Jul 11, 2016

Watch Your Mouth – Despite What Your Contract States What You Say and Do Can Vary It

The recent Court of Appeal decision in MWB Business Exchange Centres Ltd v Rock Advertising Ltd is the second recent Court of Appeal decision on the variation of contracts orally and/or by conduct where the contract contains an express clause preventing the contract being varied unless such variation is agreed, recorded in writing and signed by the parties (or words to that effect).  It has confirmed that such contracts may in spite of such clauses being included be amended orally.

The case comes hot on the heels of Globe Motors v TRW Lucas in which it was held that the contract could be amended despite the following clause being in the contract:

"This Agreement, … is the only agreement between the parties relating to the subject matter hereof. It can only be amended by a written document which (i) specifically refers to the provision of this Agreement to be amended and (ii) is signed by both Parties."

Legal Background

The general principle of English law is that parties may agree whatever terms they choose and can do so in a document, by word of mouth, or by conduct.

Previous case law had left the position uncertain as to whether contracts could be varied unless and until their terms had been complied with strictly, in part, or at all.  The two previous Court of Appeal decisions causing this confusion were: United Bank Ltd. v ASIF (decided in February 2000) and World Online Telecom Ltd v I-Way Ltd (decided after United Bank in 2002).

United Bank

It was held that the following anti-oral variation clause could only be amended by a written document complying with that clause:

"…No variation… shall be valid or effective unless made by one or more instruments in writing signed by the parties…".

The Court of Appeal endorsing the Court at First Instance when refusing permission to appeal held that no oral variation of the written terms could have any legal effect. It was also held that the person who was said to have reached the oral variation of the contract had no authority to do so.

World Online Telecom

Bewilderingly, the same Judge as passed judgment in United Bank, held that the question of whether parties could override a clause in an agreement excluding unwritten variations was sufficiently unsettled to be suitable for summary determination.

He said that, "… the parties have made their own law by contracting, and can in principle un-make or re-make it" and therefore in each case it will be a question of fact. Oral agreement or the conduct of the parties to a contract containing such a clause "may give rise to a separate and independent contract which, in substance, has the effect of varying the written contract."

Recent Decisions

Thankfully the confusion now appears to have been cleared up.

Judgment in Globe Motors was released in April 2016.  Of the two earlier conflicting cases discussed above the three judges sitting in the Court of Appeal followed World Online and consequently held that, in principle (it will always depend on the facts of each case), a contract containing a clause that variations must be in writing can be varied by oral agreement or by conduct of the parties.

The general tenor of the judgment was that the judges were reluctant to give no effect to the clause, however, there was no basis preventing such variation when the parties have a general right in law to contract and make terms as they see fit.  Therefore, they unanimously agreed that contracts containing such clauses can be amended by oral agreement or by conduct.

MWB Business Exchange Centres decided in June 2016 followed Globe Motors and World Online.  Provided it can be demonstrated that the parties have intended to waive compliance with the anti-variation clause and that the amendment is supported by "consideration" i.e. something of value an anti-variation clause will not prevent the parties' amending the contract even where there has been a failure to comply with the clause.

Is there any point including such clauses in agreements now?

The short answer is yes.  As noted above, every case will depend on its individual facts.  Including no-variation clauses will reduce casual and unfounded allegations of variation. To be successful the party seeking to avoid such a clause will require strong evidence or evidence that, on the balance of probabilities, such variation was indeed concluded before finding that there had been an oral variation of such a clause.

In all cases, it will be a question of looking at the factual circumstances to see whether a variation has taken place.

Main points of note

Contracts can be amended orally or by conduct even if the contract contains an anti-variation clause.

All negotiations conducted after a contract is signed, whether oral or in writing, should make clear whether an amendment to a contract has been reached or whether it is subject to contract/amendment or variation of the main contract.

When agreed amendments should be in writing and signed.

in: Case Law, Companies, Contract, News

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