Authored By: Taylor Arm
City St George’s University of London
Facts of the case
Rock Advertising Ltd entered into a license agreement with Business Exchange Centre for the use of an office space, the licence lasted over a fixed 12 month term. Within the contract signed, there was a “no oral modification” clause. This stated that any variation to the licence must be (i) set out in writing and (ii) signed on behalf of both parties.
However, after falling behind on rent payments, accumulating arrears of £12,000, the Director of Rock Advertising called MWB Business Exchange’s credit controller to propose a payment schedule, deferring some payments and spreading arrears over the remaining term. The credit controller initially agreed to this over the phone. However, MWB Business Exchange Centres afterwards decided against this deciding that due to the unpaid arrears they would lock Rock Advertising out of their office and terminate their licence.
MWB Business Exchange then sued Rock Advertising for the unpaid arrears, Rock Advertising then counterclaimed for wrongful exclusion.
Legal issues
The Supreme Court in the appeal identified two legal issues which needed to be resolved in order to determine whether Rock Advertising limited was liable to pay all the arrears in one payment.
The first legal issue surrounded the ‘No Oral Modification’ clause, is this legally effective, making any amendments have to be in writing. If this clause is legally effective, then it must be honoured by both sides of the party, making Rock Advertising’s ‘agreement’ become legally invalid.
The second legal issue is whether the request to reschedule payments by Rock Advertising had valid consideration and thus should be honoured. The Court would look to see if MWB received any practical benefit for keeping Rock Advertising as a client. It was established in Foakes v Beer that partial payment of debt is not good consideration typically. If consideration of Rock Advertising’s request is invalid, then their verbally approved contract would not be upheld.
Courts outcome
The courts found that the ‘No Oral Modification’ clause was valid within the contract. Therefore, it was legal binding requiring any variations or amendments by either party to be agreed in writing, not orally. Therefore, Rock Advertising’s verbal contract was invalid, it was considered to be more of a proposal than a legally binding contract. The appeal was overturned and so Rock Advertising were required to pay back their arrears.
Legal reasoning
The Supreme Court stated that “The law gave effect to contractual provisions requiring specified formalities to be observed for a variation.” As these specific formalities were not followed, the alteration of a contract could not have legally occurred. ‘No Oral Modification’ clauses have been critiqued by judges for their lack of flexibility and the fact that it should be able to bind the intentions of the parties in the future. However, Lord Sumption outlined the three reasons why these clauses should be included. He states that:
The first is that it prevents attempts to undermine written agreements by informal means, a possibility which is open to abuse…Secondly, in circumstances where oral discussions can easily give rise to misunderstandings and crossed purposes, it avoids disputes not just about whether a variation was intended but also about its exact terms. Thirdly, a measure of formality in recording variations makes it easier for corporations to police internal rules restricting the authority to agree them.
The first rule is the most applicable in this case, Rock Advertising could be seen to be undermining written agreements “by informal means”- through a phone call- in order to delay arrears payments. The inclusion of these clauses helps to mitigate this risk. In other words, “the minimal steps taken by Rock Advertising were not enough to support any estoppel defences.” Therefore. Lord Sumption concludes “that the oral variation which Judge Moloney found to have been agreed in the present case was invalid for the reason that he gave, namely want of the writing and signatures prescribed by clause 7.6 of the licence agreement.”
The next legal issue outlined in regards to consideration was also tackled by Lord Sumption after his conclusion. He states that the only consideration which MWB Business Exchange would benefit from taking a worse schedule of payment was: the prospect that the payments would be more likely to be made at the end of licence and that MWB Business Exchange would be less likely to have a vacant premise left whilst it sought a new business to take the licence. These do not amount to good enough consideration to be consider part of a contractual entitlement. Therefore, Rock Advertising did not provide ample consideration to MWB Business Exchange when forming the verbal contract. Without sufficient consideration, there is not a valid contract.
Ratio decidendi
This case has had a significant impact on commercial contracts. This ruling by the Supreme Court undermined the previously held view by the Court of Appeal that “No Oral Modification” clauses are invalid and non-applicable, as parties should not be able to bind future decision making. The judgement highlights the importance of including these clauses in commercial contracts to protect against informal discussion which could indirectly cause modification to the contract. This ruling is particularly beneficial to larger companies with numerous employees capable of binding the company. “No Oral Modification clauses” can help to reduce the chances of accidentally variating a contract. Overall, in this sense, this judgement allows parties to achieve greater certainty by including these clauses into an agreement. Parties can thus be certain when a variation has occurred in the contract.
Naturally, as a consequence of placing more emphasis on limiting clauses, this places limits on oral variation. This limits the decision-making ability of parties as they can no longer agree on a variation if this clause is in place orally. This is negative especially in this case as a representative for the business agreed informally to an oral contract. This does not bind the company unless they write it down formally.
Finally, the Supreme Court’s reluctance to decide on consideration, explicitly stating that there is a clear conflict between whether debt is a form of consideration, indicates that how the Court’s apply consideration needs rethinking and to be brought clarity.
Criticisms
The judgement provided in this case has provided several substantial criticisms amongst the clarity it provided. The two main criticisms are outlined below.
The first criticism is the power imbalance it creates. This judgement heavily favours largely commercial parties, as they can now more freely use “No Oral Modification” clauses to control what binds the company. This is a net benefit, providing security for these companies. However, smaller businesses or individuals often rely on conversations and informal discussions to create variations to contracts. They will naturally depend on these, assuming this caused a legal change to the contract. However, if a dispute was to arise, these discussion have no legal impact on their case. This is clearly showcased as being problematic within this case. MWB Business Exchange appeared to agree to the oral variation and so Rock’s Advertisement depended on this, believing that they need to follow the payment plan. However, due to the “No Oral Modification” clause, this was redundant.
The second criticism is the unresolved consideration conflict. The Supreme Court refused to resolve the conflict between Foakes v Beer and the “practical benefit” test established in Williams v Roffey. Lord Sumption only commented that the supposed benefits of MWB Business Exchange was not sufficient enough to constitute valid consideration. But, did not comment on what would be sufficient. This leaves the issue of consideration unresolved, with no clear leading decision on what constitutes valid consideration.
Conclusion
Overall, the case of Rock Advertising Limited v MWB Business Exchange Centres Limited focuses on the importance of “No Oral Modification” clauses and their significance for businesses/individuals within contracts. The Supreme Court provided clarity on their importance, emphasising their use and legal applicability. Even if both parties (under a contract which has a “No Oral Modification” clause) create a verbal agreement, this cannot be legally binding unless it goes through all the formalities and becomes a variation in writing. The Courts adopted a more strict approach than previous seen. In this case, it caused Rock Advertising to lose, as their verbal agreement was not legally binding since they did not take the appropriate steps to reinforce this agreement. Although this case did establish the usefulness of “No Oral Modification” clauses, it has been criticised by not taking the opportunity to provide clarity regarding consideration. The Supreme Court although stating that the consideration for Business Exchange Centres was not sufficient enough, did not comment on why this was the case and did not discuss the conflicting approaches found in previous judgements. This has left the doctrine of consideration and its applicability in the courts to be left unresolved for later cases. Irrespective of this, the substantial progression of contract law as a result of this case has been widely accepted, especially for larger businesses who can effectively decide who can bind their company.
