Rock Advertising Ltd v MWB Business Exchange Centres Ltd
| Jurisdiction | England & Wales |
| Judge | Lord Sumption,Lady Hale,Lord Wilson,Lord Lloyd-Jones,Lord Briggs |
| Judgment Date | 16 May 2018 |
| Neutral Citation | [2018] UKSC 24 |
| Date | 16 May 2018 |
| Court | Supreme Court |
[2018] UKSC 24
Lady Hale, President
Lord Wilson
Lord Sumption
Lord Lloyd-Jones
Lord Briggs
Appellant
Clifford Darton
Sally Anne Blackmore
(Instructed by Edward Harte LLP)
Respondent
Michael Paget
Zoë Whittington
(Instructed by DH Law Ltd)
Heard on 1 February 2018
( with whom Lady Hale, Lord Wilson and Lord Lloyd-Jones agree)
Modern litigation rarely raises truly fundamental issues in the law of contract. This appeal is exceptional. It raises two of them. The first is whether a contractual term prescribing that an agreement may not be amended save in writing signed on behalf of the parties (commonly called a “No Oral Modification” clause) is legally effective. The second is whether an agreement whose sole effect is to vary a contract to pay money by substituting an obligation to pay less money or the same money later, is supported by consideration.
MWB Business Exchange Centres Ltd operates serviced offices in central London. On 12 August 2011, Rock Advertising Ltd entered into a contractual licence with MWB to occupy office space at Marble Arch Tower in Bryanston Street, London W1, for a fixed term of 12 months commencing on 1 November 2011. The licence fee was £3,500 per month for the first three months and £4,333.34 per month for the rest of the term. Clause 7.6 of the agreement provided:
“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.”
On 27 February 2012, Rock Advertising had accumulated arrears of licence fees amounting to more than £12,000. Mr Idehen, the company's sole director, proposed a revised schedule of payments to Natasha Evans, a credit controller employed by MWB. The effect of the revised schedule was to defer part of the February and March payments, and to spread the accumulated arrears over the remainder of the licence term. Account being taken of the implicit interest cost of the deferral, Rock's covenant to pay would be worth slightly less to MWB under Mr Idehen's proposal. There was then a discussion between them on the telephone, in the course of which Mr Idehen contended that Ms Evans had agreed to vary the licence agreement in accordance with the revised schedule. Ms Evans denied this. She proceeded to treat the revised schedule as a proposal in a continuing negotiation, and took it to her boss. He rejected it. On 30 March 2012, MWB locked Rock Advertising out of the premises on account of its failure to pay the arrears, and terminated the licence with effect from 4 May 2012. They then sued for the arrears. Rock Advertising counterclaimed damages for wrongful exclusion from the premises. The fate of the counterclaim, and therefore of the claim, turned on whether the variation agreement was effective in law.
The case came before Judge Moloney QC, in the Central London County Court, who decided it in favour of MWB. He found that an oral agreement had been made with Ms Evans to vary the licence in accordance with the revised schedule, and that she had ostensible authority to make such an agreement. He held (i) that the variation agreement was supported by consideration, because it brought practical advantages to MWB, in that the prospect of being paid eventually was enhanced; but (ii) that the variation was ineffective because it was not recorded in writing signed on behalf of both parties, as required by clause 7.6. MWB were therefore entitled to claim the arrears without regard to it.
The Court of Appeal (Arden, Kitchin and McCombe LJJ) overturned him: [2017] QB 604. They agreed that the variation was supported by consideration, but they considered that the oral agreement to revise the schedule of payments also amounted to an agreement to dispense with clause 7.6. It followed that MWB were bound by the variation and were not entitled to claim the arrears at the time when they did.
It is convenient to start with the question on which the courts below disagreed, namely the legal effect of clause 7.6.
At common law there are no formal requirements for the validity of a simple contract. The only exception was the rule that a corporation could bind itself only under seal, and what remained of that rule was abolished by the Corporate Bodies Contracts Act 1960. The other exceptions are all statutory, and none of them applies to the variation in issue here. The reasons which are almost invariably given for treating No Oral Modification clauses as ineffective are (i) that a variation of an existing contract is itself a contract; (ii) that precisely because the common law imposes no requirements of form on the making of contracts, the parties may agree informally to dispense with an existing clause which imposes requirements of form; and (iii) they must be taken to have intended to do this by the mere act of agreeing a variation informally when the principal agreement required writing. All of these points were made by Cardozo J in a well-known passage from his judgment in the New York Court of Appeals in Beatty v Guggenheim Exploration Co (1919) 225 NY 380, 387–388:
“Those who make a contract, may unmake it. The clause which forbids a change, may be changed like any other. The prohibition of oral waiver, may itself be waived. ‘Every such agreement is ended by the new one which contradicts it’ ( 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 …”
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.
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.
In my opinion the law should and does give effect to a contractual provision requiring specified formalities to be observed for a variation.
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.
The advantages of the common law's flexibility about formal validity are that it enables agreements to be made quickly, informally and without...
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