An Important Ruling on Contract Variations

A recent Supreme Court judgement has illustrated the importance of fully understanding the procedural requirements for varying a commercial contract, according to a corporate lawyer.

“Many parties believe that they are free to agree changes to a contract verbally without recording the revised terms in writing.”  says Philip Round a partner at George Green LLP.  “A recent case has demonstrated the danger of such a casual approach.” 

Mr Round continues, “the case of Rock Advertising Ltd v MWB Business Exchange Centres Ltd concerned a tenant in arrears under a licence of office premises. The tenant had proposed a revised schedule of payments, and contended that the licensor had orally agreed to accept this suggestion and thereby vary the licence, notwithstanding the incorporation into the licence of a clause requiring any amendment to be in writing.  The licensor argued that the revised schedule was merely a proposal which had not been accepted, and accordingly sought to terminate the licence and receive the rent in arrears.”

According to Mr Round, after the County Court Judge had found for the licensor, the Court of Appeal held on appeal that the parties had orally decreed to dispense with the clause requiring amendments to be reduced to writing, and the licensor was according bound by the variation. “The Court of Appeal ruling sought to give effect to parties’ freedom to contract informally.  The Supreme Court, however, allowed the licensor’s appeal and refused to allow the original clause to be ignored. Parties’ autonomy to contract in any manner they see fit exists until the contract is made. It is important, however, for the law to give effect to contractual provisions requiring specific formalities to be observed for a variation.  Any decision on contract variations will depend on the specific circumstances of the case.  In this instance, the parties had apparently not referred specifically to the original clause restricting oral variations, and it was therefore difficult to imply any intention to dispense with it.”

Mr Round concludes “the judgement brings welcome certainty but also underlines the importance of parties fully understanding the implications of the agreement they have entered into, and seeking legal advice where any changes are contemplated.”