Commercial Contract Disputes – “No Oral Modification” Clause

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The UK Supreme Court has recently confirmed that contractual provisions which restrict the parties from modifying an agreement orally are binding and enforceable. These provisions are more commonly known as a ‘No Oral Modification Clause’ (“NOM Clause”).

In Rock Advertising Limited v MWB Business Exchange Centres Limited [2018] UKSC 24 (“Rock Advertising”) there were two primary legal issues before the court: First, whether a NOM Clause was binding generally; and second, whether it’s possible for parties to orally agree that any NOM Clause will have no effect on subsequent oral variations.

It was held that not only are NOM Clauses enforceable, but any oral modification made that ignores the effect of a NOM Clause will be invalidated. In the Rock Advertising judgment, Lord Sumption stated:

“…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. (emphasis added)

How does this impact you and your contracts?

All businesses enter into contracts, some more frequently than others. We have seen in our Dispute Resolution practice that few significant contracts survive from start to end without some form of variation or change to the terms of the contract. Most of the professionally prepared contracts we have encountered include a form of NOM Clause requiring written confirmation of any variations. Examples of variations might be extensions of time, changes in price, changes in work specifications, etc.

Disputes typically arise over the terms of any variation or whether any variation was agreed at all. Unfortunately, with regard to agreements made orally, these disputes devolve quickly into the age-old contest of ‘he said/she said’. NOM Clauses impact these scenarios by compelling parties to reduce the agreed variation into writing so that the agreed variation can have binding effect.

In light of Rock Advertising, businesses should consider reviewing contracts for any NOM Clauses and seek advice on the potential ramifications of the presence or absence of such provisions on any variations that may have already been agreed or are being considered.

Example Scenario

ABC Construction has been hired to build a multi-million-dollar house for a client. ABC and the client sign a contract prepared by the client’s attorney that ABC read briefly just before signing. The contract confirmed building specifications and contained a NOM Clause. Near the end of the project, the client calls ABC and says that they want ABC to change the driveway to include a massive golden statue. ABC outlines that it will be expensive to get the statue, to which the client responds that money is no object.

ABC orders the statue, which arrives in Bermuda. Prior to installation, the client calls ABC and says that they no longer want the statute and asks ABC to stick to the original specs. ABC tells the client that they have already incurred the cost of purchasing the statue and will have to be paid for those costs. The client responds stating that they never confirmed the variation in writing, and ABC should have sought and waited for that confirmation before purchasing the statue. The statue cost ABC $250,000.00 and the supplier has refused to give ABC a refund.

Summary

There are benefits to having NOM Clauses and they must be balanced against practical circumstances. There will be some contracts where frequent changes are expected and it would be overly prohibitive to require written agreements of every variation.

Nevertheless, before signing any significant agreement, we would always recommend seeking legal advice on the practical effect provisions like the NOM Clause will have the operation of the contract.

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