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Keeping trade moving: Can I modify a contract orally?

Contract with magnifying glass and pen Print publication

24/10/2019

Keeping trade moving logo - for publicationsWhat are the issues?

In today’s fast-paced commercial world, so much is about contacts, communication and keeping up with changes, competition and advances in products and technology. Add political and economic uncertainty into the mix, and it is easy to understand why parties are often eager to get on with doing business together – including adapting their business practices and commercial arrangements amid changing market forces – often before legal documentation is put in place.  However, there are some risks associated with proceeding in this way.

Contracts can be made orally (face-to-face or via the telephone, Skype, or similar); via e-mail or other correspondence; or they can arise by virtue of parties’ conduct. Crucially (with some limited exceptions) contracts can be formed without any written documentation or other formality whatsoever.

By the same token, contracts can be modified orally or by conduct and without any documentation or formality.

Following a recent Supreme Court decision [1], however, the position is different where any contract contains a ‘no oral modification’ (or ‘NOM’) clause. NOM clauses are common ‘boilerplate’ clauses within written commercial contracts. They prohibit parties from varying contracts unless they comply with specified requirements. The purpose is to preserve the integrity of the contractual terms and to achieve certainty, by preventing informal or inadvertent amendments.

If a contract contains a NOM clause or indeed any binding anti-variation conditions, restrictions or requirements, parties seeking to agree subsequent variations or arrangements must ensure that they comply fully with such conditions. Otherwise there is a real risk that changes made informally at the ‘coal face’ will have no contractual force.

As a wider point, parties should not take any boilerplate clauses for granted. All such provisions have particular legal meanings and can have a significant practical effect. Parties should ensure that they understand and assess the impact of all boilerplate clauses. For example in this context, some businesses will prefer the certainty of a NOM clause; whereas others will require the flexibility to quickly and easily agree contractual variations without restriction or formality.

What practical advice arises?

Businesses should review their contracts – in particular any informal arrangements, settlements or other changes made subsequent to the original contract – to see where arrangements might not comply with a NOM clause and may, therefore, be ineffective.

An awareness of the likely practical scenarios in which informal commercial discussions may arise for a particular business, and reviewing negotiating practices, will help businesses to mitigate risks associated with informality.

It is also vital that businesses educate their staff as to both the now-binding status of NOM clauses and, more generally, the risk of informal or inadvertent contract formation or variation.

If you would like any further advice, assistance or training in relation to the formation and modification of contracts, please do not hesitate to contact Gwendoline Davies or any member of the Commercial Dispute Resolution Team.

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[1] MWB Business Exchange Centres Ltd v Rock Advertising Ltd [2018] UKSC 24

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