Rock Advertising Limited v. MWB Business Exchange Centres Limited

United Kingdom

16.05.2018

Contract

Mere fact of agreeing to an oral variation is not a contravention of the clause

In facts of present case, MWB Business Exchange Centres Ltd operates serviced offices in central London. On 12 August 2011, Rock Advertising Ltd. entered into a contractual licence with MWB to occupy office space at Marble Arch Tower in Bryanston Street, London W1, for a fixed term of 12 months commencing on 1 November 2011. The licence fee was £3,500 per month for the first three months and £4,333.34 per month for the rest of the term. Clause 7.6 of the agreement provided: “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.”

On 27 February 2012, Rock Advertising had accumulated arrears of licence fees amounting to more than £12,000. Mr Idehen, the company’s sole director, proposed a revised schedule of payments to Natasha Evans, a credit controller employed by MWB. The effect of the revised schedule was to defer part of the February and March payments, and to spread the accumulated arrears over the remainder of the licence term. MWB locked Rock Advertising out of the premises on account of its failure to pay the arrears, and terminated the licence with effect from 4 May 2012. They then sued for the arrears. Rock Advertising counterclaimed damages for wrongful exclusion from the premises. The fate of the counterclaim, and therefore of the claim, turned on whether the variation agreement was effective in law.

The case came before Judge Moloney QC, in the Central London County Court, who decided it in favour of MWB. He found that, an oral agreement had been made with Ms Evans to vary the licence in accordance with the revised schedule, and that she had ostensible authority to make such an agreement. He held (i) that the variation agreement was supported by consideration, because it brought practical advantages to MWB, in that the prospect of being paid eventually was enhanced; but (ii) that the variation was ineffective because it was not recorded in writing signed on behalf of both parties, as required by Clause 7.6. MWB were therefore entitled to claim the arrears without regard to it. The Court of Appeal overturned him. They agreed that the variation was supported by consideration, but they considered that the oral agreement to revise the schedule of payments also amounted to an agreement to dispense with Clause 7.6. It followed that, MWB were bound by the variation and were not entitled to claim the arrears at the time when they did.

At common law, there are no formal requirements for the validity of a simple contract. The only exception was the rule that, a corporation could bind itself only under seal, and what remained of that rule was abolished by the Corporate Bodies Contracts Act 1960. The other exceptions are all statutory, and none of them applies to the variation in issue here. The reasons which are almost invariably given for treating No Oral Modification clauses as ineffective are (i) that a variation of an existing contract is itself a contract; (ii) that precisely because the common law imposes no requirements of form on the making of contracts, the parties may agree informally to dispense with an existing clause which imposes requirements of form; and (iii) they must be taken to have intended to do this by the mere act of agreeing a variation informally when the principal agreement required writing. The law should and does give effect to a contractual provision requiring specified formalities to be observed for a variation.

The advantages of the common law’s flexibility about formal validity are that, it enables agreements to be made quickly, informally and without the intervention of lawyers or legally drafted documents. Nevertheless, No Oral Modification clauses like Clause 7.6 are very commonly included in written agreements. This suggests that, the common law’s flexibility has been found a mixed blessing by businessmen and is not always welcome. There are at least three reasons for including such clauses. The first is that it prevents attempts to undermine written agreements by informal means, a possibility which is open to abuse. Secondly, in circumstances where oral discussions can easily give rise to misunderstandings and crossed purposes, it avoids disputes not just about whether a variation was intended but also about its exact terms. Thirdly, a measure of formality in recording variations makes it easier for corporations to police internal rules restricting the authority to agree them. These are all legitimate commercial reasons for agreeing a clause like Clause 7.6. The law of contract does not normally obstruct the legitimate intentions of businessmen, except for overriding reasons of public policy. Yet there is no mischief in No Oral Modification clauses, nor do they frustrate or contravene any policy of the law.

The mere fact of agreeing to an oral variation is not therefore a contravention of the clause. It is simply the situation to which the clause applies. It is not difficult to record a variation in writing, except perhaps in cases where the variation is so complex that no sensible businessman would do anything else. The natural inference from the parties’ failure to observe the formal requirements of a No Oral Modification clause is not that they intended to dispense with it but that they overlooked it. If, on the other hand, they had it in mind, then they were courting invalidity with their eyes open.

The enforcement of No Oral Modification 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. It will be recalled that both the Vienna Convention and the UNIDROIT model code qualify the principle that, effect is given to No Oral Modification clauses, by stating that a party may be precluded by his conduct from relying on such a provision to the extent that the other party has relied (or reasonably relied) on that conduct. In some legal systems, this result would follow from the concepts of contractual good faith or abuse of rights. In England, the safeguard against injustice lies in the various doctrines of estoppel. This is not the place to explore the circumstances in which a person can be estopped from relying on a contractual provision laying down conditions for the formal validity of a variation. The courts below rightly held that the minimal steps taken by Rock Advertising were not enough to support any estoppel defences. The scope of estoppel cannot be so broad as to destroy the whole advantage of certainty for which the parties stipulated when they agreed upon terms including the No Oral Modification clause. There would have to be some words or conduct unequivocally representing that the variation was valid notwithstanding its informality and something more would be required for this purpose than the informal promise itself.

The only consideration which MWB can be said to have been given for accepting a less advantageous schedule of payments was (i) the prospect that the payments were more likely to be made if they were loaded onto the back end of the contract term, and (ii) the fact that MWB would be less likely to have the premises left vacant on its hands while it sought a new licensee. These were both expectations of practical value, but neither was a contractual entitlement. Present appeal allowed.

Tags : Oral agreement Variation Validity

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