The Effectiveness of No Oral Modification Clauses in Contracts: A Legal Perspective, Slides of Business

Download The Effectiveness of No Oral Modification Clauses in Contracts: A Legal Perspective and more Slides Business in PDF only on Docsity! Easter Term [2018] UKSC 24 On appeal from: [2016] EWCA Civ 553 JUDGMENT Rock Advertising Limited (Respondent) v MWB Business Exchange Centres Limited (Appellant) before Lady Hale, President Lord Wilson Lord Sumption Lord Lloyd-Jones Lord Briggs JUDGMENT GIVEN ON 16 May 2018 Heard on 1 February 2018 Appellant Respondent Clifford Darton Michael Paget Sally Anne Blackmore Zoë Whittington (Instructed by Edward Harte LLP) (Instructed by DH Law Ltd) Page 4 (Westchester F Ins Co v Earle 33 Mich 143, 153). What is excluded by one act, is restored by another. You may put it out by the door; it is back through the window. Whenever two men contract, no limitation self-imposed can destroy their power to contract again ...” 8. Part 2 of the United States Uniform Commercial Code introduced a general requirement of writing for contracts of sale above a specified value, coupled with a conditional provision giving effect to No Oral Modification clauses: see sections 2- 201, 2-209. But before that there was long-standing authority in support of the rule stated by Cardozo J in New York and other jurisdictions of the United States. It has also been applied in Australia: Liebe v Molloy (1906) 4 CLR 347 (High Court); Commonwealth v Crothall Hospital Services (Aust) Ltd (1981) 54 FLR 439, 447 et seq; GEC Marconi Systems Pty Ltd v BHP Information Technology Pty Ltd (2003) 128 FCR 1. And in Canada: Shelanu Inc v Print Three Franchising Corpn (2003) 226 DLR (4th) 577, para 54 per Weiler JA, citing Colautti Construction Ltd v City of Ottawa (1984) 9 DLR (4th) 265 (CA) per Cory JA. A corresponding principle is applied in Germany: A Müller, Protecting the Integrity of a Written Agreement (2013), 300-305. 9. The English cases are more recent, and more equivocal. In United Bank Ltd v Asif (CA, unreported, 11 Feb 2000), Sedley LJ refused leave to appeal from a summary judgment on the ground that it was “incontestably right” that in the face of a No Oral Modification clause “no oral variation of the written terms could have any legal effect.” The Court of Appeal at an inter partes hearing cited his view and endorsed it. Two years later, in World Online Telecom Ltd v I-Way Ltd [2002] EWCA Civ 413, Sedley LJ’s view had softened. He held (para 12) that it was a sufficient reason for refusing summary judgment that “the law on the topic is not settled.” In Energy Venture Partners Ltd v Malabu Oil and Gas Ltd [2013] EWHC 2118 (Comm), para 273 Gloster LJ declined to decide the point but “incline[d] to the view” that such clauses were ineffective. The same view was expressed, more firmly, but obiter, by Beatson LJ in Globe Motors Inc v TRW Lucas Varity Electric Steering Ltd [2016] 1 CLC 712, paras 101-107, with the support of Moore-Bick and Underhill LJJ. On the other side of this debate, there is a substantial body of recent academic writing in support of a rule which would give effect to No Oral Modification clauses according to their terms: see Jonathan Morgan, “Contracting for self-denial: on enforcing ‘No oral modification’ clauses” (2017) 76 CLJ 589; E McKendrick, “The legal effect of an Anti-oral Variation Clause”, (2017) 32 Journal of International Banking Law and Regulation, 439; Janet O’Sullivan, “Unconsidered Modifications” (2017) 133 LQR 191. 10. In my opinion the law should and does give effect to a contractual provision requiring specified formalities to be observed for a variation. Page 5 11. The starting point is that the effect of the rule applied by the Court of Appeal in the present case is to override the parties’ intentions. They cannot validly bind themselves as to the manner in which future changes in their legal relations are to be achieved, however clearly they express their intention to do so. In the Court of Appeal, Kitchin LJ observed that the most powerful consideration in favour of this view is “party autonomy”: para 34. I think that this is a fallacy. Party autonomy operates up to the point when the contract is made, but thereafter only to the extent that the contract allows. Nearly all contracts bind the parties to some course of action, and to that extent restrict their autonomy. The real offence against party autonomy is the suggestion that they cannot bind themselves as to the form of any variation, even if that is what they have agreed. There are many cases in which a particular form of agreement is prescribed by statute: contracts for the sale of land, certain regulated consumer contracts, and so on. There is no principled reason why the parties should not adopt the same principle by agreement. 12. The advantages of the common law’s flexibility about formal validity are that it enables agreements to be made quickly, informally and without the intervention of lawyers or legally drafted documents. Nevertheless, No Oral Modification clauses like clause 7.6 are very commonly included in written agreements. This suggests that the common law’s flexibility has been found a mixed blessing by businessmen and is not always welcome. There are at least three reasons for including such clauses. The first is that it prevents attempts to undermine written agreements by informal means, a possibility which is open to abuse, for example in raising defences to summary judgment. 