28 June 2018

Rock Advertising Ltd v MWB Business Exchange Centres Ltd [2018] UKSC 24

In Rock Advertising Ltd v MWB Business Exchange Centres Ltd, the UK Supreme Court upheld the efficacy of a “no oral modification” clause (“NOM clause”) in the parties’ contract.

Facts

Rock Advertising Ltd (“Rock Advertising”) entered into a contractual licence with MWB Business Exchange Centres Ltd (“MWB”) to occupy office space at a tower in London for a fixed term of 12 months. The contract contained an NOM clause, which stated:

“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 variations to this Licence must be agreed, set out in writing and signed on behalf of both parties before they take effect.”

As Rock Advertising was in arrears of licence fees, it proposed, and entered into negotiations with MWB on, a revised payment schedule which involved deferring certain payments and spreading the accumulated arrears over the remainder of the term.

MWB subsequently rejected the proposal and locked Rock Advertising out of the premises on account of its failure to pay the arrears. MWB also terminated the licence and sued for the arrears. Rock Advertising counterclaimed damages for wrongful exclusion from the premises.

The crux of the dispute between the parties was whether they had orally reached an agreement on the revised payment schedule (i.e. the variation).

At first instance, it was held that the variation was ineffective because it was not recorded in writing and signed by both parties, as was required by the NOM clause in the contract. On appeal, the Court of Appeal held that the oral agreement to revise the schedule of payments amounted to an agreement to dispense with the NOM clause. It followed that MWB was bound by the variation and was not entitled to claim the arrears at the time when it did.

MWB appealed to the Supreme Court.

Decision of the UK Supreme Court

The Supreme Court unanimously allowed the appeal. Lord Sumption, giving the lead judgment, stated that the law should and does give effect to a contractual provision requiring specified formalities to be observed for a variation. There are statutes that prescribe a particular form of agreement (e.g. contracts for the sale of land and certain regulated consumer contracts), and there is no principled reason why parties should not adopt the same principle by agreement.

Lord Sumption noted that parties insert NOM clauses for a variety of commercial reasons. It prevents attempts to undermine written agreements by informal means, avoids disputes not just about whether a variation was intended but also about its exact terms, and makes it easier for corporations to police internal rules restricting the authority to agree them. In Lord Sumption’s view, there is no mischief in NOM clauses, nor do they frustrate or contravene any policy of the law.

While the enforcement of NOM clauses carries with it the risk that a party may act on the contract as varied (for example by performing it) and then find itself unable to enforce it, Lord Sumption observed that the law provides safeguards against injustice in the form of the various doctrines of estoppel. However, he cautioned that, to rely on the estoppel defences, at the very least, there would have to be some words or conduct unequivocally representing that the variation was valid notwithstanding its informality. In this regard, something more would be required for this purpose than the informal promise itself. This would ensure that the scope of estoppel is not so broad that it destroys the whole advantage of certainty for which the parties stipulated when they agreed on the terms including the NOM clause.

Accordingly, the Supreme Court allowed the appeal and restored the order at first instance.

Practical impact

This decision validates the utility of incorporating NOM clauses in written contracts, and promotes certainty in respect of such contracts. Given the prevalence of NOM clauses in modern commercial contracts, if this case is adopted by the Singapore courts, there could be reduced litigation whereby a party seeks to overcome the express terms of a contract by arguing oral or informal variations to the same.

 

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