusion, albeit via different routes.

Lord Sumption

Lord Sumption’s reasoning for upholding the Clause in MWB v Rock [2018] can be summarised as follows:

  1. Refusing to give effect to NOM clauses overrides the parties’ intentions; unfettered party autonomy ceases at the point when the contract is made.
  2. NOM clauses are good for certainty in a practical sense and are recognised as effective in many legal codes around the world. This is for many sound reasons, including:
    1. oral discussions can give rise to misunderstandings;
    2. such clauses avoid disputes not just about whether a variation was intended but its terms; and
    3. formality in recording variations makes it easier for corporations to police internal rules that restrict the authority to agree them.
  3. It is not convincing to argue that it is conceptually impossible for parties to agree not to vary their contract orally because any such agreement would automatically be destroyed on their doing. This overlooks that many legal systems have squared this circle, including English law. For example, entire agreement clauses have long been held effective to exclude alleged collateral warranties arising from contractual negotiations.
  4. Accordingly, 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.
  5. It is clearly not the case that - by agreeing to an oral variation in spite of a NOM clause – the parties must have intended to dispense with that clause.
  6. By including a NOM clause, the parties have not agreed that such variations are forbidden; they have just agreed that they will be legally invalid.
  7. If a party acts in reliance upon such an invalid variation, they may be able to seek refuge in the doctrine of estoppel – this did not arise on the specific facts in MWB v Rock [2018].

Comment on Lord Sumption

Lord Sumption – in his nuanced discussion of party autonomy – rightly observed that the handling of the same issue in MWB v Rock [2016] had been somewhat superficial. The Court of Appeal had seemed to subscribe to some unfettered notion of party autonomy (or freedom of contract) that was indefeasible in almost any circumstances and that any limiting of that freedom, even though self-imposed, was contrary to principle. For one thing, it is inherent in the nature of contracting to limit future actions. Moreover, the idea that NOM clauses impede freedom of contract is a misnomer. After all, parties can still vary their agreement in a prescribed form; this is not the same as denying the existence of that freedom.

There are two potential responses to the second argument: firstly, it ignores cases – such as that in MWB v Rock [2018] – in which both parties want to change their agreement by an oral variation where there is a NOM clause in their original written agreement. Secondly, it runs into problems if the argument is taken to the point of reduction ad absurdum, whereby the parties have agreed that no variations of their agreement in whatever form will be valid.

To counter this, it might be suggested that such a variation would be invalid if the parties did not expressly disapply the NOM clause, which Lord Briggs submits is the correct position. Furthermore, as Lord Sumption points out, parties can still vary their agreements orally where there is a NOM clause; it is just that any such variation is not valid. While this is clever reasoning, one may understandably question whether a variation that is invalid is a true variation. 

Regardless, those who argue against the effectiveness of NOM clauses seem to assume that the subsequent intention of the parties ought to prevail over their antecedent one. This puts freedom and sanctity of contract onto a collision course; the bindingness of parties’ previous intentions, as manifested in their written agreement, is undermined if NOM clauses are not respected. Why include a NOM clause in the first place if it can be just disregarded? But at the same time, parties ought to be free to contract as they please.  

An approach that holds such clauses as legally effective unless they are expressly disapplied strikes a healthy compromise between these two principles; it recognises that where parties’ subsequent intention clearly operates to negate the earlier one, it should take precedence. If not, the law would fail to keep in step with the reality of why parties include NOM clauses in their contracts: certainty.

But this leaves the question of how to respond to a clause forbidding any future variations. In light of Lord Sumption’s reasoning thus far, it follows that courts ought to respect such clauses, and respecting them does not negative parties’ freedom of contract; they are entirely at liberty to agree a new, independent contract, supported by separate consideration. The fact that the courts respect the antecedent intention of the parties over their subsequent one, should they seek a variation of an existing agreement forbidding variations, does not then flout their intentions.

Lord Sumption pointed to the example of entire agreement clauses as another species of clause that limit parties’ freedom to raise collateral issues or representations outside of contractual documents, which courts have readily applied. While Lord Briggs found this parallel unhelpful, it does demonstrate the court’s willingness to give legal effect to the antecedent intention of the parties to exclude anything other than that in their written agreement from constituting part of the contract, even where ex post facto they may seek to argue a previous representation did form part of the agreement, and for this reason, as on the facts of MWB v Rock [2018], such clauses are often included within or alongside NOM clauses.

