Clarkslegal wins Strike Out Application following new Contract Law ruling

In a hugely significant judgment for businesses, the Supreme Court has tightened the flexibility traditionally enjoyed by contracting parties to vary the terms of their contracts (Rock Advertising Ltd v MWB Business Exchange 2018).

Hidden away in most written terms and conditions, usually towards the end, you will find a standard term which says that the contract can only be varied in writing signed by both parties.  In practice, contracts are often varied informally, either through discussions or by unsigned documents.  And in many reported cases, the Courts have enforced this type of contractual variation despite a failure to comply with the requirements of the contract.  The approach of most judges was that it was unfair to allow a contracting party to withdraw from something they had actually agreed simply because the strict formalities of the contract had not been complied with.

That has all changed now following Rock Advertising.  In that case, the Supreme Court held that generally a clause requiring formalities to be observed before a contract can be varied will be binding on the parties.  There, the parties to a licence agreement in respect of a serviced office had orally agreed new reduced rental terms. However, the licence agreement required variations to be in writing and signed which had not happened.  Later, the licensor insisted on payment of the original higher rent and terminated the licence agreement when this was not paid.  The Supreme Court agreed with the licensor that they were not bound by the oral agreement to vary because it was not in writing and signed, and awarded them judgment.

This is a very strict ruling and will have a profound impact on the way businesses need to manage and operate their contracts.  It will be easy for businesses to be caught out by this rule and find themselves in Court proceedings because they wrongly assumed their oral variations were binding.

The Court did leave open one very limited exception where an oral variation might be upheld despite not complying with the contract formalities.  If the parties made it clear that they were dispensing with the obligation to comply with the formalities, that might work.  An example might be if a party stated or represented that they were aware of the required formalities but were agreeing to dispense with them, they might find themselves bound by an oral variation.  These circumstances are probably unlikely to arise often in practice and, even if they do, it would still be much safer simply to comply with the contractual formalities to avoid a dispute about what exactly had been said or represented.

In possibly the first case to be decided by the High Court following Rock Advertising, Clarkslegal has used this ruling to strike out a defence to a claim which had argued that a contract had been varied orally and without complying with the terms of the contract.  A strike out application is one of the nuclear weapons of Court procedure and, where successful, brings an immediate end to the defence which has been struck out, so this is a significant outcome.

The important messages for all businesses following the change in contract law brought about by Rock Advertising include:

1. When entering new contracts consider very carefully the level of formality you want to apply when making variations to the contract.
2. Implement internal processes to ensure your staff know who is empowered to vary a contract and how this needs to be done.
3. When you do need to vary a contract, comply strictly with the formal requirements on variation and make sure the person signing the variation holds the position specified in the contract.