Canada: A Closer Look At Contractual "No-Variation" Clauses

Last Updated: December 20 2017
Article by Marika Strobl

In commercial contracts, particularly long term supply contracts, it can be expected that at some point during the life of the contract, the circumstances underlying the parties' agreement or the parties' positions will shift. Whether it's a change in price or supply and demand, inevitably, one or both of the parties will make a move to renegotiate contractual terms.

Against this backdrop, the "no-variation" or "anti-oral variation" clause (i.e. clauses that purport to prevent the contract in question from being amended absent compliance with specified requirements) seeks to offer some peace of mind and the certainty in contracting. Commonly found in commercial contracts in various permutations, these clauses typically require any variations or amendments to the contract to be captured in a prescribed way — usually in writing and signed by the contracting parties. The clause aims to fend off false or ill-founded claims that the contract terms have been varied informally or orally during the course of negotiations.

Are No-variation Clauses Effective?

The clause is effective to a degree but far from bullet-proof. Even when a carefully worded no-variation clause is included there remains a possibility for parties to vary the contract in ways other than the mode prescribed in the no-variation clause — including by informal or by oral contract, even if those modes of variation are specifically prohibited in the clause.

Why is this? The chief difficulty stems from the fact that that the clause, which is agreed at the time of contracting, purports to restrict the parties' right to contract in the future. This can be tricky because of freedom of contract — the right to enter into a subsequent or new contract cannot be contracted out of — and in that new contract, parties can agree to whatever they want (including terminating or varying the original contract).

The Leading Case in Canada

The leading Canadian case on no-variation clauses continues to be Shelanu Inc. v. Print Three Franchising Corp.1 (Shelanu). In this case, a no-variation clause prohibiting any amendments to the original contract unless in writing and signed by parties did not prevent the parties from entering into a new oral contract that terminated the original one. This was so even though the effect of the new contract was that the original contract was varied orally.

The Court of Appeal reasoned that since the oral contract was a new contract that terminated the original one, the anti-oral variation clause was not offended. In emphasizing the fact that the subsequent oral contract terminated the original contract, the Court of Appeal was able to sidestep the issue of whether the original contract was actually varied. Since the no-variation clause applied only to the original contract, technically the new contract was not off-side the no-variation clause (again, even though the effect of this was that the original contract was varied).

A UK Case Weighs In

A 2016 case out of the UK has been widely commended for its conceptual clarity in its handling of the enforceability of a no-variation clause. In Globe Motors Inc. v TRW Lucas Varity Electric Steering Limited2 (Globe Motors), the UK Court of Appeal acknowledged that, notwithstanding a no-variation clause, a party can in fact vary a contract in any way it chooses (including orally), as long as that subsequent contract makes it clear that the specific intention of the parties is to amend the original contract and to discharge or vary pre-existing contracts by dispensing with or waiving the requirements of the no-variation clause.

Globe Motors addressed a typical no-variation clause that provided the contract could only be amended by a written document, signed by both parties. In considering the issue, the UK Court of Appeal returned to basic contractual principles. Because the principle of freedom of contract entitles parties to agree whatever terms they choose, even the clause which forbids a change, may be changed like any other:

As a matter of principle... I do not think that [contracting parties] 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.3

While both Globe Motors and Shelanu happened to address no-oral variation clauses in the context of alleged oral variations, there seems to be no reason why the same analysis wouldn't apply to informal written variations (i.e. an "agreement" in writing that does not meet the requirements for a valid variation in a no-variation clause). The example that most often arises is a chain of emails where parties agree or purport to agree to a change to a contractual term.

Will Globe Motors Be Persuasive in Canada?

Globe Motors has not yet been cited by any court decision in Canada, but it has been raised numerous times in Canadian legal commentary, and has been applied in subsequent UK decisions. Globe Motors is not inconsistent with Shelanu (it just goes a step further), so we can expect that the reasoning of the decision would be persuasive to courts in Canada looking for guidance on the issue.

