No Oral Variation Clauses

Like many commercial contracts, construction contracts often include what is commonly referred to as a "No Oral Modification"("NOM") clause. Such a clause is intended to prevent oral variations to a contract, instead requiring any variation to be agreed in writing by the parties.

As noted by Lord Sumption in Rock Advertising Limited v MWB Business Exchange Centre Limited, which we shall look at in more detail below, there are at least three commercial reasons for including a NOM clause in a contract:

It prevents attempts to undermine written agreements by informal means; In circumstances where oral discussions can give rise to misunderstanding and cross-purposes, it avoids disputes not just about whether a variation was intended but also its exact terms; and A measure of formality in recording variations makes it easier for corporations to police internal rules restricting the authority to agree them. However, whilst NOM clauses may be intended to create certainty, it may be surprising to learn that until recently the law on the effectiveness of NOM clauses was anything but certain.

The uncertainty surrounding the effectiveness of NOM clauses was due to a number of factors.

First, the principle of "freedom of contract" entitles parties to agree whatever terms they choose (subject to limits imposed by public policy) and it also entitles parties to discharge or vary those terms by agreement, including by consensual oral variation.

Secondly, at common law there are no formal requirements for the validity of a simple contract provided the essential elements of offer, acceptance and consideration are present, meaning a common law contract can be made orally as well as in writing. As noted by Lord Briggs in Rock, these matters are as applicable to the variation of an existing contract as they are to the making of a contract in the first place.

Thirdly, the uncertainty was due in some part to a couple of previous inconsistent decisions on NOM clauses by the Court of Appeal ("CA"). In United Bank 1 the CA had refused leave to appeal on the grounds that in the face of a NOM clause, no oral variation of written terms could have legal effect. The issue arose again two years later in World Online Telecom.2 In that case, the CA noted that the parties had made their own law by contracting and they could, in principle, unmake or remake it. However, and apparently in ignorance of the decision in United Bank,the Court went on to say that in the absence of...