No Oral Modification/anti-variation in commercial contracts: Latest guidance

27th May 2022

Clauses which expressly prohibit parties from varying contracts unless they comply with specified requirements (usually that amendments be made in writing and signed by both parties) are known variously as no oral modification (NOM) clauses or anti-variation clauses. They are very common in modern commercial contracts, the purpose being to preserve the integrity of contractual terms by preventing informal or inadvertent changes.

The issues of whether and to what extent such clauses have binding legal effect have hit the courts on numerous occasions. Much of the debate was settled by the Supreme Court in 2018 in Rock Advertising Ltd v MWB Business Exchange Centres Ltd [1], but a recent case offers crucial guidance for contract negotiators and drafters when it comes to the wording of NOM/anti-variation clauses.

Lee Crook and Gwendoline Davies, from Walker Morris’ Commercial Contracts and Commercial Dispute Resolution teams respectively, explain and offer practical advice.

Why is Integral Petroleum v Bank GPB International of interest?

This case, the court’s latest judgment in relation to the vexed issue of NOM/anti-variation clauses and a dispute between a Russian bank and an energy company, suggests that ambiguity in its wording may render such a clause wholly ineffective.

What practical advice arises?

The case [2] raises a number of key takeaways:

• Supreme Court authority in the Rock Advertising case provides that NOM/anti-variation clauses should be clear and unambiguous. They should contain a provision expressly prohibiting oral modifications if that is what is intended, and should be crystal clear as to what form any written modification should take. Integral Petroleum v Bank GPB International is a worked example of the Rock Advertising authority in practice. It highlights some of the risks associated with loosely worded NOM clauses and emphasises that particular care should be taken in drafting.

• Accurate records should be kept of all discussions associated with contractual terms and performance. That can be especially important post completion as discrepancies can arise between what was stated in a contract and what actually happens on the ground, and things can go ‘wrong’ once commercial arrangements actually get underway. It is easy to give the impression in verbal or electronic communications that an oral modification has been agreed without intending to do so, and that can result in inadvertent contractual variation.  If and when any dispute arises as to whether a contract has been varied and/or whether any contractual variation is effective in line with a NOM/anti-variation clause, such records can be of significant evidential value.

• Summary judgment can offer a quicker and more cost-effective route to recovering losses in the event of a breach of contract, especially where the commercial contract in question contains an effective NOM/anti-variation clause. Conversely, a poorly worded NOM/anti-variation clause can increase the chances of parties becoming embroiled in lengthy and costly litigation, the outcome of which will be uncertain and may be unfavourable.

What happened in the particular case?

The Supreme Court in Rock Advertising upended a substantial trend in English Law by deciding that a NOM/anti-variation clause will be valid providing that it is “clear and unambiguous”.  The recent case of Integral Petroleum v Bank GPB International has examined the meaning of “clear and unambiguous”.

Bank GPB International S.A (Bank) provided a debt facility to Integral Petroleum S.A. (Integral). The facility agreement contained a clause stating “any term of the Finance Documents may be amended or waived with the agreement of the Borrower or Lender in writing”.

Integral ran into difficulties and was unable to maintain its payment obligations under the facility. There followed a period of prolonged communication between the parties. This took place, as is commonplace, by a mix of phone, email, meetings and letter. A payment plan was instituted, as was an agreement for the Bank to propose a restructuring of the debt. In the end, Integral rejected the restructured facility and the Bank sought summary judgment for the amount owed under the original debt facility, a sum of $25m.

Integral’s defence was to allege that the Bank had “already agreed to extend the maturity dates on Integral’s loans” – that is, that the contract had been varied – with the result that Integral was not then in default of the facility agreement.

The Bank’s response was to argue that Integral had no realistic prospect of establishing, as a matter of fact, that the alleged oral variation was agreed and, in any event, such agreement would not have been legally binding due to the NOM clause.

The issue was whether the payment plan amounted to a valid oral modification between the parties. Integral argued that it did, whereas the Bank contended that the payment plan was merely a means for Integral to prove their ability to repay their debts with an eye on the proposed restructuring.

The High Court considered the NOM clause.  Firstly it was noted that the term did not expressly prohibit oral modifications.  Secondly it was observed that the clause was not instructive (lacking, as it did, the word ‘shall’). Importantly, the court found that the words “in writing” were ambiguous. Did this require any modification to be effected in a written document (and if so, what form must any such document take, and were any formalities required?) or was it sufficient for any modification merely to be evidenced in writing?

The court concluded that these were matters that could only be decided at a full trial where all of the evidence would be available and could be properly tested and considered. This meant that the Bank’s suggestion that Integral had “no realistic prospect of success” was not borne out.  The case was not, therefore, appropriate for summary judgment.

It is important to note that this judgment does not find that the particular NOM clause was invalid – merely that there is an argument that it may be.  Unless the parties can reach a private settlement between themselves, this case must therefore now proceed to a full trial.

In the meantime, the case demonstrates if that if the NOM/anti-variation clause had been more tightly drafted, either this dispute would not have arisen in the first place, or it could have been more quickly and cost-effectively resolved at summary judgment.  As it is, time and cost in relation to court proceedings will now be required and the outcome will turn on the particular facts and evidence.

There is also the risk that, whatever the outcome of the litigation, and depending on the facts and retainer in question, there may be a professional negligence claim in relation to the contract drafting.

Walker Morris will monitor and report on any key developments.

How we can help

An element of flexibility within a commercial contract is often preferable, to allow changes to keep in line with changing business practices, technological advancements and the like. However, to ensure that any changes are fully enforceable, parties must check any procedure[s] for doing so within the contract, and must comply with any procedure[s].  Perhaps even more fundamentally, and as highlighted by this case, parties should ensure that any NOM/anti-variation provisions within their commercial contracts are clearly and precisely drafted, so as to ensure full, and intended, legal effect and operation.

Walker Morris’ Commercial Contracts and Commercial Dispute Resolution teams can assist businesses with the drafting of effective commercial agreements, including valid and enforceable NOM/anti-variation provisions.  We can also help businesses to review their existing contracts – in particular any informal arrangements, settlements or other agreements or changes made subsequent to prior or underlying commercial contracts – to ascertain whether all NOM/anti-variation provisions are sufficient, and whether all arrangements comply and are, therefore, effective. Finally, we can help businesses to educate their staff as to binding status of anti-variation provisions, the importance of clear drafting and, more generally, the risk of informal or inadvertent contract formation.

If you would like any further information or advice, or if you would like assistance with staff training, please do not hesitate to contact Lee Crook, Gwendoline Davies or any member of Walker Morris’ Commercial Contracts or Commercial Dispute Resolution Teams.

[1] See our earlier briefings on the Rock Advertising case here and here

[2] Integral Petroleum S.A. v Bank GPB International S.A. [2022] EWHC 659 (Comm)