Do ‘No Oral Modification’ clauses work?

By Tim Drok

30 September 2024

Innumerable contracts include clauses providing that any variation to the contract must be made in writing. Despite the prevalence of these so-called ‘No Oral Modification’ (NOM) clauses, numerous courts in Australia have ruled that they have no effect and contracts containing such clauses can be varied by subsequent oral agreement.¹

Those rulings are open to challenge.

The position in the UK: NOM clauses are effective

In MWB Business Exchange Centres Ltd v Rock Advertising Ltd [2019] AC 119, the plurality of the UK Supreme Court ruled that NOM clauses are effective and cannot be circumvented by a subsequent oral agreement of the contracting parties.

Putting to one side the majority’s convincing legal analysis of contracting parties’ ability to bind themselves, the commercial reasons the Court provided were compelling (see [12]):

1. NOM clauses provide certainty. They avoid disputes as to what has and has not been agreed by the parties;
2. NOM clauses assist corporate governance. Requiring variations to contracts to be in writing makes it easier for businesses to police internal rules as to who has authority to agree them; and
3. NOM clauses protect what the parties agreed. They mitigate against attempts to undermine written agreements by informal means.

This consideration of the commercial benefits of NOM clauses, as well as the accompanying legal analysis of contractual autonomy, is largely absent from Australian jurisprudence. Instead, most Australian Courts that encounter the issue simply state that ‘NOM clauses do not work’ and refer to past decisions (which ultimately derive from UK case law) to support this conclusion.²

There are two problems with the Australian approach.

First, the UK case law principles supporting those Australian decisions are now obsolete following MWB v Rock.³ Yet as Leeming JA has observed in Sara Stockham Pty Ltd v WLD Practice Holdings Pty Ltd [2021] NSWCA 51 at [15], MWB v Rock ‘has repeatedly been said not to reflect the position in Australia’.

Secondly, the High Court is yet to consider the issue in any detail.⁴ A comprehensive and authoritative analysis of the validity of NOM clauses is yet to occur in Australia. This creates uncertainty and provides scope to challenge the prevailing legal position that NOM clauses do not work.

Protective measures

There are a couple of steps businesses can take to mitigate against the uncertainty arising from the Australian Court’s treatment of NOM clauses.

Businesses should continue to use and rely upon NOM clauses in their contracts. Although Australian precedent indicates such clauses do not work, this position is open to challenge and could plausibly change. Moreover, by ensuring their employees always record agreements in writing, businesses will eliminate any uncertainty regarding what was agreed and whether that agreement was effective.

However, businesses should also be mindful that arguments can be made both ways on the issue. It is reasonably arguable that an orally-agreed variation to a contract is valid despite the presence of a NOM clause. It is also reasonably arguable that the same NOM clause prevents such a variation taking effect.

Should you find yourself in a dispute on the issue, the team at Bennett will be more than happy to assist.

Summary

• Clauses providing that contracts can only be varied in writing are ineffective in Australia at present. However, businesses should not abandon those clauses just yet.
• The position in Australia is open to challenge in light of the UK Supreme Court’s ruling in MWB Business Exchange Centres Ltd v Rock Advertising Ltd [2019] AC 119 and the lack of any ruling on the issue by the Australian High Court since.
• Businesses should continue using the clauses but be mindful that reasonable arguments can be made as to whether or not they work.

1. See for example: Commonwealth of Australia v Crothall Hospital Services (Aust) Ltd (1981) 36 ALR 567 at 576, 577; GE Marconi Systems Pty Ltd v BHP Information Technology Pty Ltd (2003) 128 FCR 1 at [217]; Alstom Ltd v Yokogawa Australia Pty Ltd (No 7) [2012] SASC 49 at [1519]; Harrop Engineering Australia Pty Ltd v Beauville Pty Ltd [2016] VSC 17 at [68]; Rapsey, in the matter of Australasian Mortgage FinanceLimied (Administrator Appointed) [2021] FCA 189 at [41]; Flynn v PPK Mining Equipment Pty Ltd (No 2) [2022] NSWSC 1640 at [96]; PF 473 Pty Ltd v Qasim [2024] NSWSC 874 at [86].
2. See above, n 2 and the cases referred to in Commonwealth of Australia v Crothall Hospital Services (Aust) Ltd (1981) 36 ALR 567 at 576.
3. For example, in Hawcroft General Trading Co Pty Ltd v Hawcroft [2017] NSWCA 91 at [35], the New South Wales Court of Appeal referred to MWB Business Exchange Centres Ltd v Rock Advertising [2016] EWCA Civ 553 to support its conclusion that formal requirements as to contractual variations have no effect. That decision was reversed by the UK Supreme Court in MWB v Rock .
4. As noted in Noahs Rosehill Waters Pty Ltd v Centreplex Pty Ltd [2023] WASC 57 at [15].

Disclaimer: The information published in this article is of a general nature and should not be construed as legal advice. Whilst we aim to provide timely, relevant and accurate information, the law may change and circumstances may differ. You should not therefore act in reliance on it without first obtaining specific legal advice.