Opinion – The Supreme Court’s decision in Rock Advertising is a mixed blessing

The Supreme Court has turned English law on its head and ruled that “no oral modification” (or “NOM”) clauses are valid and enforceable.

Under English law, it is possible to enter into or amend a contract merely by spoken word or behaviour, provided the contract is supported by consideration, acceptance and intention.

A NOM clause is a provision in a contract that seeks to prevent this by requiring any variations to be in writing. Although there are very good reasons to include a NOM clause in a contract, and they do seek to serve a legitimate purpose, the courts have historically refused to uphold them.

That has now changed. In Rock Advertising Limited v MWB Business Exchange Centres Limited, the Supreme Court found that an oral agreement to vary the payment schedule under a licence was ineffective, because the licence required any variations to be set out in writing.

On its face, this seems perfectly reasonable, if not eminently sensible. Why should two sophisticated, commercial parties not be permitted to decide the terms of their contractual relationship, including how they might change it in the future? This was the thrust of the leading judgment from Lord Sumption.

But this gives rise to two substantive issues.

Sovereignty and all that…

First, there is an undercurrent in English law that parties holding ultimate decision-making responsibility cannot bind themselves in the future. In the realm of constitutional law, Parliament is sovereign and cannot bind itself against future decisions, even by its own Acts. This has been thrown into sharp relief recently in the context of Brexit.

Likewise, fiduciaries are generally free to make and unmake decisions as they deem fit. Directors of companies and trustees of trusts are generally precluded from fettering their own discretion and, to the extent they do, are generally able to renege on their decision if it is commensurate with their duties.

Perhaps the most appropriate analogy is with shareholders of a company. Major decisions affecting a company need to be taken by the shareholders collectively, often by a bare majority and sometimes by a supermajority, either in general meeting or using a formal (and rather prescriptive) written resolution.

But the shareholders of a company can also make these decisions informally, in writing but also orally or by their conduct, provided they all know what they are doing, they do so unanimously and no third parties are affected. The formal requirements for a meeting or a written decision can be by-passed.

This principle of English law recognises that people who make decisions should enjoy a degree of autonomy. In the case of a contract, this means the contract parties. Lord Briggs (who gave a partially dissenting judgment) recognised this when he said: “But if they … [all] agree, in some form recognised by the law, that they should no longer be bound, why should their previous agreement … stand in the way?”

A question of equity

The second problem is one of potential injustice. There will be occasions where contract parties, acting in good faith and with their eyes very much wide open, agree to vary a contract without setting the variation out in writing. They may act on that variation for months or years without realising that the basis for their new relationship is entirely invalid and open to challenge because a NOM clause was buried deep within their original contract.

Lord Sumption recognised this, noting that parties who agree an oral variation in spite of a NOM clause must either have “overlooked” the NOM clause or ignored it and “[courted] invalidity with their eyes open”. In either case, their oral variation, however considered and intentional, will be ineffective.

He then softens a little and proposes a solution: the doctrine of “estoppel”. (He is presumably talking here about promissory estoppel or estoppel by conduct.) This doctrine would prevent (or “estop”) a party from denying the variation to their contract (even though, strictly speaking, the variation has no legal effect) if the other party has relied on the variation and changed its position.

The problem is that estoppel has clear limits. It is usually an equitable remedy, and equitable remedies are fragile. Estoppel, in particular, depends heavily on demonstrating reliance and detriment, and ultimately is effective only if the court feels moved to avoid some unconscionable behaviour or outcome.

Promissory estoppel is particularly limited. Lawyers learn that promissory estoppel is a “shield, not a sword”. If a party acts genuinely on the basis of an unwritten variation, it may be able to defend itself against a claim that it did not abide by the original (unvaried) contract, but it may find it harder to actively enforce the variation against its counterparty.

It is also usually only retrospective. It will allow a party that relies on an unwritten variation to avoid liability for not performing in accordance with the original contract. But once estoppel has been raised, it is arguably open to the other party to insist on reverting to the strict letter of the contract. That could be problematic if either or both of them have modified their commercial or logistic arrangements to accommodate the variation.

No modification?

It is clearly a good thing, and important, for parties to be able to agree a specific and exhaustive framework for their contractual relationship, including for making any changes to it.

However, to hold contract parties to a prescriptive formula, even where they choose willingly and clearly to depart from it, is a significant development from case law which, in time, may produce striking and odd results.