Supreme Court lays down the Law on oral modification of contracts

Contract terms that seek to set agreements in stone, preventing their subsequent oral modification (NOM clauses), have long been controversial – but the Supreme Court has ruled in a guideline case that they perform important functions and neither frustrate nor contravene any policy of the law.

 

A property company that operates office developments in London had granted a licence in respect of certain premises to an advertising agency. The agreement stated that it set out all of the terms that had been agreed and that any variations would only take effect if formally approved in writing by both parties.

The agency accumulated licence fee arrears and its director proposed a schedule of payments to a credit controller employed by the company, by which some payments would be deferred and the payment of arrears would be spread over the remainder of the licence period. The company subsequently locked the agency out of the premises, terminated the licence and sued it for the arrears. The agency counterclaimed, seeking damages for wrongful exclusion from the premises.

A judge accepted that the company had, via the credit controller, orally agreed to the schedule of payments. However, he went on to find that the company was entitled to claim the arrears without regard to that agreement because it did not satisfy the formal requirements of the NOM clause. The Court of Appeal later upheld the agency’s challenge to that ruling on the basis that, by orally agreeing to the agency’s proposal, the company had also consented to dispense with the NOM clause and to accept an oral variation of the licence agreement.

In allowing the company’s appeal against that ruling, the Supreme Court noted that NOM clauses are commonplace and perform important purposes. They prevent attempts to undermine written agreements by informal means; they avoid disputes about whether variations are intended and, if so, their exact terms; and they make it easier for corporations to police their own internal rules.

By its decision, the Court of Appeal had overridden the contracting parties’ intention to bind themselves as to the manner in which future changes to their legal relations were to be achieved. In those circumstances, there had been no variation of the licence agreement and the company was entitled to rely on its strict terms.