01 Aug 2018

In the case of Rock Advertising v MWB Business Exchange Centres Ltd [2018] UKSC 24, the Supreme Court held that a "no oral modification" clause was legally effective.

The defendant company entered into a licence to occupy premises with the claimant company. The licence agreement contained a clause stating that "all variations to this licence must be agreed, set out in writing and signed on behalf of both parties before they take effect." The defendant fell into arrears and its director telephoned an employee of the claimant proposing a revised payment schedule. 

The defendant's director thought the claimant had agreed to the variation and made the first payment under the proposed revised contract. The claimant said it had not agreed to the variation, locked out the defendant and claimed the balance of the arrears. The first instance judge found that the amendment to the contract was not effective because it had not been in writing as required by the "no oral modification" clause. The Court of Appeal allowed the defendant's appeal and held that the parties were free to agree to depart from a previously agreed "no oral modification" clause. 

The Supreme Court reversed the Court of Appeal's decision and held that the agreement had not been varied orally because of the "no oral modification" clause. There was no reason why parties could not agree to be bound by specified conditions for future variations of their contract. "No oral modification" clauses serve a legitimate business purpose and there was no inconsistency between a general rule allowing contracts to be made informally, and a specific rule that effect would be given to a clause requiring amendments to be made in writing.

The Supreme Court also considered the position where a party is seeking to rely on a "no oral modification" clause where the other party has acted on the understanding that a contract has been varied orally. They found that a party could be prevented, or estopped, from relying on such a clause, but only where there were words or conduct unequivocally demonstrating that the variation was valid even though it was not made in writing, and something more would be required than just the oral promise itself. The minimal steps taken by the defendant here were not enough to support an estoppel defence.

The decision should be welcomed by lenders as it strongly suggests that "no oral modification" clauses in finance documents are enforceable in principle. It is not uncommon for disputes to arise where borrowers argue that lenders verbally agreed something different to what is set out in the express terms of their agreement; this decision should assist lenders in defending such claims. However, it is worth noting that the Supreme Court was ruling on a specific clause (the drafting of which differs from that frequently encountered in finance documents) and on a specific fact scenario. We cannot say with certainty that all "no oral modification" clauses will be enforced in all circumstances. 

Lenders should also bear in mind the estoppel exception set out by the Supreme Court. There is a risk that where a borrower has acted on an oral modification, and there have been words or conduct which clearly show that such modification was valid even though it was not made in writing, a lender could still be bound by it despite the inclusion of a "no oral modification" clause.

Key points

  • The Supreme Court has confirmed that "no oral modification" clauses are in enforceable in principle
  • The decision lends weight to an argument that the written terms of finance documents will prevail and should be welcomed by lenders, however it does not mean that every such clause would be enforced in all circumstances 
  • The judgment sets out some instances in which "no oral modification" clauses may not be upheld, specifically where there have been words or conduct unequivocally representing that a variation was valid notwithstanding its informality
  • Lenders should still avoid discussions with borrowers that contradict the written terms of finance documents.