Can you vary the non-variation clause? It seems you can’t! The Supreme Court rules on the effectiveness of non-variation clauses – and there is a surprise in store … (updated 3 July 2018)

Background to the case

“Can you vary the non-variation clause?” It sounds like some sort of philosophical question to do with an abstruse point of logic – but actually this case represents a major change in the commercial law. Lawyers have historically put in various clauses, often to be found at the end of a written commercial contract and somewhat derisively called the “boilerplate”. One is a non-waiver clause, but lawyers have normally thought that the parties can easily waive the non-waiver clause, making it something of a dead letter in reality.

Another is the non-variation clause – the sort of clause which states that no modification can be made to the agreement except in writing and signed by the parties. The Supreme Court decided to call this sort of clause a “No Oral Modification” or “NOM” clause: this is rather confusing as the point of such clauses goes beyond trying to prevent oral agreements, and such clauses can often proscribe very specific ways for varying an agreement. This may be significant – see below. 

The point is, all too often the parties ignore this sort of clause and just agree variations as they go. With email and instantaneous communications, it is so easily done. If you are working on a project with project board meetings, it is easy to agree something orally, and perhaps just minute it. You then get on with the work you have just agreed to do. Perhaps you never bothered to check what the NOM clause said – or maybe you were blissfully unaware of it.

What then is the status of these clauses? Does the NOM clause leap in and apply to invalidate informal “agreements”, or does the informal “agreement” still take effect as being the parties’ latest word on the contract, notwithstanding the original NOM clause?

What’s the new development then?

It came up for decision by the Supreme Court very recently in the case of Rock Advertising v MWB Business Exchange Centres [2018] UKSC 24. MWB operated serviced offices and Rock entered into a licence with MWB for space in office premises near Marble Arch. Rock unfortunately fell into arrears on its fees – it should have been paying a little over £4,000 a month, but had run up more than £12,000 of debt. Rock discussed this with MWB’s credit controller and its evidence was that they agreed a revised schedule of payments meaning that full payment would be made by the end of the term of the licence.

The problem was clause 7.6, which stated,

“… All variations to this Licence must be agreed, set out in writing and signed on behalf of both parties before they take effect.”

It is a very typical sort of clause you routinely see in commercial contracts and setting out a “No Oral Modification” clause. Needless to say, there was no written variation let alone signature by both parties. The case went to the Supreme Court and the scene was set for a final decision, one way or another, on the legal effect of a NOM clause.

Some legal background

While it might be thought that such a clause, being so common, would have numerous decisions on the point, in fact there are very few in English Law. Some of them have been to the Court of Appeal recently which, after some hesitation in earlier cases, decided that a NOM clause did not in fact invalidate a subsequent oral agreement. That is in fact what the Court of Appeal decided in this case, upholding the oral agreement between Rock and MWB’s credit controller, and finding that clause 7.6 was not effective to invalidate it.

When you think about it, this is not such a strange conclusion: if you make one agreement, you can always make another one later overriding the earlier one. Sometimes, the overriding might not be explicit, but it can be implied from the circumstances.

What the Supreme Court thought

The majority of the five Supreme Court Justices (all bar one in fact) found that NOM clauses are in fact effective to invalidate later oral agreements. They took account of the fact that other common law jurisdictions like Australia and Canada have found that NOM clauses do not invalidate later oral agreements, but they preferred to follow the lead given by some international commercial legal codes, such as the Vienna Convention on Contracts for the International Sale of Goods and the UNIDROIT Principles of International Commercial Contracts (despite the Supreme Court’s observation that the UK has not ratified the Vienna Convention). These codes uphold the effect of a NOM clause.

The majority of the Supreme Court thought that there were good reasons for holding NOM clauses effective to invalidate later oral agreements:

• It would stop attempts being made to undermine written agreements
• Allowing oral agreements would give rise to misunderstandings – having an effective NOM clause would avoid disputes about whether a variation was intended but also would prevent disputes about its terms
• Businesses will like a measure of formality, which allows them to have internal rules about varying contracts

Some thoughts on the judgement – and what you need to do now

It is very true that written agreements need to be upheld otherwise you end up in chaos with no-one knowing what the contract consists of or demands. This is a very common situation and the law needs to be clear and capable of easy application. It is not clear that the majority’s decision in Rock provides that certainty. Let’s look at some problems in the judgement.

Just what does the judgement mean anyway?

