Many commercial contracts contain a term (usually referred to as a 'no oral modification' ("NOM") clause) purporting to prevent the contract from being varied verbally by the parties. NOM clauses typically state that no variations to the terms of the contract will take effect unless set out in writing and signed by the parties.
The purpose of NOM clauses is, in theory, to give the contracting parties certainty by avoiding, for example, confusion as to whether or not an informal discussion between employees of the parties has effectively varied the agreed contractual terms, perhaps relating to the specification of goods or agreed payment terms.
Despite the theory and desire for certainty, the courts have tended to give effect to verbal variations of contracts notwithstanding the existence of NOM clauses. The view of the courts has been that, if both parties to a contract agree that they should no longer be bound by the original terms of a contract, why should their previous agreement to the contrary (i.e. the requirements of a NOM clause) stand in their way?
This conflict between the parties' ability to agree variations to the contract verbally, notwithstanding their original intentions that such variations should be in writing, has led to much unwanted uncertainty in the law.
Clarification of the law
A recent decision by the Supreme Court as to the effect of NOM clauses should bring much needed clarity to the position.
In Rock Advertising Limited v MWB Business Exchange Centres Limited, the parties entered into a licence agreement in respect of the occupation of commercial premises in London. The licence agreement contained a NOM clause which stated that all variations of the licence must be agreed, set out in writing and signed on behalf of both parties before they took effect. A dispute between the parties subsequently arose as to whether this clause (and other terms of the licence relating to payment of the licence fees) had been verbally varied by employees of the parties during a telephone call.
The Court unanimously held that the NOM clause in this case was effective in preventing the alleged variation from taking place, and that, as a matter of general principle, the law should give effect to a contractual provision requiring specified formalities to be observed for a variation. In reaching its decision, the Court held that there is no conceptual inconsistency between a general rule allowing contracts to be made informally and a specific rule that effect will be given to a contract requiring a variation to be in writing.
The Court also noted that there is a risk that a party may act on the contract as varied, only to find itself unable to enforce it, because the formalities were not followed. However, the safeguard to this is the legal doctrine of estoppel. In effect, if Party A can show that Party B had represented to it unequivocally (by words or conduct) that a variation had taken effect, notwithstanding the fact that Party A hadn't complied with the requirements of a NOM clause, Party B would be prevented from enforcing the contract except as varied.
What this means for you
This decision clarifies the effectiveness of NOM clauses and should reduce the number of cases before the courts where it is alleged that a contract has been verbally varied despite the existence of a NOM clause. However, it remains to be seen whether there will be an increase in the number of cases where the estoppel argument is raised instead.
On a practical level, and regardless of the nature of your business, it is worth revisiting the terms of your commercial contracts to identify whether they include a NOM clause, and if so, what formalities are required.
Make sure that you (and, crucially, any employees on the ground who are responsible for managing or implementing the contract) are aware of any variation requirements, so that the correct procedure is followed if you need or want to vary the terms, or if you find yourself in a situation where the other party to the contract insists that the contract has been varied informally.
Of course, the way you conduct business may mean that it is not always realistic or viable to follow a formal variation process to document each and every minor departure from the terms of the contract. If so, it might be sensible to revisit the extent to which you include NOM clauses in your contracts as a matter of course (whilst at the same time being alive to the risk of the other party seeking to rely on informal variations to your detriment).
For more information or advice on NOM clauses, please contact Mark Rhys-Jones on 0117 915 4613 or by email at firstname.lastname@example.org, or Catherine Haugh on 0117 915 4984 or by email at email@example.com.
Case: Rock Advertising Limited v MWB Business Exchange Centres Limited  UKSC 24