Rock Advertising Limited v MWB Business Exchange Centres Limited: the Supreme Court changes the law on informal contract variations
Back in 2001, a company agreed to sell electric motors to a company that manufactured power steering for cars. The buyer was not supposed to buy motors from anyone other than the seller but, after about 4 years, started doing so. The parties fell out, went to court, and HHJ Mackie KC ruled that the buyer was in breach of contract.[1]
The buyer, who was ordered to pay approximately Euro 10m, was not impressed, and (in April 2016) appealed the decision.[2] It succeeded on appeal.
Most of the Court of Appeal’s judgment is uneventful (for present purposes, at least), but 16 paragraphs were given over to an (obiter) discussion of whether a contract could be varied orally or by conduct if it contained an express clause that required amendments to be in writing. The question had arisen in the Court of Appeal many years before, and had given rise to two conflicting decisions,[3] the latter of which appeared to have been decided without reference to the former, such that clarity was required. The Court of Appeal held that:
“…in principle the fact that the parties’ contract contains [a clause requiring variations to be in writing] does not prevent them from later making a new contract varying the contract by an oral agreement or by conduct”[4]
The Court’s reasoning is neatly summarised in the following section of Moore-Bick LJ’s judgement:
“The governing principle, in my view, is that of party autonomy. The principle of freedom of contract entitles parties to agree whatever terms they choose, subject to certain limits imposed by public policy. The parties are therefore free to include terms regulating the manner in which the contract can be varied, but just as they can create obligations at will, so also can they discharge or vary them, at any rate where to do so would not affect the rights of third parties”[5]
Later in 2016, a new case came before the Court of Appeal: MWB Business Exchange Ltd v Rock Advertising Ltd.[6] Rock occupied some office space in London, under a licence granted by MWB which contained a clause stating – just like in the electric motor supply contract – that variations had to be in writing and signed by both parties.
Rock fell behind in the rent, but (orally) agreed a payment plan with someone at MWB. Someone more senior at MWB was unhappy with this, kicked Rock out, changed the locks, and sued for the rent arrears. The case turned on whether the oral agreement to the payment plan varied the licence, or whether this was not possible due to the clause stating that variations had to be in writing and signed.
Following its earlier 2016 decision in the electric motors appeal,[7] the Court of Appeal found that “the most powerful consideration is that of party autonomy“,[8] and that this included having the autonomy to decide to orally vary the licence notwithstanding that they had originally agreed not to do so.
Permission to appeal was granted by the Supreme Court on 31 January 2017, the appeal was heard on 1 February 2018, and judgment was given on 16 May 2018.[9]
The Supreme Court held that the licence was not varied by the oral agreement reached between Rock and MWB, since it did not comply with the terms of the licence.
In his speech, Lord Sumption referred to the Court of Appeal’s view that “the most powerful consideration is that of party autonomy“,[10] and called it “a fallacy“:[11]
“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”[12]
Lord Sumption went on to note that restricting variations to a prescribed form had numerous legitimate commercial justifications:
“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.” [13]
English law has, therefore, now changed. Where once it was possible for a party to establish a variation of a contract notwithstanding the inclusion in that contract of prerequisite formalities that had not been complied with, that is no longer possible.
Employers and contractors up and down the country might breathe a deep sigh of relief. The nature of construction projects is such that, all too often, informal instructions are given and agreements reached without records being created or kept, and without a second thought for what the contract might require. Going forward, providing that the contract is clear, the Court is likely to require that any agreed formalities are complied with before it will find that the contract has been varied. Most of the common standard form contracts already expressly seek to prohibit informal variations (examples include NEC4 clause 12.3, JCT SBC/Q 2016 clause 3.12, and FIDIC Red Book 2017 GC1.2(c)) and these are likely to be given effect going forward.
However, that sigh should not be too deep. The Supreme Court’s decision:
Cuts both ways. Whilst it protects parties from the undesirable consequences of unintended, mistaken, or surreptitious informal variation, it might also mean that any desirable aspects of an informal variation are not available. Parties must pay close attention to any formalities set out in the contract, and take care to ensure that they are complied with;
is not a panacea. It does not prevent a disgruntled party contending that:
- an estoppel has arisen that prevents reliance on the clause containing the formalities. Estoppel was recognised by the Supreme Court as something capable of defeating a party that sought to rely on a clause requiring certain formalities;[14] or
- a collateral contract exists between the parties, such that the question is not whether a contract has been informally varied, but whether a separate one has been informally created (the latter’s creation being unaffected by the clause in the former).
By Daniel Shaw
- [1] [2014] EWHC 3718 (Comm)), HHJ Mackie KC
- [2] Globe Motors Inc v TRW Lucasvarity Electric Steering Ltd [2016] EWCA Civ 396, Moore-Bick, Beatson, Underhill LJJ
- [3] United Bank Ltd v Asif, unreported, 11 February 2000; World Online Telecom Ltd v I-Way Ltd. [2002] EWCA Civ. 413
- [4] para 100, per Beatson LJ
- [5] para 110, per Moore-Bick LJ
- [6] [2016] EWCA Civ 553
- [7] para 34 per Kitchen LJ
- [8] para 34 per Kitchen LJ
- [9] Rock Advertising Limited v MWB Business Exchange Centres Limited [2018] UKSC 24
- [10] para 34 per Kitchen LJ
- [11] para 11 per Lord Sumption
- [12] para 11 per Lord Sumption
- [13] para 12 per Lord Sumption
- [14] para 16 per Lord Sumption