Lord Briggs

Lord Briggs’ reasoning for upholding the Clause in MWB v Rock [2018] can be summarised as follows:

  1. As Lord Sumption noted, NOM clauses have practical utility, recognised in other legal systems.
  2. As Lord Sumption noted, the obstacle in common law jurisdictions to NOM clauses is purely conceptual; parties should be able to agree by further agreement to unbind themselves as to their future conduct, not just with regard to substantive obligations but procedural ones concerning how their agreement can be varied.
  3. Two key questions arise. Firstly, can parties orally agree to remove a NOM clause? And secondly – if so – will such an agreement be implied where they orally agree upon a variation of the substance of their relationship?
  4. Lord Briggs answered yes to first question: he was unpersuaded by Lord Sumption’s argument that refusing to enforce a NOM clause disregards the parties’ intentions; indeed, how can this be the case when they agree to expressly waive the effect of the clause? True, some statutes prescribe a form of agreement, but they are binding because they are imposed by the legislature not by virtue of parties’ agreement.
  5. Entire agreement clauses are not a good analogy as they do not bind parties as to future conduct and leave the procedure for future variations unaffected.
  6. Lord Briggs answered no to the second question. He drew a parallel to subject to contract negotiations; abandonment of subject to contract status will not be implied merely because parties have reached full agreement.
  7. Lord Briggs therefore concluded that a NOM clause continues to bind unless the parties expressly agree to dispense with it, or they dispense with it by necessary implication. Neither of these occurred on the facts of MWB v Rock [2018], leaving the attempted oral variation was ineffective.

Comment on Lord Briggs

Lord Briggs’ judgment is more sensitive than Lord Sumption’s to the transient quality of parties’ intentions. One could argue that Lord Sumption’s speech falls foul of the opposite fallacy to that of opponents of NOM clauses; rather than giving absolute priority to subsequent intentions of the parties, he ascribes such status to their antecedent intention.

Nevertheless, the solution to this false dichotomy – and the way to recognise and give effect to parties’ real intention, whether that is their antecedent or subsequent one – articulated by Lord Briggs - involves disapplying a NOM clause only where the parties expressly dispense with the clause or where such dispensation can be necessarily implied. Lord Briggs’ alternative example of subject to contract negotiations is a useful demonstration of the expediency of such a solution, and its consistency with the common law as it stands.

What About Estoppel?

Lord Briggs did not mirror Lord Sumption and discuss the role of estoppel. One of the most remarkable features of the Court of Appeal’s judgment in MWB v Rock [2016] was that the common law seemed to temper the harshness of equity; the court found the presence of consideration where Rock would have found no refuge in the doctrine of estoppel.

It is contended that Lord Sumption was correct to argue that promissory estoppel has a key role to play in ameliorating the harshness of giving effect to NOM clauses where one party has relied on an ineffective oral variation. This achieves the right balance between certainty and justice on the facts of any given case, as shown by the Court of Appeal’s correct conclusion that the extent of the reliance was not enough to engage the doctrine of estoppel.

Jonathan Morgan has raised concerns with this approach, arguing that parties may seek to exclude the effect of estoppel if the courts apply the doctrine too widely. However, this overlooks that:

  • The statutory protections in the CRA 2015 and the UCTA 1977 would likely intervene to ensure that – in cases involving consumers or great disparity between the respective strength of two commercial parties – a clause purporting to do so would be inapplicable.
  • In cases where either party finds no assistance under UCTA 1977 or the CRA 2015, the solution articulated by Lord Briggs, of the efficacy of NOM clauses barring express or necessary disapplication, can still assist.

Conclusion

The Supreme Court’s decision in MWB v Rock [2018] did not herald the long-awaited showdown between Foakes v Beer [1884] and Williams v Roffey [1989] that this author had previously predicted for Keep Calm Talk Law.

Nevertheless, the Supreme Court produced a judgment perhaps as significant. It provides some much-needed clarity on the legal effectiveness of NOM clauses: an issue of increasing importance because of the popularity of such clauses in commercial contracts, and because they appear to bring foundational principles of contract law into conflict. However, as the Supreme Court made clear, appearances can be deceiving.

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Tagged: Contract Law

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