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Contract variation - Supreme Court rules on non-variation clauses - no means no

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In July 2016 I wrote a blog concerning Non-Variation clauses in light of the Court of Appeal’s decision in Globe Motors Inc v Lucas Varity Electric Steering Limited [2016] EWCA Civ 396. The Court in that case reasoned that a contract could be varied orally or by course of conduct, in contravention of a non-variation clause, as this preserved the parties’ freedom to agree.

Now, two years on, the Supreme Court has decided otherwise in Rock Advertising Limited v MWB Business Exchange Centres Limited [2018] UKSC 24.

The Facts

Rock Advertising entered into a contractual licence to occupy office space with MWB, under which it accumulated arrears. The sole director of Rock Advertising proposed a revised schedule of payments to MWB’s credit controller and contended that they agreed by telephone to vary the agreement in accordance with this schedule. The licence agreement, however, included a No Oral Modification (NOM) clause.

Lord Sumption, with whom Lady Hale, Lord Wilson, and Lord Lloyd-Jones agreed, opined that “the law should, and does, give effect to a contractual provision requiring specified formalities to be observed for a variation”.

He declared that “party autonomy operates up to the point when the contract is made, but thereafter only to the extent that the contract allows”. This is in line with the principle that contracting parties create a ‘local law’ by agreement under which their conduct is governed.

Further, Lord Sumption stated that it does not follow that parties who agree an oral variation in spite of a NOM clause necessarily infers an intention to dispense with that clause. Rather, he felt, the natural inference is that the clause has been overlooked.

Lord Briggs, the only dissenting judge, agreed that in the instant case the variation was invalid. His views differed in that he argued that it was possible for parties to agree to remove a NOM clause orally, but that this is not implied simply because an oral variation has been agreed.

What does this mean for commercial organisations?

Commercial parties will likely breathe a sigh of relief following this decision. The decision in Globe Motors left organisations in a position where unauthorised employees might inadvertently vary agreements. When time and money is spent in the preparation of a comprehensive contract, the parties will want to ensure that it can only be varied in accordance with the agreed terms.

What action should I take?

In many areas of commerce, particularly as technologies advance, variations can be required with speed. It can be tempting to agree to a variation orally, which could lead to costly litigation. You should ensure that your contracts are sufficiently flexible to allow for these situations. Consider whether it would be appropriate for written variations to be subject to a counterparts clause, and whether delivery must be in hard copy, or whether email would be sufficient.

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