Key Points
- No oral variation/modification clauses are prima facie enforceable, outside of the limited exception where promissory estoppel applies.
- The Supreme Court declined to extend concept of practical benefit as good consideration established in Williams v Roffey to promises to accept less – but left open the possibility that it will reconsider Foakes v Beer and re Selectmove
Facts
- MWB (C), the licensor, and Rock Advertising (D), the licensee, entered into a licensing agreement for the use of business premises with no oral variation clause (which excludes variation of contract terms by oral agreement)
- After D ran into financial trouble and started missing payments, C agreed over phone to allow payment of arrears in instalments with a reduction in initial payments, backloaded to later instalments
- C later claimed that D breached the original contract by making insufficient payment, removed D from premises and initiated proceedings to claim arrears.
- Judge Moloney allowed C’s clam, holding that D was in breach and that the oral agreement made between C and D over the phone was not enforceable.
Held (Court of Appeal)
- D’s appeal was allowed; the oral agreement was valid.
Kitchin LJ
- “[The trial judge] was clearly of the view that the oral variation agreement would have a number of beneficial consequences for [the claimant]:
- First, [the claimant] would recover some of the arrears immediately and would have some hope of recovering them all in due course.
- But secondly and importantly, [the defendant] would remain a licensee and continue to occupy the property with the result that it would not be left standing empty for some time at further loss to [the claimant].” [47]
- “There was, so it seems to me, a commercial advantage to both [the claimant] and [the defendant] in reaching an agreement if that could be achieved… Accordingly this is not a case in which the only benefits conferred on [the claimant] by the oral variation agreement were benefits of a kind contemplated by Lord Blackburn in Foakes v Beer and by this court in Re Selectmove.” [48]
- “This is therefore a case where, as in Williams v Roffey… [the agreement] conferred a practical benefit on [the claimant] which amounted to good consideration, so rendering the oral variation agreement enforceable.”
Held (Supreme Court)
- Appeal allowed; oral agreement was not binding pursuant to the no oral variation clause, which was enforceable.
Lord Sumption
No oral variation clause is generally enforceable
Commercial reasons
His Lordship thought that there are valid commercial reasons for allowing its enforcement: “There are at least three reasons for including such clauses.
- The first is that it prevents attempts to undermine written agreements by informal means, a possibility which is open to abuse, for example in raising defences to summary judgment.
- Secondly, in circumstances where oral discussions can easily give rise to misunderstandings and crossed purposes, it avoids disputes not just about whether a variation was intended but also about its exact terms.
- Thirdly, a measure of formality in recording variations makes it easier for corporations to police internal rules restricting the authority to agree them. These are all legitimate commercial reasons for agreeing a clause like clause 7.6. I make these points because the 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.” [12]
Conceptual reasons
His Lordship disproved of the conceptual reasons advanced by the defendant’s counsel and cited by the Court of Appeal:
- “The reasons advanced in the case law for disregarding them are entirely conceptual. The argument is that it is conceptually impossible for the parties to agree not to vary their contract by word of mouth because any such agreement would automatically be destroyed upon their doing so. The difficulty about this is that if it is conceptually impossible, then it cannot be done, short of an overriding rule of law (presumably statutory) requiring writing as a condition of formal validity. Yet it is plain that it can.” [13]
- The Vienna Convention on Contracts for the International Sale of Goods (1980) and article 1.2 of the UNIDROIT Principles of International Commercial Contracts, 4th ed (2016), which permit the enforcement of no oral variation clauses, “suggest that there is no conceptual inconsistency between a general rule allowing contracts to be made informally and a specific rule that effect will be given to a contract requiring writing for a variation.” [13]
- “The same point may be made in a purely English context by reference to the treatment of entire agreement clauses, which give rise to very similar issues.” [14]
Exceptions where the no oral variation clause may not be binding
His Lordship stated promissory estoppel might apply to defeat the injustice of enforcing the no oral variation clause on a party who relied on a oral promise.