The big problem is that, especially in this modern world of instantaneous communications, parties frequently do resort to oral or informal methods of varying their contracts, and just as frequently they act on those oral or informal “agreements” believing them to be valid. The really big problem is knowing just what the Supreme Court thought a NOM clause was invalidating.

NOM clauses are not always seeking to prevent later oral variations, but also go on to prescribe specific means for varying an agreement. A good example is to be found in the case of Virulite LLC v Virulite Distribution [2014] EWHC 366 (QB) where there was a pretty standard NOM clause:

This Agreement shall not be modified in any way except by a subsequent written instrument signed by both parties.

All well and good, but the agreement also provided,

… reference to writing includes fax and similar means of communication. Daily and on going business correspondence may be carried out via email; provided that any modifications of this Agreement or any material alteration of the relationship between [the parties] must be in written and executed form; not including email or fax. [underlining in the original]

What actually happened is – predictably – the parties in fact made various material amendments by email including one deferment of a payment. This was not therefore an oral variation, but a variation using a method of communication that had been proscribed by the terms of the original agreement.

The problem comes in trying to apply the Supreme Court’s reasoning in Rock to the facts of this case. If the Supreme Court thought it was just trying to outlaw oral variations, is it possible to say about Virulite that at least there was something in writing and so the proscription of email or fax could still be deemed waived and that the email exchanges were therefore effective as valid variations? On the other hand, the majority of the Supreme Court seemed to be saying that the parties could restrict their autonomy when it came to later variations, so a clause invalidating both oral and informal email variations should be upheld.

The strict wording of the two Conventions cited by the Supreme Court does not help either. Article 29(2) of the Vienna Convention provides,

A contract in writing which contains a provision requiring any modification or termination by agreement to be in writing may not be otherwise modified or terminated by agreement. … [underlining added]

In other words, this wording only proscribes later oral variations. Compare this with the wording of UNIDROIT Article 1(2):

A contract in writing which contains a clause requiring any modification or termination by agreement to be in a particular form may not be otherwise modified or terminated. [underlining added]

The underlined part here seems to be going wider than just oral agreements and captures the sort of non-variation clause in Virulite which demands a very specific form for any valid variation by excluding email or fax.

The upshot is that it is hard to know exactly what the Supreme Court was outlawing – just purely oral variations or variations not in the precise form required by the original agreement.

How is it going to work out in practice?

Leaving to one side that uncertainty, there must also be concerns about how the judgement is going to work out in practice. As we saw right at the beginning of this update, many large and (otherwise) well run projects are run with something like a Project Board, which meets to discuss matters of strategic importance and is intended to, and does, make important decisions about the future conduct of the project. As we all know, these decisions are sometimes recognised as variations to the original contract, but many times they are not – and the reality is that the parties will still go on to start to implement them regardless. Sometimes these Project Board decisions become formal variations, many other times not; sometimes, one party will draft a formal variation to reflect a Project Board decision, but it then becomes forgotten or encounters difficulties in negotiation and in either case just falls by the wayside. What happens then? Just as most projects start without a formal written agreement and perhaps with just a “letter of intent”, most existing projects can continue without a formal variation and the parties rely on their oral “agreement”.

How does the Supreme Court’s decision in Rock apply to such common situations?

• if the Project Board makes a decision at a meeting which is effectively a variation of the original contract and there is nothing in writing, it seems clear from the majority in Rock that such an oral agreement is invalidated by a NOM clause
• if one party takes a private note of the Project Board’s decision, would that count as an agreement in writing? Probably not – the note counts as evidence, not a document setting out an original agreement
• if one party take a private note of the Project Board’s decision and shares it with the other side, which either approves it or says nothing, would that count as an agreement in writing? Unclear – again, the note might just be evidence of an invalid oral agreement rather than an agreement in writing
• if the parties produce a joint minute of the Project Board’s decision, would that count as an agreement in writing? Unclear, but it is starting to look more like an agreement in writing, though it could still be open to the criticism that it is an invalid oral agreement evidenced in writing, not one made in writing

Finally, what about Agile projects? These are conducted for the most part orally in meetings – Sprint team meetings. There could be many cases where a Sprint team decides something orally which amounts to a contract variation, but it never gets written up, because that is the nature of Agile. Has the Supreme Court in Rock effectively just outlawed Agile where the contract includes a NOM clause? Does a NOM clause actually work in the context of an Agile project?

How do we get out of this?

