A new and momentous Supreme Court ruling makes ‘NOM’ clauses banning oral modification far more effective
The most momentous legal judgment to hit construction law in recent times is Rock Advertising Ltd vs MWB Business Exchange Centres Ltd, handed down by the Supreme Court on 16 May 2018. This case looked at the validity of so-called “no oral modification” (NOM) clauses – clauses commonly found in construction contracts and consultants’ appointments stating that any contractual amendment to the terms and conditions must be in writing to be effective. The Supreme Court recognised the academic, jurisprudential and practical importance and interest in this case stating: “Modern litigation rarely raises truly fundamental issues in the law of contract. This appeal is exceptional.” Readers will have their subjective tangible experience of oral discussions where certain terms and conditions in a construction contract have been to some extent modified or varied – but are such oral agreements reached in site meetings now good enough to circumvent a “no oral modification” clause?
The Supreme Court decided that a ‘NOM’ clause was absolutely effective to prevent the parties agreeing a subsequent variation save in accordance with its express requirements
This case concerned a lease of serviced offices by Rock from MWB. A revised schedule of payments was agreed orally on the phone between MWB’s credit controller and Rock’s sole director which, in financial terms, was worth slightly less to MWB. The lease contained a clause requiring all variations to be in writing and signed before they took effect, as follows: “This licence sets out all of the terms as agreed between MWB and licensee. No other representations or terms shall apply or form part of this licence. All variations to this licence must be agreed, set out in writing and signed on behalf of both parties before they take effect.”
At first instance, the judge held that although an oral variation (supported by consideration) had been agreed, it was ineffective because of the NOM clause, such that MWB could claim arrears without regard to the orally agreed variation. The Court of Appeal reversed the judge’s decision, in keeping with the recent trend towards such clauses having limited or no effect. This was on the basis that it was considered that NOM clauses could be overridden by oral agreement due to so-called party autonomy. Put another way, it was thought that parties with freedom of contract cannot bind themselves as to their future agreements. English courts followed Judge Cardozo’s well-known 1919 judgment in the New York Court of Appeals in Beatty vs Guggenheim Exploration Co, where he said: “Those who make a contract, may unmake it.”
The recent trend towards such clauses having limited or no effect […] has now all changed […] ‘nom’ clauses will now have a real, decisive impact in construction law
This has now all changed with Rock vs MWB. The Supreme Court decided that a NOM clause was absolutely effective to prevent the parties agreeing a subsequent variation save in accordance with its express requirements – subject only to a party being able to establish an estoppel specifically preventing reliance upon the precise NOM clause. Lord Sumption gave the judgment, which had the support of the majority in the Supreme Court. He drew attention to the commercial advantages of NOM clauses, such as certainty and preventing attempts to undermine agreements by informal means, which may be open to abuse. The construction industry will now need to look at the precise terms of the NOM in each contract or appointment to ensure that modifications or amendments of the terms are codified in accordance with the NOM – otherwise the written words in the contract continue to be effective, bind and regulate each party’s rights and obligations.
Readers will note that the only lifeline may be to argue that the other party cannot rely on the particular clause – in other words argue that there has been a waiver and estoppel. While the strict approach of Lord Sumption may sometimes be mitigated by the availability of estoppel, that may be a blunt tool (as the failure of the estoppel argument in the Rock Adverting shows). For example, it will not be effective where the employer resiles from the oral agreement before the contractor has any opportunity to rely on it, and where estoppel does operate, in some cases it could prove only temporary in effect.
Lord Sumption also appears to have limited the scope for estoppel to mitigate this new approach to NOM clauses, by saying that:
- there would at the very least have to be some words or conduct unequivocally representing that the variation was valid notwithstanding its informality, and
- something more would be required for this purpose than the informal promise itself.
Academics are already considering whether the minority judgement in the Supreme Court was better. It does not matter in practice – “no oral modification” clauses will now have a real, decisive impact in construction law.
Hamish Lal is a partner in Akin Gump Strauss Hauer & Feld