- “The enforcement of No Oral Modification clauses carries with it the risk that a party may act on the contract as varied, for example by performing it, and then find itself unable to enforce it.” [16]
- “In England, the safeguard against injustice lies in the various doctrines of estoppel. This is not the place to explore the circumstances in which a person can be estopped from relying on a contractual provision laying down conditions for the formal validity of a variation. The courts below rightly held that the minimal steps taken by Rock Advertising were not enough to support any estoppel defences. I would merely point out that the scope of estoppel cannot be so broad as to destroy the whole advantage of certainty for which the parties stipulated when they agreed upon terms including the No Oral Modification clause. At the very least, (i) there would have to be some words or conduct unequivocally representing that the variation was valid notwithstanding its informality; and (ii) something more would be required for this purpose than the informal promise itself.” [16]
No consideration (in obiter)
- It was not necessary to consider the issue of consideration as the no oral variation clause was held to be binding. His Lordship recognised that C had obtained a practical benefit in this case. He thought that the distinction between Williams v Roffey and Foakes v Beer was “somewhat forced” and thus Foakes v Beer will have to be re-examined to decide on whether practical benefit can be good consideration. Such re-examination would require a larger panel where the decision would be more than obiter dictum: [18]
Lord Briggs
A more “cautious” approach to oral variation clauses
His Lordship differed with the majority judgment of Lord Sumption. While he agreed on the outcome, he thought that no oral variation clauses may be excluded expressly or by necessary implication through a subsequent oral agreement.
- “The critical questions for present purposes are, first: whether the parties can agree to remove a NOM clause from their bargain orally and, second: whether, if so, such an agreement will be implied where they agree orally upon a variation of the substance of their relationship (which the NOM clause would require to be in writing) without saying anything at all about the NOM clause. Must they be taken so to have agreed by the very fact that they have made the substantive variation orally? Lord Sumption would answer the first question in the negative, so that, for him, the second question would not arise. For the reasons which follow, I would answer the first question in the affirmative, but not (generally at least) the second.” [24]
He drew an analogy to “subject to contract” clauses, and that courts should treat no oral variation clauses similarly:
- “Where parties agree to negotiate (or declare that they are negotiating) under the subject to contract umbrella and, at the end of those negotiations, reach consensus ad idem supported by consideration sufficient (but for the umbrella) to give rise to a contract, no binding obligations thereby ensue unless or until they have made a formal written contract, or expressly agreed to dispense with that umbrella. Its abandonment will not be implied merely because they have reached full agreement, unless such an implication was necessary.” [29]
- “In my view this more cautious recognition of the effect of a NOM clause, namely that it continues to bind until the parties have expressly (or by strictly necessary implication) agreed to do away with it, would give the parties most of the commercial benefits of certainty and the avoidance of abusive litigation about alleged oral variation for which its proponents contend. It would certainly do so in the present case.“: [31]
Comparison to estoppel
In the end there would seem to be not too much substantive difference in outcome under his Lordship’s approach as Lord Sumption’s, as he argues that such situations should give rise to an estoppel would arise in any case. (Although it is to be noted that estoppel would require reliance).
- “It would probably leave only those cases where the subject matter of the variation was to be, and was, immediately implemented, where estoppel and release of the NOM clause by necessary implication are likely to go hand in hand. While it might in theory also leave open the case where it is alleged that the parties did have the NOM clause in mind, and then agreed to do away with it orally, that seems to me to be so unlikely a story that a judge would usually have little difficulty in treating it as incredible (if denied), and therefore as presenting no obstacle to summary judgment on the contract in its unvaried form.” [31]
Conceptual reasons
- This difference is based on his conceptual understanding of intention: the conceptual problem raised by Ds’ counsel is resolved by Lord Sumption’s approach:
- “What is to my mind conceptually impossible is for the parties to a contract to impose upon themselves such a scheme, but not to be free, by unanimous further agreement, to vary or abandon it by any method, whether writing, spoken words or conduct, permitted by the general law.” [26]
Commentary
Arguments for overruling Foakes v Beer
- The distinction drawn between promises to accept less and promises to pay more is unprincipled
- As Mindy Chen-Wishart points out, both promises decrease the relative value of the promisee’s obligation to the benefit he receives
- Problem of opportunism can be prevented by the doctrine of duress
- Although unscrupulous persons might threaten to breach their contracts so as to extract more favourable promises, but as was pointed out by Glidewell LJ in Williams v Roffey, the doctrine of economic duress protects the promisor
- Giving effect to the intention of the parties
- If the purpose of consideration is to ensure that contracts are seriously entered into, then the practical benefit of obtaining a higher chance of payment from financially distressed debtors should evidence serious intention
- As Russell LJ pointed out in Williams v Roffey, courts must be more ready to find the existence of consideration to reflect the intention of parties to contract
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