No oral modification clauses – the implications

“No oral modification” clauses (hereafter, NOM clauses) are oftentimes employed in commercial contracts to prevent parties from varying terms of a contract via means which are other than the agreed upon form, e.g. varying the contract in writing and with an accompanying signature.

In a recent decision, the Supreme Court of the United Kingdom has held that an attempt to vary a term of a contract orally was invalid due to the existence of a NOM clause within the contract, thereby upholding the validity of NOM clauses overall. Lord Sumption, the Supreme Court Justice handing down the lead judgment, unequivocally found that “the law should and does give effect to a contractual provision requiring specified formalities to be observed for a variation.” What, however, may be the reasons for this judgment and, perhaps more importantly, what may be the judgments implication?

Reasons for the judgment

The Supreme Court judgment, in this case, deals with the issue of whether parties wishing to modify a contract clause in a certain way are allowed to do so after already having agreed upon a clause which prohibits that certain way of modifying a clause; the fundamental question revolves around party autonomy. In the past, it has not been rare for parties to a contract containing a NOM clause to override it on the premise that a variation of a contract clause “is itself a contract [...] and that the parties must have intended to dispense with any requirements of form by the mere act of agreeing a variation informally when the principal agreement required writing.”

Lord Sumption, however, rejected this presumption, instead arguing that variations made contrary to a pre-existing NOM clause are invalid. Writing in support of NOM clauses, the Lord Justice argued NOM clauses prevent the undermining of contracts by informal means, prevent disputes over terms of informally varied contacts and simplify processes for larger corporations. Lord Sumption’s judgment further argued that where the parties orally varied a contract containing a NOM clause meant that the parties merely overlooked the NOM clause rather than meaning that the parties intended to do away with the clause.

In a concurring judgment, Lord Briggs suggested at the slightly different conclusion; A NOM clause could, in theory, be overridden if all parties to a contract entered into an agreement to do away with the NOM clause. Despite this, Lord Sumption’s forceful cementation of NOM clauses remains the leading judgment and the law.

What are the decision’s implications?

Following this judgment, the overall response from the legal world signalled a strong solidification of a previously unclear area of contract law. Parties’ certainty as to their rights in situations revolving around the workability of NOM clauses is now clear. The decision does not, however, provide full certainty as “[a] party that has acted in reliance on an oral variation that is ineffective in the face of a NOM clause may be able take some comfort in the continued availability of equitable remedies, but such remedies are an unattractive – and limited – alternative.”

The implications of this decision are that parties ought to pay particular attention to NOM clauses clearly detailing the agreed-upon procedures of modifying commercial contract clauses. All variations which a party may want to apply to a contract at one point in the future must be included in the NOM clause. After the contract has been agreed upon, the parties who comply with NOM clauses strictly will risk the least. The Supreme Court judgment may just introduce an era of parties strongly binding themselves to future conduct via NOM clauses, for better or for worse.

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