Introduction
Commercial contracts often include the “No Oral Modification” (“NOM”) clauses, which provide that the contract in question can only be modified formally in writing.
Despite the common usage of NOM clauses, their legal effects remain uncertain. On one hand, such clauses limit the parties’ autonomy to bind themselves as to the manner of variations of contract while the law imposes no requirement of form on the creation of contracts. On the other hand, such clauses prevent the contract from being varied informally and thus ensure commercial certainty and avoid disputes.
Recently, the UK Supreme Court in the case Rock Advertising v MWB ruled that NOM clauses should be upheld in most circumstances and provided a welcomed clarification on the enforceability of NOM clauses.
Background of the case
Rock Advertising Limited (“Rock”) and MWB entered into a license agreement to occupy office space (“Licence”). The Licence contains a standard NOM clause, which provides that "All variations to this Licence must be agreed, set out in writing and signed on behalf of both parties before they take effect." (Clause 7.6.) Rock fell into arrears, so MWB excluded Rock from the premises and claimed for full payment from Rock. Rock counterclaimed for damages for wrongful exclusion on the ground that the payment term has been orally revised. The case turned on whether there had been any oral agreement to revise the payment term and if yes, whether it was effective in law.
The Decision
It was held that even when there was an oral agreement between the parties to vary the Licence, such variation is legally ineffective due to the NOM clause. This decision confirms the enforceability of the NOM clause.
Lord Sumption opined that “the law should and does give effect to a contractual provision requiring specified formalities to be observed for a variation”. His Lordship highlighted that:-
1. Parties’ autonomy “operates up to the point when the contract is made, but thereafter only to the extents the contract allows”. Parties should be able to bind themselves as to the form of any variation; to hold otherwise would override the parties’ intentions and is a “real offence against party autonomy”;
2. There are no overriding public policy grounds to consider the NOM clauses unenforceable. There exist legitimate commercial reasons for incorporating NOM clauses into business contracts, for examples: (i) it prevents attempts to undermine written agreements by informal means; (ii) it avoids disputes about the exact term of a variation over oral discussion; and (iii) such measure of formality makes it easier for companies to “police internal rules restricting authority to agree variations”. The law of contract should not obstruct such legitimate intentions; and
3. There is no inconsistency between the general rule allowing contracts to be made informally and a specific rule giving effect to a contract requiring writing for variation.
It is interesting to note that Lord Briggs, on the other hand, arrived at the same conclusion with a narrower reasoning. He took the view that NOM clauses should bind the parties, unless “the parties expressly (or by strictly necessary implication) agreed to dispense with it”. However, such an agreed variation would not be freely implied from the mere fact that the parties reached oral agreement to modify the contract without referring to the clause.
The judges recognized that the enforcement of NOM clause might lead to injustice and abuse, and suggested that the various doctrines of estoppel offered adequate safeguard.
Conclusion
This decision confirms the effectiveness of the NOM clauses, which are commonly found in commercial contracts but often overlooked by parties.
Takeaway
1) Parties who want to vary the terms of an agreement should do so by way of written agreements instead of oral agreements. To ensure that the variations are legally effective, procedural requirements in the NOM clauses should be carefully observed.
2) Although Rock Advertising v MWB is an English case, it is likely that Hong Kong courts will follow the decision when similar disputes arise.
3) Parties who have acted in reliance on an oral agreement can rely on equitable remedies like estoppel, but complying with requirements of the NOM clauses will be a safer approach.
The full judgment can be viewed here.
