In today’s fast moving commercial environment, it is common for parties to agree contracts based on undocumented discussions.
But, agreements without proper written evidence are likely to pose difficulties later – for example when one party relies on the agreement and the other treats the discussion as a proposal in part of continuing negotiations.
This basic contract law issue reached the Supreme Court, the highest judicial court in England and Wales, earlier this year in Rock Advertising Limited v MWB Business Exchange Centres , and serves as a refresher of the importance of documenting agreements.
The case concerns a variation of an existing contract. MWB operates serviced offices in central London. Rock entered a contractual licence with MWB to occupy office space in Marble Arch, and had accumulated licence fees in arrears. Rock’s sole director proposed a revised schedule of payments and discussed the proposal with MWB’s credit controller over the telephone.
Subsequently, Rock contended that an agreement was concluded, albeit orally, meaning that the licence agreement was varied in accordance with the revised schedule. However, MWB’s credit controller denied this. She proceeded to treat the revised schedule as a proposal in a continuing negotiation and took it to her boss who rejected it.
MWB locked Rock out of the premises and sued for the arrears. Rock counterclaimed damages for wrongful exclusion of premises, relying upon an oral agreement.
The crux of the dispute was whether the variation agreement was effective in law. The Supreme Court held the alteration by oral agreement was ineffective, the reason being the original licence agreement contained a ‘No Oral Modification’ clause that said: “All variations to this licence must be agreed, set out in writing and signed on behalf of both parties before they take effect.” The oral agreement was not reduced in writing and signed by both parties.
An earlier Court of Appeal’s decision decided that parties who agree to altering the original contract orally despite a ‘No Oral Modification’ clause, must have intended to dispense with the clause. But, the Supreme Court overturned this decision.
The Supreme Court held that where both parties failed to observe the formal requirement to put the alteration in writing, the Courts should naturally infer both parties had not intended to dispense with the clause but had overlooked it.
Any later agreements that alter the original terms of contract should be put in writing. Sending a follow up email to the other side may help elicit a response confirming the alterations, this provides more certainty and minimise future disputes which ultimately protects both parties. It is good practice to pay close attention to any formalities in the contract from the outset.
Later written agreements amending the original contract need to be treated as a contract in itself. Some basic ingredients must be present for it to be a valid contract: the offer, acceptance, consideration and intention to create legal relationship. The consideration can be of any amount – a token of £1 would be sufficient for a valid contract.
Dr Alan Ma is partner at Gordon Dadds LLP.
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