This eagerly-awaited judgment from the Supreme Court (described by the court itself as "exceptional") considers the enforceability of no oral modification (or "NOM") clauses.
Rock was granted a licence for serviced offices operated by MWB. When Rock fell behind with its licence fees, it proposed a revised payment schedule (clearly a variation to the terms of the agreement). This would have the effect of deferring some payments and rescheduling others. However, this new arrangement was never agreed in writing. MWB subsequently locked Rock out of the premises for failing to pay its rent arrears (claiming that no change to the payment schedule had been agreed).
The licence agreement, in common with all manner of commercial agreements, specified that all variations must be agreed in writing signed by the parties. The issue before the Supreme Court was whether the NOM clause was legally effective.
At first instance, the court held that there was an oral variation but that it was ineffective because of the NOM clause. The Court of Appeal disagreed, for reasons which many have found compelling. Specifically, it found that as English law imposes no formal requirements to bring a contract into being (save for some specific exceptions), then parties can just as easily change its terms: "those who make a contract, may unmake it". This is the principle of "party autonomy". The Court of Appeal considered that the oral agreement to revise the payment schedule also amounted to an agreement to dispense with the formal requirements of the NOM clause and so MWB was bound by the oral variation.
The Supreme Court took issue with this. In upholding the NOM clause in the licence agreement, it dismissed the basis of the Court of Appeal's reasoning as being "entirely conceptual". In particular, Lord Sumption (delivering the leading judgment) found that the rule applied by the Court of Appeal overrides the parties' intentions: "the real offence against party autonomy is the suggestion that they cannot bind themselves as to the form of any variation, even if that is what they have agreed." Drawing on legal principles established in other jurisdictions (and codes such as the Vienna Convention on Contracts for the International Sale of Goods), the Supreme Court's view was that there is no contradiction in saying that, on the one hand, contracts can be made informally, and on the other, NOM clauses will be given effect by the courts.
Clearly, upholding NOM clauses carries a risk that a party, believing it has varied the terms of a contract despite the lack of signed writing, acts on that belief to its detriment with no means of redress. The Supreme Court's view is that the safeguard against this injustice is the doctrine of estoppel (essentially a legal mechanism for preventing a party to a contract from going back on certain words or conduct, where the other party has relied on it).
The real issue for those drafting commercial contracts is, of course, what (if anything) to do differently to reflect this important judgment?
The judgment generally vindicates the usual approach of using NOM clauses. However, it is a useful wake-up call to remind us all that care is needed in administering contracts post-signature; it is rare in our experience to find that, some years in, any complex longer-term contract is still being operated to the letter by the parties.
In-house lawyers have a critical role to play here; if the client business and a customer have modified their ways of working in a manner that has business value for the client, the advice should be that it is important to capture that change, if possible, in a variation which complies with the NOM clause. (for a good example see the case of Globe Motors v Lucas)
It may be sensible for in-house lawyers in businesses which are dependant on key contracts (particularly those of long duration) to instigate a regular review of the way those contracts are being operated and to advise on any need for a formal variation.
Care will also be needed where there is a NOM clause to ensure that its strict requirements are complied with.