The true scope of the elusive but all pervasive party autonomy doctrine was at the heart of the debate in the case of Rock Advertising Limited v. MWB Business Exchange Centres Limited. On the day when Kings XI fell just three runs short of the 186 runs scored by Mumbai Indians, the UK Supreme Court delivered two opinions in the case settling and at the same time unsettling the law on the validity of oral amendments to a contractual provision which prohibited oral modifications to an agreement (No Oral Modification or NOM Clause). While the two opinions coincided in the outcome, the reasoning and the scope of the party autonomy doctrine in the context of validity of oral amendments to NOM clauses were vastly different. While one opinion preferred commercial certainty, the other side sought to strike a balance between certainty and reality. No wonder the leading opinion began with these lines: "Modern litigation rarely raises truly fundamental issues in the law of contract. This appeal is exceptional." (Para 1)
In this post we will provide a descriptive comment of the decision of the UK Supreme Court of the majority opinion in the case and in a later post, we will look at the minority view and the Indian law on the subject.
Facts
Rock Advertising Limited ("Rock") entered into an agreement with MWB Business Exchange Centres Limited ("MWB"), a company engaged in the business of operating serviced offices. Rock, the licensee, was supposed to pay a monthly consideration to the licensor, MWB. Clause 7.6 of the agreement, which was the term in issue, read:
“This Licence sets out all of the terms as agreed between MWB and Licensee. No other representations or terms shall apply or form part of this Licence. All variations to this Licence must be agreed, set out in writing and signed on behalf of both parties before they take effect.” (emphasis supplied)
Unfortunately, Rock defaulted in payments to MWB. Rock's sole director spoke over phone with an employee of MWB regarding the dues. The director contended that the MWB's employee agreed to vary the agreement by in line with the revised schedule of payment proposed by him, which MWB's employee denied.
The Legal Proceedings
Thereafter MWB locked out Rock from the premises owing to Rock's failure to pay the arrears, then terminated the licence agreement,and sued for the arrears in the County Court. In the proceedings, Rock filed a counterclaim for damages for wrongful exclusion from the premises.
Although the County Court found that (a) there was an oral agreement between the Director of Rock and the employee of MWB and (b) MWB's employee had the ostensible authority to enter into such an agreement, the court concluded that Clause 7.6 (quoted above) made such a variation agreement ineffective. Note that clause 7.6 (emphasised above) requires that a variation agreement should be agreed, in writing and signed on behalf of both the parties before they took effect.
The Court of Appeal decided in favour of Rock by holding that the oral agreement to revise the payment schedule amounted to an agreement to dispense with the requirements of Clause 7.6. On the contention that there was no consideration in the purported agreement, the Court held that the consideration was supported by consideration: that Rock would make payments as per the revised schedule of payments. MWB appealed to the Supreme Court.
Judgement of the UK Supreme Court
As noted above, there are two opinions, one by Mr Justice Sumption (with whom Ms Justice Hale, Mr Justice Wilson and Mr Justice Lloyd-Jones agreed) and the other one by Mr Justice Briggs. We'll summarise the majority opinion in this post:
The Leading Decision by Justice Sumption
The reasoning part of Justice Sumption's opinion began by acknowledging the baseline legal position that "law should and does give effect to a contractual provision requiring specified formalities to be observed for a variation." Next, the judge gave the analogy of statutes requiring certain agreements to be in specific forms and stated that there is no principle prohibiting parties from doing what a statute does by adopting formal requirements by contract..
The judge noted three reasons why No Modifications Clauses are recognised despite common law placing virtually no formal requirements for a valid contract:
- Such clauses prevents attempts at undermining agreements by informal means;
- It avoids disputes between the parties as to whether there was a modification in the agreement and the exact nature of the modification;
- A level of formality provides a level of internal control to the corporations on authority to effect such contractual modifications.
The judge felt that such "legitimate commercial reasons" do not act against any public policy and that case law disregarding them were entirely "conceptual", that is to say, did not serve substantial practical purpose. The conceptual justification to disregard NOM clauses was that parties who could agree on such clauses could also undo them.
The judge took aid from the international legal systems such as the UNIDROIT Principles of international Commercial Contracts and the Vienna Convention on Contracts for International Sale of Goods regarding the absence of formal requirements for contracting and the paradoxical recognition of NOM clauses. These were taken to suggest that there was "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."
Drawing the attention to Entire Agreement clauses, the judge took note of the coupling of such clauses with NOM clauses and found the commonality between these provisions: contractual certainty. The court "clarified" the legal position on the enforceability of entire agreement clauses by holding that such clauses may not operate where there is a collateral agreement (whose effect is against the entire agreement clause) which is supported by its own consideration, then most standard form Entire Agreement clauses would not have the effect of preventing such agreement's enforceability. However, the court clarified that if otherwise, the entire agreement clause would be given effect to.
As regards the parties' right to orally modify the agreement, the court held that it was not that oral modifications were forbidden; they simply agreed that oral modifications were forbidden. This is not to mean a party who made a representation so as to make the other rely on that representation and act on it can go without accepting the consequences. But for such a situation to arise, there should have been atleast "some words or conduct unequivocally representing that the variation was valid notwithstanding its informality; and something more would be required for this purpose than the informal promise itself".
On the basis of the above principles, the Judge Sumption concluded on facts that the oral variation was invalid as it did not satisfy the requirements of Clause 7.6 of the Agreement. The opinion of Judge Sumption left the question as to whether the consideration was adequate enough for MWB to accept a less advantageous schedule of payments to a larger bench and on another occasion.
More in the next post on this topic. The decision can be accessed from this link.
Drawing the attention to Entire Agreement clauses, the judge took note of the coupling of such clauses with NOM clauses and found the commonality between these provisions: contractual certainty. The court "clarified" the legal position on the enforceability of entire agreement clauses by holding that such clauses may not operate where there is a collateral agreement (whose effect is against the entire agreement clause) which is supported by its own consideration, then most standard form Entire Agreement clauses would not have the effect of preventing such agreement's enforceability. However, the court clarified that if otherwise, the entire agreement clause would be given effect to.
As regards the parties' right to orally modify the agreement, the court held that it was not that oral modifications were forbidden; they simply agreed that oral modifications were forbidden. This is not to mean a party who made a representation so as to make the other rely on that representation and act on it can go without accepting the consequences. But for such a situation to arise, there should have been atleast "some words or conduct unequivocally representing that the variation was valid notwithstanding its informality; and something more would be required for this purpose than the informal promise itself".
On the basis of the above principles, the Judge Sumption concluded on facts that the oral variation was invalid as it did not satisfy the requirements of Clause 7.6 of the Agreement. The opinion of Judge Sumption left the question as to whether the consideration was adequate enough for MWB to accept a less advantageous schedule of payments to a larger bench and on another occasion.
More in the next post on this topic. The decision can be accessed from this link.
