Cyprus: Contracts: Small Details Today Prevent Big Problems Tomorrow

 

When dealing with contracts, it is of the utmost importance to stay up to date and consider all developments in case law and statutory interpretation. Contract law is continually evolving, and even well-established principles may be subject to new rulings that can impact the enforceability of agreements. Ensuring that contractual terms reflect the most up-to-date legal standards is critical to avoiding potential disputes.

While amending contracts may seem straightforward, and parties might assume that if they mutually agree, they can change a contract in any manner, even informally with a handshake, the legal reality is far more complex. The case law indicates that this is not necessarily true.

The relatively recent judgement in Rock Advertising Ltd v MWB Business Exchange Centres Ltd ([2018] UKSC 24) serves as an important reminder of this, particularly in relation to "No Oral Modification" (NOM) clauses and the principle of consideration.

In this case, MWB Business Exchange Centres Ltd operated serviced office spaces in London, and Rock Advertising Ltd entered into a licence agreement to occupy one of these spaces. The contract specified that any modifications had to be made in writing, as per a NOM clause. By early 2012, Rock Advertising had fallen behind on its licence payments, accruing arrears of over £12,000. The company’s director proposed a revised payment schedule to a credit controller at MWB, which he claimed was accepted orally. However, MWB later rejected the proposal, locked Rock Advertising out of the premises, and eventually terminated the contract. MWB issued proceedings for the unpaid arrears, while Rock Advertising counterclaimed for wrongful exclusion, arguing that the parties had agreed to a valid variation of the contract through the oral agreement.

At trial, the first instance court found that there had been an oral agreement between the parties, but it held that this variation was invalid due to the NOM clause in the original contract, which required any changes to be made in writing. The case was then brought before the Court of Appeal, which overturned the lower court’s decision. The Court of Appeal held that the oral agreement effectively waived the NOM clause, making the variation valid and enforceable. MWB then appealed to the UK Supreme Court, and the case raised two fundamental issues: the enforceability of NOM clauses and whether there was valid consideration to support the oral variation of the contract.

The Supreme Court ultimately ruled in favor of MWB, reaffirming the enforceability of NOM clauses. In its decision, the Court held that a contractual clause requiring modifications to be made in writing must be upheld, even if the parties later agree to vary the contract orally. The Court emphasized that allowing parties to disregard such clauses based on informal agreements would undermine contractual certainty and the ability of the parties to control how their agreements are modified. Lord Sumption, delivering the leading judgment, noted that NOM clauses serve to prevent misunderstandings and disputes over oral modifications, aligning with common commercial practices. He rejected the argument that an oral variation could implicitly waive a NOM clause, unless there was a clear, explicit agreement to do so. The ruling stressed the need for parties to follow the formalities agreed upon in their contracts, especially when a NOM clause is in place.

It also highlighted the practical reasons why parties might include NOM clauses in their contracts. These clauses are often inserted to ensure that any changes are properly documented, to avoid disputes over whether a variation was agreed upon and to protect businesses from informal or unauthorized modifications. In this context, the ruling reinforced the idea that parties who include NOM clauses in their contracts do so for valid commercial reasons, and the courts will respect those decisions.

Additionally, the Court addressed the issue of estoppel, which could potentially limit the strict application of a NOM clause in certain circumstances. The doctrine of estoppel can prevent a party from enforcing a NOM clause if the other party has relied on an oral variation to their detriment. However, in this case, the Supreme Court found that Rock Advertising’s reliance on the oral agreement was insufficient to establish estoppel. There was no unequivocal representation from MWB that the oral agreement would override the NOM clause, and thus, MWB was not estopped from enforcing the original written terms of the contract.

In relation to consideration, the Supreme Court chose not to make a final determination on whether the oral variation was supported by valid consideration. While the Court of Appeal had ruled that MWB received practical benefits from the variation, such as a higher likelihood of receiving payment and avoiding an empty office, the Supreme Court noted that resolving this issue would require a re-examination of the principle set out in Foakes v Beer (1884). This case established that practical benefits alone might not be sufficient to constitute valid consideration. Therefore, while the Court left the issue of consideration unresolved, it highlighted the complexity of determining whether such practical advantages meet the legal requirements for consideration.

Notably, there has been divergent treatment of Rock Advertising across jurisdictions¹.

In conclusion, the Rock Advertising case serves as a critical reminder of the complexities involved in contract law, particularly when it comes to modifying agreements. The Supreme Court’s decision underscores the importance of adhering to formal contractual provisions, especially when NOM clauses are involved. It also highlights the ongoing debate surrounding the principle of consideration. Both businesses and individuals are strongly advised to seek legal counsel when drafting or modifying contracts to ensure that all legal requirements are satisfied and to avoid disputes that may arise from informal or misunderstood agreements.

¹ The Singapore Court of Appeal in Charles Lim Teng Siang v Hong Choon Hau [2021] SGCA 43 rejected the Supreme Court's reasoning in Rock Advertising. In contrast, the UK Supreme Court reinforced Rock Advertising's authority in Kabab-Ji Sal (Lebanon) v Kout Food Group (Kuwait) [2021] UKSC 48.

Disclaimer: This article is intended for informational purposes only and does not constitute legal advice. For advice specific to your situation, please consult a qualified lawyer.

 

For further information, please contact:

Panagiotis Hadjimichael, Associate

Papadopoulos, Lycourgos & Co LLC, Nicosia

e: p.hadjimichael@paplyclaw.com

t: +357 22 676 126

 

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