Contract effectively varied by oral agreement

Contract effectively varied by oral agreement

Published:

Author: Charlotte Walker

Applies to: England and Wales

In MWB Business Exchange Centres Ltd v Rock Advertising Ltd, the Court of Appeal has decided that a provision in a contract requiring any variations to be in writing and signed by the parties did not prevent a valid variation by oral agreement.

This decision is of relevance to all commercial contracts but it does not obviate the need to comply with particular statutory requirements that apply to contracts for the sale or other disposition of land.

The facts

Rock Advertising occupied serviced office premises belonging to MWB, as licensee. Rock's business did not develop as it had planned and it fell into arrears. When MWB sought to terminate the agreement, Rock challenged that termination claiming that an oral agreement had been reached between Rock's managing director and MWB's credit controller to re-schedule the licence fee payments in such a way that the arrears would have been paid off. The first of the revised payments had been paid and accepted.

When the dispute reached the Court of Appeal the main points for it to decide were:

  • whether the parties were able to vary the original licence agreement orally because a provision within it stipulated that any variations must be set out in writing and signed by the parties
  • whether there had been consideration given for the oral variation, ensuring that it created a binding contract between the parties

The decision

The Court of Appeal decided both points in favour of Rock.

Conflicting case law had meant, historically, that there has been considerable uncertainty over whether an agreement in writing which contains a clause stating that it can only be varied in writing can be varied orally. In MWB the court took the opportunity to favour, very clearly, the idea of party autonomy: parties who make a contract can vary the contract in the future as they wish even if one of the changes involves ignoring the provision governing how changes may be made. Like Parliament, parties to a contract cannot fetter their successors.

On the consideration point, even though the agreement of Rock to pay the arrears was, essentially, an agreement to pay what was already due, the court found that there were commercial benefits for MWB that could constitute fresh consideration. By agreeing the revised payment terms, some of the arrears would be recovered immediately and MWB had the hope that all would be recovered in due course. Importantly Rock would continue as licensee and the property would not be left vacant at a further loss to MWB. As there was consideration, this meant that the variation agreement was binding on MWB.

Consequences of this decision

This decision is not confined to cases involving property. It will apply to the majority of contracts.

However, the decision will not apply where the law provides that an agreement, or a variation of that agreement, has to be in a particular form. For example, a contract for the sale or other disposition of land is governed by section 2 Law of Property (Miscellaneous Provisions) Act 1989. This provides that such a contract can only be made in writing and only by incorporating all the terms which the parties have expressly agreed in one document or, where contracts are exchanged, in each.

Where a material term of such a contract is varied, that variation must also satisfy the formalities prescribed by section 2. This particular point was decided in another Court of Appeal decision in 1996: McCausland v Duncan Lawrie Ltd. Accordingly, an oral variation will be ineffective where compliance with section 2 is required. But where a contract does not fall within the parameters of section 2, the MWB decision will apply.

The court's decision on consideration is important to bear in mind: to ensure that any agreement is enforceable under the basic requirements of contract law, there needs to be consideration provided by each of the parties to it. To avoid dispute, it is wise to specify what that consideration is. However, where a contract is executed as a deed, no consideration is needed.

About the Author

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Charlotte Walker

Professional Support Lawyer

0370 086 8715

Charlotte is a professional support lawyer responsible (with others) for keeping the firm's real estate lawyers up to date with changes in law and practice.

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