Rock Advertising Limited (Respondent) v MWB Business Exchange Centres Limited (Appellant)  UKSC 24 – An Unwelcome Result for Commodity Traders?
by Lisa Hillary & Emma Halton
This judgment handed down on 16th May 2018 by the Supreme Court serves as an interesting development in contract law but one that may not be welcomed by trading companies. The court held that No Oral Modification Clauses (“NOM clause”) are to be given their full force and effect and any attempt to vary a contract ignoring the formalities prescribed by the NOM clause will be ineffective. The same will likely apply to Entire Agreement Clauses (“EAC”), which may result in unfortunate consequences for trading companies.
Background to the Appeal
MWB Business Exchanges Centres Ltd (“MWB”) entered into a licence agreement with Rock Advertising Limited (“Rock”) for the occupation of office space for a fixed term. Clause 7.6 of the agreement stated the following:
“…All variations to this Licence must be agreed, set out in writing and signed on behalf of both parties before they take effect”.
Rock, having accumulated licence fee arrears proposed a revised payment schedule to MWB. A dispute ensued as to whether MWB had accepted Rock’s proposal. The issue before the courts was whether the variation was effective in law. The County Court held the variation was ineffective because it was not recorded in writing and signed on behalf of both parties, as required by clause 7.6. The Court of Appeal overturned the decision of the County Court, finding that the oral agreement to revise the payment schedule amounted to an agreement to dispense with clause 7.6 and the variation was effective. MWB appealed to the Supreme Court.
The Supreme Court Judgment needs to be read in the context of previous judgments.
In recent years, the courts have taken an increasingly adverse approach to the draconian effect of a NOM clause and allowed informal variations, disregarding the formalities required by the clause.
Despite this, the appeal was allowed by the Supreme Court.
Giving his lead judgment, Lord Sumption stated “the law should and does give effect to a contractual provision requiring specified formalities to be observed for a variation”.
The issue raised by NOM clauses is their perceived conflict with party autonomy and the doctrine of freedom of contract. Lord Sumption determined that there are legitimate commercial reasons for agreeing to a NOM Clause:
- Firstly, to prevent attempts to undermine written agreements by informal means;
- Secondly, to avoid the vulnerabilities of oral communications which invariably give rise to disputes as to whether a variation was intended and to its precise terms; and
- Thirdly, a prescribed formality for effecting variations of a contract assists corporations with their ability to police internal rules restricting the authority to agree them.
In summarising the courts’ approach prior to this judgment, Lord Sumption recites a passage made by Cardozo J in the New York Court of Appeals in Beatty v Guggenheim Exploration Co (1919) 225 NY 380, 387-388:
“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. Whenever two men contract, no limitation self-imposed can destroy their power to contract again”.
However, Lord Sumption states that such reasoning is entirely conceptual; the argument that parties cannot agree not to vary a contract orally, because such an agreement would be destroyed automatically upon an oral variation, is wrong.
He considers that the same point may be made by reference to the treatment of EACs. Both clauses are intended to provide contractual certainty about the terms agreed. EACs are routinely enforced by the courts.
Lord Sumption went on to consider the position where parties agree an oral variation in spite of a NOM Clause:
“the natural inference from the parties’ failure to observe the formalities of a No Oral Modification clause is not that they intended to dispense with it but that they overlooked it. If… they had it in mind, then they were courting invalidity with their eyes open”.
In practical terms, what does this mean for a party who acts on an invalidly varied contract but then finds he is unable to enforce it? The protection against any injustice created by strict enforcement of a NOM clause lies in the various doctrines of estoppel. However, it is apparent from the judgment that the scope for defending an informal variation is narrow. Lord Sumption says that there would, at the very least, have to be “(i)…some words or conduct unequivocally representing that the variation was valid notwithstanding its informality; and (ii) something more would be required for this purpose than the informal promise itself”.
The practical difficulty with the judgment for trading companies is that many commodity contracts contain EACs. While certain types of contract, for instance, those dealing with real property, require few variations during the life of the agreement, the commodities world is a fast-moving environment where the logistics of the transaction require frequent variations in order to produce a workable outcome. These variations are commonly carried out by telephone or by email without regard to the formalities required by an EAC. In light of this decision, the validity of such variations is now doubtful.
Notwithstanding the limitations prescribed by the Supreme Court in relation to estoppel, commodity arbitrators can expect to see an increase in such arguments, which are fact sensitive and notoriously difficult to determine.
In seeking certainty, the Supreme Court Judgment may well open the door to even greater uncertainty.
If you have any queries about this article, please get in touch with Lisa Hillary, whose details appear below.