Variations to IP licences - who is holding the pen?

This article discusses the IP licensing implications of the recent decision in Rock Advertising on no oral modification clauses and the potential for informal variation arrangements.

Overview

The recent decision in Rock Advertising Ltd v MWB Business Exchange Centres Ltd1 overturned the previously open-ended position reached by the Court of Appeal on no oral modification (NOM) clauses, favouring a strict application. But what does this mean for IP licensing counterparties? What if the commercial reality relies on the ability to agree oral variations at short notice? If so, perhaps the licence needs to provide for more informal procedures to agree variations.

Facts

Rock Advertising Ltd (Rock) entered into an agreement for the use of premises (the Agreement) managed by MWB Business Exchange Centres Ltd (MWB). Clause 7.6 of the Agreement set out that “all variations to this licence must be agreed, set out in writing and signed on behalf of both parties before they take effect.”

The Agreement provided for a schedule of payments over the agreed term for use of the premises. Rock was in arrears and its sole director proposed a revised payment schedule to MWB’s credit controller by telephone, which Rock understood to have been agreed.

The credit controller’s manager did not agree to the revised payment schedule. He locked Rock out of the premises and claimed for the arrears payable to MWB. Having relied on the oral agreement and paid the first instalment under the revised payment schedule, Rock counterclaimed for damages for wrongful exclusion from the premises by MWB.

Judgment

First instance - It was found that the MWB employee had orally agreed to the variation and there was sufficient consideration. However, as the variation was not in writing as required by clause 7.6 of the Agreement, it was not effective.

Court of Appeal - overturned the first instance decision, finding that the parties were entitled to depart from a NOM clause on the basis of freedom of contract.

Supreme Court - Lord Sumption then overruled the Court of Appeal. He found that in general NOM clauses will bind contracting parties, unless an oral variation is relied upon to one party’s detriment giving rise to an estoppel.

Lord Sumption found support for his estoppel approach as follows: (i) the Vienna Convention and UNIDROIT model code already accepted a qualification to the enforcement of NOM clauses where one party had reasonably relied upon the oral agreement in acting upon it, and (ii) it was already accepted that estoppel may permit the enforcement of a collateral warranty, as an exception to the routine application of entire agreement clauses.

Lord Briggs reasoned that variations in the presence of NOM clauses would require writing in order to be effective, save in cases of estoppel or a ‘strictly necessary’ implication.

Rock’s claim for estoppel was not successful as Rock suffered no detriment in relying on the revised payment schedule (as had been found at first instance).

Implications for licensing counterparties

  • Strict enforcement of NOM clauses, generally - The Supreme Court appears to give weight to certainty over practicality in stating that two parties may agree to limit themselves as to their future conduct by strictly enforcing a NOM clause. However, it was unanimously accepted that there was a limit on enforcement of NOM clauses in certain circumstances, albeit that licensing counterparties have not been given much guidance as to what this is. Lord Sumption suggested that ‘something more’ would be required than reliance on an informal promise, and Lord Briggs’ indicated the prospect of a ‘strictly necessary’ implication. Therefore, it is advisable to ensure that, for example, variations to royalty rates and milestone payment schedules are made in writing where a NOM clause is in place. It is possible that this lack of clarity was intentional on the part of the Supreme Court, to leave a general discretion for the court to save exceptional cases from what otherwise appears to be a strict application of NOM clauses.
  • Providing for a more informal variation mechanism - The Supreme Court acknowledged the widespread use of NOM clauses was evidence that commercial entities needed the option to agree formalities between themselves which go beyond the common law requirements. On one level, the decision should mean that parties to a licence agreement can be more certain that their written agreement reflects what they agreed and will make it more difficult to argue that there has been an oral variation of the licence agreement. However, this decision may stifle the commercial reality of many licensing relationships and may leave current business practices exposed where they are not reflected in writing.
  • Therefore, if licensing counterparties require a more informal mechanism to make oral variations to a licence with a NOM clause, it would appear to be sensible to reflect this oral variation mechanism in the licence agreement. For instance, the licence could provide that nominated individuals of each party (or a committee comprised of such authorised representatives) may agree certain variations orally, or that oral variations made would need to be confirmed in writing by such individuals (or committee) within a certain period.
    The practicality this would offer would need to be balanced with the contractual uncertainty it could then create between the parties. In particular, it would need to be as specific as possible and tailored to each licensing relationship in order to reduce the risk of a dispute. For example, in a co-development licence, the parties could agree that such individuals (or such committee) may authorise or vary orally certain development expenses below a certain value or make minor changes to a development timetable, with escalation to senior officers of the parties where necessary. Alternatively, matters which might be dealt with in this way could be specified in a schedule.
  • Express consent to payments made in arrears - Payment in full on dates outside of the terms of the licence may not defeat a subsequent claim for breach of the licence and/or termination, even where the variation has been agreed orally. Estoppel is unlikely to save a licensee who fails to agree a revised payment schedule in writing, unless it can demonstrate that it relied on the licensor’s promise to its detriment.
  • Tightening up NOM clauses - It has been suggested that parties could contract out of a remedy in estoppel, thereby providing further absolute certainty in excluding oral variations2. It is not entirely clear if this type of clause would be enforceable as it is untested in the courts. The Supreme Court’s reasoning in Rock also appeared to infer that there was a limit to what the parties could agree for practicality and where the common law would ultimately step in to prevent unjust outcomes.
  • Room for further disputes - In favouring certainty, the Supreme Court did not consider arguments around the creation of a collateral contract (as opposed to an informal variation of the original contract) based on the terms of the oral agreement. This is likely to be because it could not find valid consideration. Rock had provided MWB with a practical expectation of a benefit (i.e. that Rock’s payments would eventually be paid, and that the property would not be left vacant whilst it sought a new licensee), but this was not sufficient. To have found otherwise, would have required the revisiting of Foakes v Beer (settled law since 1884). On a different set of facts, a collateral contract may have arisen, resulting in a different outcome to the one found by the Supreme Court.

Conclusion

The decision in Rock protects contracting parties from the consequences of a mistaken or unintended informal variation of their licence agreement and so provides more legal certainty. Parties must have regard to any formalities specified in their licence agreement to ensure compliance if any variation is to be effective.

Where, in practice, commercial relationships between contracting parties require more flexibility with regard to the management of certain day to day matters (as with a co-development licence agreement), the parties should consider providing for alternative less formal procedures in their licence agreement so that a ‘no oral modification’ clause does not, inadvertently, hinder their commercial endeavours.


1 [2018] UKSC 24

 

2 Jonathan Morgan, Cambridge Law Journal 76(3), November 2017 pp589-615

This document (and any information accessed through links in this document) is provided for information purposes only and does not constitute legal advice. Professional legal advice should be obtained before taking or refraining from any action as a result of the contents of this document.