Whereas Shelanu was careful to emphasize the importance of the subsequent oral contract terminating the original contract (thereby sidestepping the suggestion that the original contract was varied), Globe Motors suggests that notwithstanding a no-variation clause, a party can actually vary a contract in any way it chooses in a subsequent contract — as long as that subsequent contract makes it clear that the intention of the parties is to bypass the requirements of the anti-variation clause.

Bottom line is that if the rule of freedom of contract is to be preserved, it should always remain open to the courts to find that the parties have agreed to do away with the previously agreed procedures — whether by termination of original contract (as in Shelanu) or simply by agreeing to do away with previously required procedures (as in Globe Motors). The practical outcome in many cases will be that contracts containing a no-variation clause can be in effect amended in ways other than as contemplated in the clause.

Remaining Value in a No-variation Clause?

One might ask if there is any remaining value in including a no-variation clause in a commercial contract. The answer is yes. Although a no-variation clause may not achieve its stated objective of outright precluding an amendment other than by the method prescribed in the clause, inclusion of a no-variation clause will:

  • Make the argument that a contract has been varied considerably more difficult (as it raises the bar on the evidence required to establish a variation to the contract).
  • Signal to a court that the parties considered the issue of variations the contract at the outset and determined that variations should not be considered to have occurred lightly.
  • Provide negotiating value for the party seeking to rely on it.

There is also a practical value in the inclusion of a no-variation clause in a contract. It will make unintentional amendments less likely by encouraging parties to follow a process and be very clear in capturing intended variations to the contract, ensuring those variations are documented and signed off by all the parties.

Key Points of Consideration

  • No matter how carefully drafted the no-variation clause, it will still be possible to enter into a subsequent contract that has the effect of informally or orally varying the original contract
  • This does not mean that variations not in compliance with the no-variation clause will be easy to establish: A party seeking to rely on a variation that does not comply with the requirements prescribed in a no-variation clause in the original contract will need to establish through evidence that:

    • A valid subsequent contract exists, and
    • The parties mutually intended to terminate the original contract (Shelanu) or mutually intended to do away with the previously required procedures to vary the contract (Globe Motors).
  • The onerous evidentiary requirements to establish a contract variation in the face of a no-variation clause is perhaps the real safeguard to the risk of contract terms being falsely varied orally or informally. Courts require clear evidence of mutual contract in a subsequent contract varying or terminating the original contract.
  • Even if a party falls significantly short in terms of evidence in support of the existence of a subsequent contract, this does not prevent that party from attempting to establish a claim that may be time consuming to defend.
  • When engaging in any discussion about varying the original contract, consider making a written record (for example, in meeting minutes or in each email exchange) that any variations remain subject to signing an amendment contract in accordance with the terms stipulated in the original contract.
  • Personnel tasked with overseeing the day to day performance of the contract should remain mindful about the potential risks of departing from the written contract and be careful about what is being said or written throughout the contract duration — even if those discussions take place casually over email or in person or over the phone. If conduct does depart from the contract, make a clear written record that conduct inconsistent with the written contract is not intended to waive or amend the contract.
  • Greater thought to the wording of these clauses may help avoid unintended variations of a contract's terms. For example, a no-variation clause that incorporates detailed variation mechanisms within the contract will reduce the likelihood of a later finding that the parties have agreed to override previously required procedures for amendments or to have terminated the original contract or overridden or waived the prescribed requirements.
  • On the flip side, if parties intend to vary the contract, they should ensure that all contractual variation mechanisms are strictly complied with to leave no room for argument as to whether a legally binding agreement to vary or terminate a contract was in fact reached.

Footnotes

1. [2003] O.J. No. 1919 (Ont. C.A).

2. [2016] EWCA Civ 396 [Globe Motors].

3. Globe Motors, para 120 [emphasis added].

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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