The UK's highest court has upheld a provision in a contract that required any changes to the contract to be made in writing.
This meant that the parties were not able to change their contract by verbal agreement.
Those responsible for managing contracts within a business need to be familiar with the process contained in each contract for variation and ensure it is followed.
The case concerned a licence of serviced offices in central London. The tenant owed more than £12,000 in rent arrears.
The tenant claimed that it had reached an oral agreement with the licensor on the terms on which those arrears would be repaid.
In the ensuing dispute, the licensor relied on this provision in the contract:
"All variations to this Licence must be agreed, set out in writing and signed on behalf of both parties before they take effect."
This provision is known as a "no oral modification" clause.
The court's decision
The Supreme Court said that the law should and does give effect to a contractual provision requiring specified formalities to be observed for a variation.
The effect of a "no oral modification" clause is that verbal changes to a contract will be invalid.
What are the risks to contracting parties from this decision?
Imagine you have a supply contract which contains a "no oral modification" clause.
The contract provides that the goods will be delivered within 14 days of order acceptance. A customer phones up and asks if the delivery can be made within 7 days instead. The supplier's representative says that will be fine. The customer arranges an on-sale on the basis of this.
You know what's coming... The goods arrive late and the customer loses its on-sale deal.
As a result of this case, it will be open to the supplier to argue that the oral variation was invalid and that the customer therefore has no claim against it.
There are potential protections available where one party (party A) has detrimentally relied on informal promises made by the other party (party B) about varying the contract.
But the court has set a fairly high bar for those protections to apply. It said:
- there would have to be some words or conduct from party B unequivocally representing that the change was valid even though it was being made informally; and
- something more would be required for this purpose than party B's informal promise.
It remains to be seen what kind of words or conduct would be enough to "override" non-compliance with a "no oral modification" clause. This point wasn't elaborated on in the case.
What should businesses be doing?
Contracts tend to contain "no oral modification" clauses in the small print at the end. No-one usually gives them more than a passing glance. This is likely to change.
If contracting parties have taken the trouble to include a formal process for making changes to your contract, they will need to comply with it.n The person responsible for managing the contract is best placed to do this.
For contacts under negotiation, the parties will want to weigh up the pros and cons of including such a provision.
The pros include certainty (there's written evidence of a change that both parties have signed up to which should reduce the risk of disputes) and control (the contract can specify who has to sign variations and make sure that's someone with the appropriate level of authority).
As a matter of good business management, having all changes in writing will enable anyone in the business to get a handle on the current agreed terms.
On the other hand, "no oral modification" clauses could be seen as inflexible. In a fast paced commercial environment, a business might not have time to get every last detail of a change put into writing and signed off by a director.
The answer to this is to draft the clause so that it fits the business requirements for that particular contract.
- If the clause requires variations to be in writing, could "writing" include emails?
- If so, how would the requirements for "signature" work?
- Who should be authorised to agree/sign the variations? It may be possible to provide for an authorised signatory below board level for some types of changes.
Contract variation clauses have often been relegated to the "small print at the back of the contract" section. Following this case, those drafting and negotiating contracts will want to put some thought into how those clauses are going to work in practice - and then make sure that's communicated to those responsible for managing the contract on a day to day basis. For further advice, please contact your usual Brodies contact.