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. These are all legitimate commercial reasons for agreeing a clause like clause 7.6. I make these points because the law of contract does not normally obstruct the legitimate intentions of businessmen, except for overriding reasons of public policy. Yet there is no mischief in No Oral Modification clauses, nor do they frustrate or contravene any policy of the law. 13. The reasons advanced in the case law for disregarding them are entirely conceptual. The argument is that it is conceptually impossible for the parties to agree not to vary their contract by word of mouth because any such agreement would automatically be destroyed upon their doing so. The difficulty about this is that if it is conceptually impossible, then it cannot be done, short of an overriding rule of law (presumably statutory) requiring writing as a condition of formal validity. Yet it is plain that it can. There are legal systems which have squared this particular circle. They impose no formal requirements for the validity of a commercial contract, and yet give effect to No Oral Modification clauses. The Vienna Convention on Contracts for the International Sale of Goods (1980) has been ratified by 89 states, not including the United Kingdom. It provides by article 11 that a contract of sale Page 6 “need not be concluded in or evidenced by writing and is not subject to any other requirement as to form.” Nonetheless, article 29(2) provides: “A contract in writing which contains a provision requiring any modification or termination by agreement to be in writing may not be otherwise modified or terminated by agreement. However, a party may be precluded by his conduct from asserting such a provision to the extent that the other party has relied on that conduct.” Similarly, article 1.2 of the UNIDROIT Principles of International Commercial Contracts, 4th ed (2016), provides that “nothing in these Principles requires a contract, statement or any other act to be made in or evidenced by a particular form.” Yet article 2.1.18 provides that “A contract in writing which contains a clause requiring any modification or termination by agreement to be in a particular form may not be otherwise modified or terminated. However, a party may be precluded by its conduct from asserting such a clause to the extent that the other party has reasonably acted in reliance on that conduct.” These widely used codes suggest that there is no conceptual inconsistency between a general rule allowing contracts to be made informally and a specific rule that effect will be given to a contract requiring writing for a variation. 14. The same point may be made in a purely English context by reference to the treatment of entire agreement clauses, which give rise to very similar issues. Entire agreement clauses generally provide that they “set out the entire agreement between the parties and supersede all proposals and prior agreements, arrangements and understandings between the parties.” An abbreviated form of the clause is contained in the first two sentences of clause 7.6 of the agreement in issue in this case. Such clauses are commonly coupled (as they are here) with No Oral Modification clauses addressing the position after the contract is made. Both are intended to achieve contractual certainty about the terms agreed, in the case of entire agreement clauses by nullifying prior collateral agreements relating to the same subject-matter. As Lightman J put it in Inntrepreneur Pub Co (GL) v East Crown Ltd [2000] 2 Lloyd’s Rep 611, para 7: “The purpose of an entire agreement clause is to preclude a party to a written agreement from threshing through the Page 9 relying on such a provision to the extent that the other party has relied (or reasonably relied) on that conduct. In some legal systems this result would follow from the concepts of contractual good faith or abuse of rights. In England, the safeguard against injustice lies in the various doctrines of estoppel. This is not the place to explore the circumstances in which a person can be estopped from relying on a contractual provision laying down conditions for the formal validity of a variation. The courts below rightly held that the minimal steps taken by Rock Advertising were not enough to support any estoppel defences. I would merely point out that the scope of estoppel cannot be so broad as to destroy the whole advantage of certainty for which the parties stipulated when they agreed upon terms including the No Oral Modification clause. At the very least, (i) there would have to be some words or conduct unequivocally representing that the variation was valid notwithstanding its informality; and (ii) something more would be required for this purpose than the informal promise itself: see Actionstrength Ltd v International Glass Engineering In Gl En SpA [2003] 2 AC 541, paras 9 (Lord Bingham), 51 (Lord Walker). 17. I conclude 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. 18. That makes it unnecessary to deal with consideration. It is also, I think, undesirable to do so. The issue is a difficult one. The only consideration which MWB can be said to have been given for accepting a less advantageous schedule of payments was (i) the prospect that the payments were more likely to be made if they were loaded onto the back end of the contract term, and (ii) the fact that MWB would be less likely to have the premises left vacant on its hands while it sought a new licensee. These were both expectations of practical value, but neither was a contractual entitlement. In Williams v Roffey Bros & Nicholls (Contractors) Ltd [1991] 1 QB 1, the Court of Appeal held that an expectation of commercial advantage was good consideration. The problem about this was that practical expectation of benefit was the very thing which the House of Lords held not to be adequate consideration in Foakes v Beer (1884) 9 App Cas 605: see in particular p 622 per Lord Blackburn. There are arguable points of distinction, although the arguments are somewhat forced. A differently constituted Court of Appeal made these points in In re Selectmove Ltd [1995] 1 WLR 474, and declined to follow Williams v Roffey. The reality is that any decision on this point is likely to involve a re-examination of the decision in Foakes v Beer. It is probably ripe for re- examination. But if it is to be overruled or its effect substantially modified, it should be before an enlarged panel of the court and in a case where the decision would be more than obiter dictum. 