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Certainty on Non Oral Modification Clauses
In the recent decision of Rock Advertising Limited v MWB Business Exchange Centres Limited , the Supreme Court unanimously upheld the effectiveness of a “No Oral Modification” clause (“NOM”), holding that any oral agreement or variation of a contract is invalid where the terms of the NOM are not strictly adhered to.
Rock Advertising and MWB entered into a contract which gave Rock Advertising a licence to occupy serviced office space in London. The contract included a NOM clause which provided that all variations to the licence must be agreed, set out in writing and signed on behalf of both parties before they took effect.
The Respondent argued that the parties had agreed orally to vary the licence agreement with a revised schedule of payments, and a dispute arose as to whether the oral variation was effective in law. The County Court found that the oral variation did not satisfy the formal requirements of the NOM clause. The Court of Appeal reversed this decision, holding that the oral variation amounted to an agreement to dispense with the NOM clause. The Appellant brought the case to the Supreme Court.
Supreme Court Decision
The main issues before the Court was whether the contractual term precluding amendment of an agreement other than in writing had legal effect. The majority’s conclusion was that “the law should and does give effect to a contractual provision requiring specified formalities to be observed for a variation”.
It was noted by the Court that NOM clauses are common in business agreements and are recognized as effective in many legal codes around the world for three reasons:
- they prevent attempts, including abusive attempts, to undermine written agreements by informal means;
- they avoid disputes not just about whether a variation was intended but also about its exact terms; and
- they make it easier for corporations to police their own internal rules restricting the authority to agree variations.
The Court held:
“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”.
The case’s outcome is a fair response to what is litigation around “he said/she agreed”.
It is our view that the courts in New Zealand are now less likely to find a lawful variation (whether alleged to have been effected orally or by conduct) where the requirements of the NOM clause has not been followed strictly.
The onus is now even more so on the parties to a contract or agreement to record any variation in strict adherence to the NOM clause which gives certainty and reduces litigation based on opportunism.