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Contract variation just got easier – mitigating the risk of inadvertent change

 

25 July 2016

​In finding that an oral agreement to defer payments was legally binding, the Court of Appeal in MWB Business Exchange Centres Ltd v Rock Advertising Ltd [2016] EWCA Civ 553 has confirmed the limitations of “no variation” clauses whilst at the same time making it easier for a party to establish the critical elements of consideration or estoppel when seeking to show a contractual variation. The consideration for the agreement was simply the benefit to the landlord of not having empty premises.

The more things change, the more they stay the same, or so the saying goes. In light of recent events one might be forgiven for doubting that adage. Certainly, it has not found much favour recently with the Court of Appeal when it comes to the law of contract. Following its recent decision in Globe Motors Inc v TRW Lucas Varity Electric Steering Ltd [2016] EWCA Civ 396, the Court of Appeal has now loosened further the rules of when and how a contract can be altered by the parties.

The story was a familiar one. Rock licensed office space in central London. The licence agreement contained a clause precluding oral variations, but when Rock encountered financial difficulties it negotiated an oral agreement with its landlord, MWB, essentially to defer payment of part of the rent. Two days later MWB wrote to Rock insisting that it honour the terms of the original licence. Was the oral variation binding?

That question gave rise to three issues:

  1. What was the effect of the no variation clause?
  2. Assuming the contract could be varied, Rock was simply paying its original debt over a longer period of time: was that sufficient consideration to make the variation binding?
  3. Assuming it was not, was MWB estopped from going back on the oral variation?

Was a variation possible?

This was the most straightforward issue, in that the Court of Appeal adopted the reasoning in Globe Motors. “No variation” clauses may make it harder to show that the parties intended their negotiations to result in a change to the contract, but they cannot preclude that outcome. In terms of how much harder they make it to establish a binding change it is notable that the Court of Appeal here found that the hurdle had been surmounted despite considerable uncertainty, stemming from the first instance proceedings, as to what the terms of the oral agreement actually were. As the Court of Appeal noted in Globe Motors and again here, that uncertainty is precisely the issue that “no variation” clauses are designed to avoid. It made no difference to the outcome, however; the clause did not preclude the variation.

Was it supported by consideration?

If a party wants to vary a contract it must show the same elements that go to form a contract in the first place, namely offer, acceptance, consideration and intention to create legal relations. Those with memories of their undergraduate contract classes may recall that the requirement of consideration can be satisfied with objects of apparently trivial value: peppercorns and chocolate wrappers will, in the right circumstances, suffice. What has generally not been sufficient, at least when it comes to the payment of debts, is performance of an existing obligation. Put another way, part payment of a debt does not discharge the whole debt (what is sometimes called the rule in Foakes v Beer).

On the face of it, that is exactly what was happening here: Rock was not paying interest on the deferred payments and so was doing nothing more than performing its original obligation late. In the circumstances, could the oral agreement be enforced?

The Court of Appeal found that it could because MWB enjoyed two advantages from the revised arrangement:

  1. MWB would immediately recover some of the arrears that had built up and would have “some hope” (to use the words of Kitchin LJ) of recovering them all in due course. As the Court of Appeal noted, that in itself would not be enough.
  2. Rock would remain a licensee and continue to occupy the property, meaning it would not be left standing empty. This was found to be significant because in the context of commercial real estate, a “void” or empty unit can affect the value of the property as a whole. As such, keeping in place a tenant that was a poor payer (or presumably even a non-payer) offered some practical benefit to MWB. In circumstances where there was no evidence of economic duress from Rock, that was sufficient consideration.

This approach raises two issues. The first is a factual question. Parties will only normally enter into an agreement where they see some practical benefit to it. If that is the case, what does consideration add to the requirement to show offer and acceptance? Presumably something, since otherwise why require it at all, but there is little guidance as to what that something is.

Second, the Court of Appeal recognised that there were questions as to where this left the rule in Foakes v Beer. That is important because Foakes v Beer is a decision of the House of Lords and so the rule can only be changed by the Supreme Court. Arden LJ suggested that there was no issue because there has always been an exception to the rule, which was explained by Lord Coke in Pinnel’s Case: “the gift of a horse, hawk, or robe etc in satisfaction is good for it shall be intended that a horse, hawk or robe etc might be more beneficial to the plaintiff than the money.” The doctrine of practical benefit was, Arden LJ suggested, simply a more modern equivalent of that long standing exception.

Again, that is not straightforward. In Pinnel’s Case Lord Coke was talking about substitute performance – something different to what was originally agreed. Here, the parties are talking about the same or lesser performance; it is simply that the situation has developed in a way that renders that performance more beneficial, at least to one of them, than was originally thought. Factually, determining whether performance has changed is straightforward; determining whether it was more useful is, obviously, a question more likely to lead to disputes. Legally, if the Court of Appeal’s approach does not fit within an exception to the rule in Foakes v Beer, there is the obvious risk of a legal argument as to which approach should apply.

Was MWB estopped from denying the variation?

Given the Court of Appeal’s conclusions on the first two questions this fell away, such that the decision on this issue was obiter. It still raises some valuable points, however. Having reiterated the elements of promissory estoppel – a representation had to be made and it had to be inequitable, in all the circumstances, for the representor to go back on it – the Court of Appeal found there was no estoppel on the facts. Again, two elements of the decision are significant:

  1. In establishing that there was no detriment it was important that MWB had acted quickly, after making its representation, to reassert its rights. There was nothing to suggest that Rock’s position had been prejudiced in the interim.
  2. Estoppel can result in a permanent change in the parties’ relationship, not simply a suspension of obligations. Put another way, it can operate as an alternative route to achieve (effectively) a variation of the contract. Kitchin LJ emphasised simply that “All will depend upon the circumstances.”

Let’s talk about Brexit

− Contracts come under strain, and attempts to vary them are more common when they stop working for one or more parties. Volatility, especially economic volatility, is a key driver. And we live in volatile times. Coupled with Globe, MWB has made such variations harder to control and, therefore, less predictable. Whether that strikes you as a good thing or a bad thing probably depends on whether, economically, you are in the money or out of it under the contract as it stands. Either way, there are three key points to keep in mind:

  1. “No variation” clauses clearly now offer only limited protection. Even where the precise terms of the subsequent oral agreement are contested or unclear, they may still represent a valid variation.
  2. Part payment of a debt may now discharge the whole debt, especially where there will be an on-going relationship between the parties. The rule in Foakes v Beer is arguably not such an absolute bar as it once was.
  3. Estoppel can take the place of variation. Everything will turn on the specific circumstances, but the longer the representor waits before seeking to reassert its rights, the more likely it is that a permanent change will have been effected to the parties’ relationship.

In a quickly changing environment having the systems in place to keep on top of renegotiations is easier said than done, of course. But as the recent cases have made clear, the party that gives things a little more consideration often prevails.

 

Update: MWB was granted permission to appeal to the Supreme Court on 31 January 2017 (UKSC 2016/0152)

 

Further information

This case summary is part of the Allen & Overy Litigation and Dispute Resolution Review, a monthly publication.  For more information please contact Sarah Garvey sarah.garvey@allenovery.com, or tel +44 20 3088 3710.

 

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