Christopher Philpot, Senior Associate in the Dispute Resolution & Contentious Construction Team at Teacher Stern LLP considers the recent decision of the Supreme Court in Rock Advertising Limited v MWB Business Exchange Centres Limited and the potential impact on parties who verbally agree variations to contract works in circumstances where the contract contains a clause prohibiting oral modification.
No Oral Modification (NOM) Clauses
NOM clauses that confirm variations to a contract must ‘be agreed in writing and signed on behalf of both parties’ are very common in construction contracts and there are a number of sound commercial rationale for including them. For example, verbal discussions can very easily give rise to misunderstandings between parties and cause disputes as to what was agreed, in addition, requiring a level of formality can help police internal rules restricting the authority to agree variations.
The position before 16 May 2018
Until Judgment was given in Rock Advertising Limited v MWB Business Exchange Centres Limited on 16 May 2018, the law was widely considered settled that despite the existence of a NOM clause in a contract the parties could still agree variations and, importantly, could agree to do so verbally. This had been confirmed by the Court of Appeal in Globe Motors v TRW Lucas and had been followed by the Court of Appeal in MWB Business Exchange Centres Limited v Rock Advertising Limited.
The position now
The Supreme Court has now confirmed that by including a NOM clause in a contract the parties have agreed that oral variations will be invalid. The natural inference from parties agreeing an oral variation is not that they intended to dispense with the formal requirements of the NOM clause (as was previously decided by the Court of Appeal), but that they had overlooked the existence of the clause.
To show the parties intended to dispense with a NOM clause it would be necessary, at the very least, (according to Lord Sumption) for (a) there to be words or conduct unequivocally confirming that the variation was valid notwithstanding its informality and (b) something more than the informal promise itself would be required for this purpose.
This leaves open the risk that a party may act on a contract which has been varied orally, for example by performing variation works, but then find itself unable to enforce it. Relying on the doctrine of estoppel might (as indicated by the Supreme Court) be available to prevent a party from suffering loss if it was alleged that the oral variation had not occurred. However, arguments based on estoppel may well prove not to be straightforward and much will turn on the individual facts and details of the particular case, for example, the status of the person who was alleged to have agreed the variation orally and how any previous oral variations had been agreed and/or documented between the parties.
The Take Home
Always check the terms of your contract before agreeing variations to ensure that you comply with the contractual mechanism.
If you have a NOM clause in your contract but want the option to agree variations more informally, both parties will need to take adequate steps to properly document that decision by acknowledging the existence of the NOM clause and confirming the parties decision to vary it.
If this step is not taken and variations to the contract are agreed and performed in a way prohibited by the NOM clause, this will create serious uncertainty as to the validity of the variation.