20th March 2017

Do as I say or do as I do – Can a contract clause prohibiting oral variations be varied orally?

At a glance

Contracts will often seek to prevent any subsequent changes to their terms unless such variations are specifically agreed and recorded in writing by the parties. Many contracts will even contain clauses expressly prohibiting subsequent variations from being agreed orally. However, following a number of Court decisions in the past year, Liane Simmonds assesses whether such clauses are still likely to be effective.

The starting point is that commercial parties are, on the whole, free to agree whatever terms they wish to be incorporated into a contract (subject, of course, to certain exceptions). Many contracts include a standard clause that there shall be no valid variation of the written contract unless agreed between the parties, recorded in writing and signed by both parties (known as anti-oral variation clauses). Such clauses seek to create certainty by preventing oral variations of a contract, which may be difficult to evidence and may also be inadvertent.

The law on the effectiveness of these clauses has been historically inconsistent. A case in 2000 decided that no oral variation could have any legal effect in the face of such a clause, suggesting that anti-oral variation clauses were enforceable (United Bank v Asif). However this was quickly followed by a case in 2002 indicating that an oral variation of a written contract was possible, even in circumstances where there was an anti-oral variation clause, on the basis that the parties had formed the contract and should have the ability to change it if they so wished (World United Telecom v I-Way).

There have been three further cases in the last year which clarified the position and confirmed that parties should not assume that an anti-oral variation clause will be effective to prevent agreed oral changes to the contract from being validly incorporated.

Globe Motors Inc v TRW Lucas Variety Electric Steering Ltd [2016]

This case involved an exclusive supply contract which contained the following anti-oral variation clause: “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.”

Despite this clear wording, the Court of Appeal confirmed in their comments that the parties should nevertheless have the freedom to agree any contractual terms they wish, whether in writing, orally or by conduct. The fact that the exclusive supply contract contained an anti-oral variation clause should not prevent the parties from making a new contract in discussions later and thereby varying the original contract.

MWB Business Exchange Ltd v Rock Advertising Ltd [2016]

Rock had a licence to occupy managed office space in London run by MWB. MWB sued Rock for unpaid licence fees and, in their defence, Rock argued that there was an oral agreement to reschedule the licence fee payments. MWB sought to counter Rock’s position by relying upon the following anti-oral variation clause: “This licence sets out all of the terms as agreed between MWB and the licensee. No other representations or terms shall apply or form part of this licence. All variations to this licence must be agreed, set out in writing and signed on behalf of both parties before they take effect.

The Court of Appeal concluded that, on the evidence, there was an oral agreement and the anti-oral variation clause did not preclude the oral agreement from being effective to vary the terms of the licence. This case accordingly followed the Globe case and confirmed the approach taken in that case.

ZVI Construction Co LLC v University of Notre Dame (USA) in England [2016]

A land development agreement contained the following anti-oral variation clause: “No modification, alteration or waiver of any of the provisions of this agreement, except as otherwise provided for in this agreement, shall be effective unless it is in writing and signed by or on behalf of the party…”.

The Technology and Construction Court, upon considering the previous cases in this regard, held the contract could be changed by oral agreement – contrary to the anti-oral variation clause – and that the parties were able to “un-do the limitation” of that provision in relation to a dispute over the validity of an expert determination.

Summary

The recent case law indicates a greater willingness on the part of the Courts to uphold oral variations to a contract, even when there is an express and unambiguous anti-oral variation clause in the original contract. In simple terms, as the Courts recognise that contractual parties are able to orally vary most (if not all) of their contractual terms by agreement, that must also include the ability to vary any anti-oral variation clause. This is a more flexible approach, which allows contractual parties to vary the terms in the manner they see fit. Does this mean that anti-oral variation clauses can now be disregarded?

We would say no. In the case of Globe [2016], the Court acknowledged that issues might arise when seeking to prove that a contract had been orally varied and that there could be some dispute between the parties in this regard. The Court will clearly need to be satisfied that, on a balance of probabilities, there had been an oral variation. If so, this will create a new contract and there must, presumably, be consideration (although case law suggests that if there is a “practical benefit” then this might suffice).

On balance, the safest approach would be for the parties to comply with the requirements of the contract and, in order to avoid any potential dispute, make it clear during any oral discussions or negotiations that no variation will be effective unless and until it is recorded in writing and signed by the parties.

If, when orally discussing a potential variation, both parties intend for that potential variation to become binding and effective, then they will presumably be willing and able to record that agreement in writing. This should prevent future evidential disputes arising in relation to proving whether or not an oral variation was agreed, as the parties will have not only recorded the agreed variation in writing, but they will also have expressly stated during the oral negotiations that no discussed variation would be considered to be agreed until it was recorded in writing.

However, if there is an anti-oral variation clause and a situation arises whereby an oral variation has been allegedly agreed but (for whatever reason) not formally recorded in writing, the recent case law will be of assistance (although only in relation to the prohibition contained within the anti-oral variation clause, and not in relation to proving that an oral variation was agreed). Should a party therefore enter into discussions with a counterparty regarding a variation to the contract, it should not assume that such discussions will never under any circumstances have legal effect.

If you would like any further information, please contact Liane Simmonds by emailing Liane or call her on +44 (0)1293 558504.

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 taking any action as a result of the contents of this document.

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