In a decision with important implications for businesses generally, the Supreme Court has ruled that a “No Oral Variation Clause” (a NOV Clause) was effective. It followed that where a party to a contract containing such a clause had orally agreed it would accept a lesser sum than it was entitled to be paid under the contract, it was not bound by that agreement. It was therefore entitled to sue for the outstanding balance.
In Rock Advertising Ltd v MWB Business Exchange Centres Ltd, MBW were in the business of providing serviced office accommodation. It granted Rock Advertising a licence to occupy offices for a year on its standard terms, including a NOV Clause stipulating that all variations to the agreement had to be agreed in writing and signed both parties. Rock Advertising soon got into financial difficulties and struggled to make the licence payments. The parties’ representatives agreed on a new payment plan over the phone which deferred part of the earlier payments but increased the amount of the later payments. However, Rock Advertising only paid the first instalment under the revised plan. MWB responded by locking Rock Advertising out of the premises, terminating the licence and suing for the arrears. Rock Advertising counterclaimed damages for wrongful exclusion from the premises.
The case raised two important issues.
- Firstly, there was an issue relating to consideration. The essence of a legally enforceable contract is that it is a two-sided bargain. Each party must give good consideration – i.e. each must agree to do, or not do, something. It has long been a rule – much criticised – that a party does not give good consideration if they simply agree to accept less than the amount they are already entitled to contractually.
- The second issue was the enforceability of the NOV Clause.
In the High Court, the Judge ruled in Rock Advertising’s favour on the first issue. In his view, there was a real benefit to MBW in Rock Advertising agreeing to make the revised payments and continuing to occupy the premises rather than having them left empty. However, he went on to rule that the variation was not enforceable due to the NOV Clause. The Court of Appeal allowed Rock Advertising’s appeal. Whilst the Court of Appeal agreed with the High Court Judge on the consideration issue, the Court ruled that it had been open to the parties to mutually agree to override the effect of the NOV Clause.
The Supreme Court allowed MBW’s appeal on the NOV Clause point, ruling that such a clause would normally be effective and binding. It may be different if the parties explicitly refer to the NOV Clause (but that will raise questions of proof which is exactly what a NOV Clause is designed to avoid) or where one party can show that he has relied on the variation to his detriment in some way. Generally speaking, it will only be possible to vary a contract containing a NOV Clause in accordance with the procedure set out in the Clause.
To the disappointment of many lawyers, the Supreme Court decided that it did not need to address the consideration issue.
People will disagree as to the merits of the Supreme Court’s decision. To an extent, it depends on where you are standing at any particular time. It is quite possible for a party who insists on a contract including a NOV Clause to be later caught out by its terms. On the positive side, the case makes it much less likely that a business will find itself bound by a variation to an important contract without the involvement of senior management,
However, the basic message of this case is clear. The variation of a contract is something that needs to be handled carefully, particularly where the contract contains a NOV Clause. As Rock Advertising found to its cost, there are real dangers in assuming that an informal variation to a contract will bind the parties.