The omnipotence paradox?

A UK Supreme Court decision on 16 May brings to mind the conundrum about whether an all-powerful being can create something too heavy for it to lift.

The issue

Rock Advertising Limited v MWB Business Exchange Centres Limited ([2018] UKSC 24) concerned the common clause that says a contract variation is invalid unless (usually) it is in writing and signed by the parties.

Here a term of a licence to occupy commercial property said:

“All variations … must be … set out in writing and signed on behalf of both parties before they take effect.”

Following a merely verbal rescheduling of payments, the issue was whether the parties could nevertheless validly agree a binding variation without completing the necessary formalities.

The background

The Judge said not, but the Court of Appeal overruled him. Autonomy governs. The parties can undo what they have done, and that applies equally to the bargain’s mechanics. Contracts can be created informally and (as a variation is also a contract) they can likewise be changed. Unless statute or code says otherwise, parties can informally agree not to enforce any term, even one requiring formality for valid variation.

The US approach

Subject again to specific exception, for example under the Uniform Commercial Code for certain contracts, that is the general position in the US, and largely the very reasoning of a famous judge almost a century ago.

The UK differs

The Supreme Court said that this approach ignores the parties’ intentions, as clearly expressed in their agreement, and if statutes set requirements for creating contracts parties should be able to do the same for changing them.

Various conventions and codes show that there is no inconsistency between contracts being created informally but requiring formality for any change, and agreeing a variation only verbally does not indicate intention to ignore such requirements, which more likely were simply overlooked.

UK law “should and does give effect to a contractual provision requiring specified formalities to be observed for a variation.”

Discussion

We see these clauses often, in many types of commercial contract. They are generally known as No Oral Modification  (“NOM”) clauses, and perhaps common understanding and practice has been to take the Court of Appeal path, with such terms being routinely waived. Plainly, too, there will be many instances of parties agreeing a variation in contented ignorance of something making it invalid without certain formalities, whose rationale will often be clarity, certainty and internal supervision by fetter on authority.

Whatever may have been happening, in the UK at least NOM clauses are valid and will be enforced, and counsel may wish to highlight these provisions and make any necessary recommendations so all relevant teams know what to do if a contract is to be varied.

A review of any changes agreed in all active contracts containing such a clause might also be a sensible step.

If you would like to discuss anything arising from this commentary please contact Ed Floyd at ed.floyd@floydzad.com and +1 (917) 999 6914 or Luke Zadkovich at luke.zadkovich@floydzad.com and +1 (917) 868 1245 / +44 (20) 8068 6844.  This article is to be considered general commentary only and not to be relied upon as legal advice for any particular circumstances.

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