UK: When Does A Clause Not Achieve What It Says? Varying The "No Variation" Clause

Summary and implications

Given recent events, we could be forgiven for wanting some certainty and consistency. Understandably, when you enter into a contract, you want to ensure that the terms can only be changed formally, once they are recorded in writing and signed by both parties. Any oral agreement should only be given effect once it is so recorded, right?

After some 15 years of uncertainty, the Court of Appeal has recently answered this definitively, and the answer is: No. An oral agreement is fine (and so is variation by conduct, for that matter).

Background

At the end of most contracts you will ordinarily find a number of standard or "boilerplate" clauses. Invariably included is a provision in relation to variation of the contract terms; or more commonly no-variation of the contractual terms (unless recorded in writing and signed by both parties). Two examples are set out below:

Two standard clauses, the meaning and purpose of which is clear and unambiguous, and which should be straightforward to enforce.

So why should the Court of Appeal be concerned with clauses of this type?

Issue

Until recently, there were two conflicting Court of Appeal decisions on the effect of clauses which seek to restrict the way in which contracts can be varied, and in particular with a view to prohibiting oral variation.

In the first case – United Bank Ltd v Asif and Anor (11 February 2000, unreported) – the Court of Appeal held that in light of such a clause, no oral variation of the written terms could have any legal effect.

Two years later, in World Online Telecom v I-Way Ltd [2002] EWCA Civ 413 – in apparent ignorance of the earlier decision – the Court of Appeal held that the effect of such a clause was unsettled as a matter of English law, and the point was not therefore suitable for summary determination. In reaching this conclusion, it was noted that "the parties have made their own law by contracting, and can in principle unmake or remake it".

Accordingly, the effect of either of the example clauses above on a purported oral variation of the relevant contract was unclear. In April this year, the Court of Appeal therefore took the opportunity to clarify the position, albeit obiter. The position has now recently been confirmed in a judgment handed down at the end of June.

Decisions

In Globe Motors, Inc and others v TRW Lucas and Varity Electric Steering Limited and another [2016] EWCA Civ 396, the Court of Appeal provided its reasoned judgment on the effect of the clause set out at example 1 above on an oral agreement to vary the contract. Despite having allowed the appeal on other grounds, the Court proceeded in providing its obiter judgment, due to the importance of addressing the previous inconsistent judgments. The Court preferred the position in World Online that, in principle, a contract containing a clause requiring that any variation be in writing can be varied by an oral agreement or by conduct. This view was not arrived at lightly, as the Court appreciated the legitimacy of parties wishing to insist that any subsequent variation to a formal written agreement should be agreed in writing. However, the governing principle is that of party autonomy. As such, whilst parties are free to include terms regulating the manner in which any contract can be varied, they are equally free to discharge or vary such terms.

Having reserved judgment, until the judgment in Globe Motors was handed down and the parties were given opportunity to provide written submissions on the same, on 21 June the Court of Appeal handed down its judgment in MWB Business Exchange Centres Ltd v Rock Advertising Ltd [2016] EWCA Civ 553. It endorsed the obiter position in Globe Motors, finding that the wording set out in example 2 above did not prohibit the oral variation of the relevant agreement, made in a telephone call between a credit controller on the part of one party and the managing director of the other party.

What next for no-variation clauses?

Before striking through any clauses seeking to restrict variations in any draft contract received, it is important to note that the Court of Appeal itself recognised a number of purposes that such clauses still serve. Any party seeking to rely on an oral variation, or one based on conduct, still has to prove, on the balance of probabilities, that such variation was indeed concluded. This will likely not be without its difficulties; not least demonstrating that both parties intended that what was said or done should alter their legal relations. Further, there may also be issues with authority, and who can be said to bind the parties. Such difficulties may be significantly greater if the parties have agreed to a provision requiring formal variation.

However, it is now clear that agreements can be varied orally or by conduct, despite the inclusion of a clause which, on its face, prohibits the same. It is therefore important to ensure that contract managers and other individuals having day-to-day conduct of contract management are aware that the carefully drafted variation clause may no longer have the last say.

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.