Construction Update: Limits on Oral Amendments to Written Contracts – Developers Beware
08 June 2018
Post-contractual oral agreements to amend written contracts are common in the Irish construction industry. The recent judgment handed down by the UK Supreme Court in Rock Advertising Limited v MWB Business Exchange Centres Limited declining to give effect to these types of amendment, provides a timely reminder to parties of the risk arising from a failure to ensure that any amendments are agreed in accordance with the terms of the contracts.
The dispute, in this case, arose from a purported amendment to an existing licence agreement. The licensee, Rock Advertising Limited (Rock), was in arrears in paying its licence fees. Rock proposed a revised schedule of payments and deferred a portion of a payment due under the original terms of the licence. The licensor (MWB) denied Rock access to the premises, terminated the licence and sued Rock for the arrears. Rock counterclaimed for damages suffered from being barred from the premises. The license contained a clause stating “All variations to this Licence must be agreed, set out in writing and signed on behalf of both parties before they take effect”.
The judge at first instance held that the purported modification to the licence was ineffective due to the ‘No Oral Modification’ or NOM clause. The Court of Appeal overturned this decision and found that the parties had validly amended the license. MWB appealed to the Supreme Court.
In upholding the NOM clause, the Supreme Court noted that NOM clauses provided similar benefits to an entire agreement clause in a written contract. In particular, these clauses serve three important functions:
- NOM clauses reduce the risk of disputes arising as to whether the parties had intended to vary the terms of a contract and what the precise amendments were
- NOM clauses prevent written agreements from being eroded to the detriment of parties by informal means, and
- NOM clauses provide increased certainty for internal governance as to what obligations the party was promising to satisfy
The Supreme Court also considered the potential for injustice to arise where one party acted to its detriment in reliance on the oral variation to the contract. The Court stated that a party could, in some circumstances be estopped or blocked from denying the variation to the contract. However, in this instance, the words and conduct of MWB relating to the proposed change to the payments schedule had not been sufficient. This, in turn, prevented it from relying on terms of the contract to their full force and effect.
It is unclear whether this decision will be approved by the Irish courts. Recently, the Irish courts have held written contracts to have been amended by the manner in which the contract was operated by the parties. Where this occurs, a party to a contract may subsequently be prohibited from withdrawing from the common understanding as to how the contract was to operate where the other party would be unfairly prejudiced.
Requiring these amendments to be made in writing where a NOM clause forms part of the contract helps to reduce the scope for contradictory interpretations by the parties. This in turn reduces the commercial risk to the parties and is, therefore, to be welcomed. The decision should also be welcomed by funders who would otherwise be at increased risk of approved contractual terms being subsequently amended in an informal manner without their consent being obtained.
For further information on NOM clauses in contracts, contact a member of our Construction team.
The content of this article is provided for information purposes only and does not constitute legal or other advice.