Case alert - "NOM" clauses given teeth

A common problem, when enforcing a contract, is that the defendant says the obligations were varied "orally".  If nothing more, this can be an effective strategy to delay (preventing summary judgment). A recent Supreme Court (UK) decision offers more hope that courts will be robust in examining those allegations, if the contract has a "no oral variation" or "no oral modification" clause.

Rock Advertising Ltd v MWB Business Exchange Centres Ltd [2018] UKSC 24, [2019] AC 119, [2018] 2 WLR 1603, the Supreme Court (UK) gave effect to a "no oral modification" clause, so an oral agreement to vary was held to be inoperative.

Reasons why NOM clauses traditionally ineffective

Lord Sumption delivered the majority judgment.  He started by noting the reasons why NOM clauses have often been treated as ineffective [7]:

  • a variation of a contract is itself a contract, therefore not generally subject to any formalities
  • accordingly the parties may agree informally to dispense with a clause imposing form requirements
  • they must be taken to have intended to do this by the mere act of agreeing to a variation informally.

More robust approach for business reasons

Rejecting that approach, Lord Sumption considered that concepts of party autonomy and business needs supported enforcing a NOM clause [12] (subject only to estoppel to prevent injustice):

  • a NOM clause prevents attempts to undermine the contract by informal means
  • it avoids the misunderstandings that easily arise with oral discussions
  • a measure of formality makes it easier for corporations to police in terms of internal rules.

Estoppel to prevent injustice

Normally if parties agree a variation and fail to comply with formality requirements, the inference is they simply overlooked that requirement.  If they had it in mind but chose not to comply, they were "courting invalidity with their eyes open" [15]. Lord Sumption's view was that neither of these circumstances would found an estoppel. He described the following minimum requirements for an estoppel [16]:

  • some words of conduct unequivocally representing that the variation was valid notwithstanding the informality
  • this would require something more than the informal promise itself.

Lord Briggs' further "necessary implication" exception?

Lord Briggs separately reached the same outcome, but on different and slightly narrower grounds.  He agreed that NOM clauses are sensible for business reasons. However, his view was that the NOM clause could also be dispensed with by "necessary implication" [30] and [31].  This could arise, for example, in situations of urgent performance where there would be no time to comply with formality requirements.

Conclusion

New Zealand courts have given effect to NOM clauses (Air New Zealand Ltd v Nippon Credit Bank Ltd [1997] 1 NZLR 2018 (CA); Stevens v ASB Bank [20120 NZCA 611).  Rock Advertising should nevertheless assist to ensure more consistency in approach, and that exceptions are limited to situations of unconscionable behaviour or injustice.