UK Supreme Court offers certainty on 'no oral modification' contract clauses UK Supreme Court offers certainty on 'no oral modification' contract clauses

UK Supreme Court offers certainty on 'no oral modification' contract clauses
26 Sep 2018

Although not strictly an employment case, the UK Supreme Court’s determination that certain clauses in a contract can only be altered in writing rather than verbally, has wide implications. In fact, the case, which relates to a property licence, has ramifications for all types of contract, including employment documents.

While the Supreme Court noted that “modern litigation rarely raises truly fundamental issues in the law of contract”, it noted that Rock Advertising Limited v MWB Business Exchange Centres was one such example. The relevant clause, known as a “no oral modification” or “NOM” clause, indicated that the agreement could not be amended except in writing and had to be signed on behalf of both parties involved.

The facts of the case

In August 2011, Rock Advertising entered into a contractual licence with MWB, which operates serviced offices in London, to occupy space in Marble Arch Tower. A clause in the agreement stated: “This Licence sets out all of the terms as agreed between MWB and Licensee. No other representation 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.”

By February 2012, Rock had accumulated rent arrears of more than £12,000 (US$15,777). Mr Idehen, the company’s sole director, proposed a revised schedule of payments to one of the credit controllers employed by MWB. This schedule would have effectively deferred part of the organisation’s February and March payments and spread the arrears throughout the year.

The credit controller took the proposal to her boss, who rejected it, and Rock was locked out of the premises. But Rock argued that the Licence had been effectively varied as a result of the conversation with the credit controller.

To date, case law and commentary on the effect of NOM clauses has been mixed. The UK Court of Appeal took the view in this case that parties cannot be prevented from modifying the terms of any contract and effectively making a new one on the basis of “party autonomy”. This principle renders NOM clauses ineffective.

But the Supreme Court disagreed with this reasoning. It ruled that the impact of an agreed NOM clause is that oral modifications are invalid unless recorded in writing as the clause requires. As a result, it overturned the earlier decision and found the purported variation unsound.

Outcome

The ruling now clarifies this area of law, providing certainty to those entering into contracts with NOM clauses that they will be enforced. As a result, if such clauses are included in an employment contract, employers will need to ensure that any variations are properly documented or they will be invalid.

It is also worth bearing in mind that NOM clauses are widely used in the case of senior employees. Therefore, such clauses could have the unintended effect of leaving a pay rise open to challenge if employees are notified of the rise by letter but fail to countersign to accept the increase.

While the situation is likely to be largely theoretical as employees are unlikely to challenge a pay rise, it does raise the question of what happens if both parties act on an oral variation, in breach of contract. But such questions are, ultimately, for another case to answer.

 Emma Bartlett

Emma Bartlett is a partner at Charles Russell Speechlys LLP. She advises on all aspects of employment law and has particular expertise in dispute resolution and litigation, notably discrimination, whistleblowing and trade union issues. With a strong record in negotiating and resolving complex employment disputes, Emma is considered a skilled deal broker.

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Although not strictly an employment case, the UK Supreme Court’s determination that certain clauses in a contract can only be altered in writing rather than verbally, has wide implications. In fact, the case, which relates to a property licence, has ramifications for all types of contract, including employment documents.

While the Supreme Court noted that “modern litigation rarely raises truly fundamental issues in the law of contract”, it noted that Rock Advertising Limited v MWB Business Exchange Centres was one such example. The relevant clause, known as a “no oral modification” or “NOM” clause, indicated that the agreement could not be amended except in writing and had to be signed on behalf of both parties involved.

The facts of the case

In August 2011, Rock Advertising entered into a contractual licence with MWB, which operates serviced offices in London, to occupy space in Marble Arch Tower. A clause in the agreement stated: “This Licence sets out all of the terms as agreed between MWB and Licensee. No other representation 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.”

By February 2012, Rock had accumulated rent arrears of more than £12,000 (US$15,777). Mr Idehen, the company’s sole director, proposed a revised schedule of payments to one of the credit controllers employed by MWB. This schedule would have effectively deferred part of the organisation’s February and March payments and spread the arrears throughout the year.

The credit controller took the proposal to her boss, who rejected it, and Rock was locked out of the premises. But Rock argued that the Licence had been effectively varied as a result of the conversation with the credit controller.

To date, case law and commentary on the effect of NOM clauses has been mixed. The UK Court of Appeal took the view in this case that parties cannot be prevented from modifying the terms of any contract and effectively making a new one on the basis of “party autonomy”. This principle renders NOM clauses ineffective.

But the Supreme Court disagreed with this reasoning. It ruled that the impact of an agreed NOM clause is that oral modifications are invalid unless recorded in writing as the clause requires. As a result, it overturned the earlier decision and found the purported variation unsound.

Outcome

The ruling now clarifies this area of law, providing certainty to those entering into contracts with NOM clauses that they will be enforced. As a result, if such clauses are included in an employment contract, employers will need to ensure that any variations are properly documented or they will be invalid.

It is also worth bearing in mind that NOM clauses are widely used in the case of senior employees. Therefore, such clauses could have the unintended effect of leaving a pay rise open to challenge if employees are notified of the rise by letter but fail to countersign to accept the increase.

While the situation is likely to be largely theoretical as employees are unlikely to challenge a pay rise, it does raise the question of what happens if both parties act on an oral variation, in breach of contract. But such questions are, ultimately, for another case to answer.

 Emma Bartlett

Emma Bartlett is a partner at Charles Russell Speechlys LLP. She advises on all aspects of employment law and has particular expertise in dispute resolution and litigation, notably discrimination, whistleblowing and trade union issues. With a strong record in negotiating and resolving complex employment disputes, Emma is considered a skilled deal broker.

OTHER ARTICLES THAT MAY INTEREST YOU

What might Brexit mean for UK employment law?

The regulatory impact of Northern Irish devolution

UK government refuses to expand gender pay gap reporting