19. I would allow the present appeal and restore the order of Judge Moloney. Page 10 LORD BRIGGS: 20. I agree with Lord Sumption that this appeal should be allowed, on the ground that the “No Oral Modification” (“NOM”) provision in clause 7.6 of the Licence Agreement deprived the alleged oral agreement asserted by Rock Advertising of any binding force as a contractual variation. I also agree that, in those circumstances, it would not be desirable for this court to address the issue of consideration, for the reasons which he gives. I have however reached my conclusion about the NOM issue on different and rather narrower grounds than his, although I do not think that our differences in reasoning would have any significant consequences for the application of the common law, save perhaps on very unlikely facts. 21. The starting point, as Lord Sumption says, is that NOM clauses are a frequently encountered, sensible provision in business agreements, which are recognised as effective in many legal codes around the world, such that the common law should give effect to them if it can. I need say nothing more than he does about their advantages. 22. I also agree that the obstacle which has thus far stood in the way of their recognition in this and many other common law jurisdictions is mainly conceptual. Two (or more) persons may of course bind themselves contractually as to their future conduct, and that will prevail for as long as one of them desires that this regime should remain in place. But if they both (or all) agree, in some form recognised by the law, that they should no longer be bound, why should their previous agreement to the contrary stand in their way? While statute may, in the public interest, require certain formalities for the making of certain types of contract, the common law leaves the parties to choose their own, so long as the essential elements of offer, acceptance and consideration are observed. These matters are as applicable to the variation of an existing contract as they are to the making of a contract in the first place. 23. This basic concept, that parties to a contract have complete freedom by further agreement to “unbind” themselves as to their future conduct, is in principle applicable not merely to their substantive mutual obligations, but also to any procedural restraints upon which they may agree, including restraints as to how they may vary their existing contractual relationship. It is therefore fully applicable to the constraint upon their future conduct imposed by a NOM clause. No-one doubts that parties to a contract containing a NOM clause are at liberty thereafter to remove it from their bargain, temporarily or permanently, by a compliant written variation, following which it will not inhibit them from agreeing further variations purely orally. Page 11 24. The critical questions for present purposes are, first: whether the parties can agree to remove a NOM clause from their bargain orally and, second: whether, if so, such an agreement will be implied where they agree orally upon a variation of the substance of their relationship (which the NOM clause would require to be in writing) without saying anything at all about the NOM clause. Must they be taken so to have agreed by the very fact that they have made the substantive variation orally? Lord Sumption would answer the first question in the negative, so that, for him, the second question would not arise. For the reasons which follow, I would answer the first question in the affirmative, but not (generally at least) the second. The outcome on the present facts is the same. In this case the alleged oral agreement to vary the Licence said nothing whatsoever about the NOM clause (of which both Mr Idehen and Ms Evans were probably entirely unaware), and I would not treat it as having been done away with by necessary implication. The result is that their alleged agreement as to the terms of a variation had no immediately binding force, any more than an agreement made subject to contract. This will probably be the outcome on any comparable or likely fact-set since, leaving aside emergencies, once the parties focus on the obstacle presented by the NOM clause, they would almost certainly remove it by a simple written variation, or indeed make the whole of the substantive variation itself in writing. 25. I must start by explaining why I have not been persuaded by Lord Sumption’s analysis that I can surmount the conceptual problem that has thus far proved insuperable in most common law jurisdictions, as enunciated in the celebrated dictum of Cardozo J in Beatty v Guggenheim which Lord Sumption cites at para 7. His starting point is that to refuse to recognise the effect of a NOM clause is to override the parties’ intentions, so as to make it impossible for them validly to bind themselves as to the manner in which a change in their legal relations is to be achieved in the future. I respectfully disagree. For as long as either (or any) party to a contract containing a NOM clause wishes the NOM clause to remain in force, that party may so insist, and nothing less than a written variation of the substance will suffice to vary the rest of the contract (leaving aside estoppel). The NOM clause will remain in force until they both (or all) agree to do away with it. In particular it will deprive any oral terms for a variation of the substance of their obligations of any immediately binding force, unless and until they are reduced to writing, or the NOM clause is itself removed or suspended by agreement. That fully reflects the autonomy of parties to bind themselves as to their future conduct, while preserving their autonomy to agree to release themselves from that inhibition. 26. There are of course statutes which require particular formalities for the making of certain types of contract, but they are binding because they are imposed by the legislature as part of the law of the land, and may only be released by the legislature. Of course private parties may agree upon a scheme of local law by which they (and even their successors in title) are in future to be bound, as in the case of certain types of covenants affecting the use of land, but that scheme of local law