Banking Update: Enforcing No Oral Modification Clauses to Reduce Future Litigation
04 September 2018
It has been argued for some time in the UK that “No Oral Modification” (NOM) clauses should be enforced. Commentators were critical of the approach taken by the English Court of Appeal which allowed later oral agreements to override the written agreements both parties commercially agreed to and signed.
The UK Supreme Court decision in Rock Advertising Limited v MWB Business Exchange Centres Limited  was welcomed by many in the UK as it confirmed that parties should be permitted to impose formality requirements in the contracts they agree to. This means that the terms of the contract must be observed and cannot later be altered or set aside by a less formal oral agreement.
Previous position on NOMs
In Globe Motors Inc. v TRW Lucas Variety Electric Steering L , the English Court of Appeal in its judgment remarked that including an anti-oral variation clause in a contract will not prevent subsequent variation of the contract orally or by conduct. The clause in question stated that any variation of the contract should be in writing. This approach was then endorsed by the Court of Appeal in Rock Advertising Limited.
Background to the Rock Advertising case
Rock was in arrears under a licence agreement and proposed a revised payment schedule. The English Court of Appeal had found that an oral agreement to vary the payments was valid and amounted to an agreement to override the NOM clause. The UK Supreme Court disagreed, upholding the trial judge's decision that a NOM clause should be enforced.
Why is the Rock Advertising Limited decision important?
The Supreme Court noted that this case was extremely important as:
“Modern litigation rarely raises truly fundamental issues in the law of contract. This appeal is exceptional, it raises two of them.”
The clarity provided by this decision means that parties to a contract can now be more certain that the terms that have been commercially agreed will be abided by both sides.
The UK Supreme Court also noted that the enforcement of no oral modification clauses will likely reduce future litigation.
NOM clauses from a banking law perspective
There are legitimate commercial reasons for using NOM clauses as they:
- Prevent attempts to undermine written agreements by informal means
- Avoid disputes about whether a variation had been intended and about its exact terms
- Provide formality in recording variations, making it easier for corporations to police internal rules restricting the authority to agree them
- Prevent fraud and evidentiary issues
From a lender perspective, the Loan Market Association (LMA) standard is to include a NOM clause and the LMA precedent facility agreement includes the following language:
“No election to affirm any Finance Document on the part of any Finance Party shall be effective unless it is in writing”.
Although this was a UK decision, it holds persuasive value for this jurisdiction.
This decision makes it clear that if parties wish to amend an agreement, it is important for them to follow the formal procedures set out in the contract to vary its terms. If an agreement contains a NOM clause, an oral agreement to vary the contract may not be effective, even where the other counterparty agrees to it.
For more information on the enforcibility of NOM clauses in loan agreements or other finance related documentation, please contact a member of our Financial Services team.
The content of this article is provided for information purposes only and does not constitute legal or other advice.