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Rowan Turrall
Rowan Turrall,
No contractual variations except in writing?
04 August 2016

Commercial contracts often include a clause which provides that the contract cannot be varied unless certain conditions are fulfilled e.g. the variation must be in writing. There have previously been inconsistent decisions by the Court of Appeal as to whether such a clause will be upheld. In United Bank Ltd v Asif [2000] the Court of Appeal held that no oral variation of a contract was possible when it included an anti-oral variation clause. In World Online Telecom v I-Way Ltd [2002] apparently in ignorance of the United Bank decision the Court of Appeal decided that the law on the issue was sufficiently unsettled and refused summary determination.

The question has now been considered again twice in quick succession by the Court of Appeal, firstly in the case of Globe Motors Inc and others v TRW Lucas Varity Electric Steering Limited and others [2016] and then again more recently in MWB Business Exchange Centres Ltd v Rock Advertising Ltd [2016].

Globe Motors Inc and others v TRW Lucas Varity Electric Steering Limited and others

The facts

The case concerned an exclusive supply agreement between TRW Lucas (“TRW”) and Globe under which TRW Lucas agreed to purchase certain electric motors and leadframe assemblies. At first instance TRW Lucas was found to be in breach of contract and the judge awarded damages. As part of his decision he concluded that another company “Porto”, one of Globe’s subsidiaries, had become a party to the agreement.

The agreement contained a provision which stated:

“…This Agreement…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.” 

The judge found that notwithstanding this clause, the agreement had been varied or waived by the parties’ conduct because in their dealings over a long period of time they had operated as if Porto was a party, including ordering products from Porto under the agreement, the supply and invoicing of the products by Porto, the submission of warranty claims under the agreement to Porto and TRW’s continued submission of volume forecasts under the agreement to Porto.

The appeal

The decision was appealed. One of the grounds of appeal was that the judge had erred in finding that Porto had become a party to the agreement by means of an implied novation or variation by conduct because (a) the conduct relied upon was not unequivocal (b) the agreement precluded variation by parol.

As matters turned out, the Court of Appeal did not need to determine the question in order to be able to address the appeal. However, the judges recognised the importance of this issue and, in light of the previous conflicting authorities, made obiter comments on how they would have answered the question if they had been required to do so.

Whilst the judges recognised that it was legitimate for the parties to wish to insist that variations should only be agreed in writing, the arguments in favour of a flexible approach were strong. The governing principle was one of party autonomy.

“The parties are therefore free to include terms regulating the manner in which the contract can be varied, but just as they can create obligations at will, so also can they discharge or vary them, at any rate where to do so would not affect the rights of third parties…”

This did not mean that the judges did not recognise the ongoing value of such clauses:

In LJ Underhill’s view:

It does not follow that [these] clauses …have no value at all. In many cases parties intending to rely on informal communications and/or a course of conduct to modify their obligations under a formally agreed contract will encounter difficulties in showing that both parties intended that what was said or done should alter their legal relations; and there may also be problems about authority. Those difficulties may be significantly greater if they have agreed to a provision requiring formal variation.”

And in LJ Moore-Bick’s view:

A clause such as [this]…may have considerable practical utility, if only because it is likely to raise in an acute form the question whether parties who are said to have varied the contract otherwise than in the prescribed manner really intended to do so. As a matter of principle, however, I do not think that they can effectively tie their hands so as to remove from themselves the power to vary the contract informally, if only because they can agree to dispense with the restriction itself. Nor do I think this need be a matter of concern, given that nothing can be done without the agreement of both parties; and if the parties are in agreement, there is no reason why that agreement should not be effective.”

MWB Business Exchange Centres Ltd v Rock Advertising Ltd [2016]

The facts

Rock Advertising Ltd (“Rock”) occupied business premises operated by MWB Business Exchange Centres Ltd (“MWB”) as a licensee. Rock fell behind payment of its licence fees and other charges. MWB exercised its right under the licence agreement to lock Rock out of the offices and gave notice accordingly. It then issued proceedings seeking payment of arrears and damages. Rock counterclaimed for loss and damage for being excluded from the premises. It argued that there had been an oral agreement with MWB’s credit controller in which it was agreed that the licence fee payments would be rescheduled to clear the arrears and it had paid £3,500 on the same day in accordance with that revised schedule. MWB denied any such agreement had been reached, that if it had been it would be unenforceable due to lack of consideration and it was precluded by a clause in the licence agreement prohibiting oral variations.

The clause in question was in a format commonly seen in commercial contracts and stated:

“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 decision at first instance

At first instance the judge found in favour of MWB. Although he concluded that there had been an oral agreement as alleged and that there was consideration for it, he found that the terms of the licence agreement prevented it being varied orally.

The appeal

Rock appealed. The Court of Appeal considered the two previous conflicting authorities and also considered the Globe Motors decision.

The Court of Appeal held that the clause did not prevent the contract being varied orally.

Giving the leading judgment Kitchin LJ felt that the most powerful consideration was that of party autonomy. Given the detailed analysis which had been undertaken by the court in the Globe Motors case he felt it would require a powerful reason to adopt a different approach and none had been shown. He concluded that the clause in the licence agreement did not preclude any variation of the original agreement other than one in writing and in accordance with its terms. The oral variation agreement was supported by consideration and was binding and enforceable against each of the parties.

Learning points

The comments of the judges in the Globe Motors case suggest that parties should not stop including clauses in their contracts which provide for variations to be in writing. However, they need to be aware of the potential limitations of such clauses. If the court considers that the parties have conducted themselves in a manner which indicates agreement to vary a contract or if they verbally agree to a variation, they are unlikely to be able to use a clause requiring variations to be in writing to argue that the contract has not been varied. However, including such a clause may raise the threshold that has to be reached to persuade the court that a variation has been agreed. There will of course be questions of fact as to whether such agreement has actually been reached. Parties would be well served to continue to document any agreed variations in writing to seek to avoid later disputes.

For more information about the issues raised in this article or to find out about how the Dispute Resolution team can help you please contact Rowan Turrall on 0118 952 7206 or email [email protected].

Consistent with our policy when giving comment and advice on a non-specific basis, we cannot assume legal responsibility for the accuracy of any particular statement. In the case of specific problems we recommend that professional advice be sought.

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