There are other principles of law which might assist in this sort of situation – the Supreme Court said that the principle of estoppel would help in these situations. So if one party represented to the other party that it could proceed in line with an oral (or informal) “agreement”, and the other party relied on that representation and did so, then the second party could rely on the first party’s representation to say that the first party was “estopped” from denying the variation.

One problem with an estoppel is that the party estopped can withdraw the estoppel on reasonable notice. Then there are two problems – firstly, what would be “reasonable” notice and, secondly, once the estoppel has been withdrawn, the NOM clause has invalidated the oral agreement and it is unclear where the parties then stand. Maybe a lot of work has been done and expenses incurred: what is going to happen to these?

This was the sort of situation in the Virulite case: the judge decided that an exchange of emails could be a valid variation, notwithstanding the prohibition of such “informal” variations by the express words of the contract. However, he looked at the situation in estoppel as well, and concluded from the authorities that an estoppel can be withdrawn assuming that it is not inequitable to do so. The email agreement between the parties was to the effect that a payment could be deferred and he decided that the estoppel meant that the party estopped could not rely on the non-payment for the period before the estoppel was withdrawn as making out a breach of contract. The question then was whether it was inequitable to withdraw the estoppel – in Virulite, the judge decided that the initial representation defined how long it was to last and there was substantial reliance on that representation over an extended period, so it was inequitable for the party making the representation to withdraw the estoppel on any sort of notice.

If you have followed this so far, you will realise that taking away the option of an informal or oral agreement plunges the parties into a sea of uncertainty. Arguing estoppel and withdrawal of estoppel and whether it is inequitable to do so can become like arguing over how many angels can dance on the point of a needle – not a satisfactory situation for parties that want certainty, not legal arguments. You could well say that it is the parties’ own fault, because all they had to do was follow the contractual variation mechanism: this is theoretically correct, but not very sympathetic to how parties in fact carry on their business day by day in the modern age.

Another way of getting around it

Another way of circumventing this judgement is suggested by the recent case of Glencore Energy v OMV Supply & Trading [2018] EWHC 895 (Comm). This was a carriage of goods by sea case, where the buyer asked the seller (and shipper) to keep the vessel waiting offshore while the port of discharge was congested: the seller did so and incurred costs and expenses in keeping the vessel waiting around. The judge found that this had been done by email and could not be a variation in the circumstances (as the agreement did not envisage this sort of arrangement). However, he decided nonetheless that there was an implied contract – a fresh, separate agreement constituted by the exchange of emails and the conduct of the parties. It could not be envisaged that the seller intended to provide a free service in keeping a ship waiting around for days on end, so it was necessary to imply a contract so that the seller could be remunerated for it costs and expenses.

As well as the uncertainties of estoppel, it seems that the consequence of the Supreme Court’s ruling in Rock will be that this argument of implied contract will be run more frequently.

Best practice now

How this will work out in practice is unclear at the moment. The best practice now when looking at making any contract variation, however large or small, is to go back in every case to the original agreement and see what it requires for any variation – and then follow those requirements to the letter. So if the NOM clause requires something in hard copy, signed by both parties and exchanged, do it – all of it, to the letter. 

One possible conclusion is to do away with NOM clauses altogether, and allow for the fact of informal or even oral variations. You would end up with arguments about whether such and such was “agreed”, but it seems that you are going to do this anyway by facing arguments about estoppel and implied contract. If you are going to include a NOM clause, perhaps the best practice is to exclude oral agreements only and not to exclude certain forms of agreement (e.g. email) so as to avoid a debate about the precise scope of the Supreme Court’s decision. Including a NOM clause in a contract where it is anticipated that there will be substantial oral discussions and agreements (such as an Agile project) may well be a hostage to fortune. 

What if you don’t follow the NOM clause? What if the NOM clause requires signature and exchange, but you only sign it and don’t exchange copies? What if some complex process for agreeing changes is prescribed in the detailed change control provisions but you don’t follow them to the letter? Before this judgement, the informal or defective “agreements” would probably be upheld nevertheless as the court would say that the parties had waived reliance on the strict wording by their conduct, but now the variations potentially stand to be invalidated, and the parties would be looking to a defence in the law of estoppel or seeking to set up some sort of implied contract, with all the uncertainty that brings. 

However, this is now the law and the bottom line is this: NOM clauses are effective, so attempts to vary contracts orally or informally without following the NOM clause are invalid. How this will pan out in practice is anyone’s guess at the moment. 

Small print

Remember – this is a general description of a recent legal development, and not intended to be advice for a specific situation. We would be happy to help you with advice if you have any specific questions!