UK: The English Courts Broaden The Scope For Oral Variation Of Contracts

Last Updated: 16 November 2016
Article by Nicola Vinovrski

In two cases this year, the Court of Appeal has held that a term in a contract that no variation shall be binding unless it complies with certain formalities (e.g. in writing and signed by both parties) does not necessarily prevent an informal variation. The English courts seem intent on eroding the effect of such clauses in the name of upholding party autonomy. The line taken in all cases where this issue has come before the courts in 2016 has been towards greater flexibility to the variation of agreements, even where the contracts expressly provide that they cannot be varied other than in writing which is signed by both parties.

The Court of Appeal handed down its decision in Globe Motors Inc v TRW Lucas Varity Electric Steering Ltd [2016] EWCA Civ 396 in April.  The case concerned a long term contract for supply of automotive industry products by Globe to TRW.  At first instance, the judge held that TRW was in breach of the agreement for purchasing improved motors from another manufacturer which Globe could have supplied if 'Engineering Changes' had been made.  On appeal, the Court held that the definition of 'Product' did not include the improved motors, and TRW was not in breach by sourcing them from another manufacturer. The Court considered that the agreement was structured so that TRW either had to agree a new Product, or propose Engineering Changes to existing Products, but it was not obliged to do so.

Relevantly, the exclusive supply agreement contained the following clause:

Entire Agreement; Amendment: This Agreement, which includes the Appendices hereto, 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.

TRW argued that this clause meant it was not open to the parties to amend the agreement orally.  They submitted that anti-oral variation clauses promote certainty and avoid false or frivolous claims of an oral agreement.  This is in part because, while such claims may be disproved after a full trial, they might carry the day when the party making the claim is able to resist summary judgment. TRW also submitted that such clauses can usefully prevent a person in a large organisation producing a document which unwittingly and unintentionally is inconsistent with a provision in a contract between the organisation and a counterparty. They thus set an evidential threshold.  

Perhaps surprisingly, the Court of Appeal disagreed. The judge at first instance found that the agreement had been varied by the parties' conduct because in their dealings over a long period of time they had operated as if a third party (the Second Claimant) was a party to the agreement.  Although not obliged to deal with the anti-oral variation provision because of the decision in relation to the meaning of Product, Beatson LJ made the following obiter remarks:

"The parties have freedom to agree whatever terms they choose to undertake, and can do so in a document, by word of mouth, or by conduct. The consequence in this context is that in principle the fact that the parties' contract contains a clause such as [the one above] does not prevent them from later making a new contract varying the contract by an oral agreement or by conduct."

This approach was followed in the Court of Appeal's decision in MWB Business Exchange Centres Ltd v Rock Advertising [2016] EWCA Civ 553.  The appellant, Rock, licensed office space in London from MWB.  The licence agreement contained the following 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.

After Rock incurred arrears of licence fees and other charges, MWB exercised its right under the licence agreement to lock Rock out of the premises and gave notice terminating the agreement. MWB claimed for payment of the arrears and damages.  Rock counterclaimed for loss and damage for wrongful exclusion from the premises, alleging that an oral agreement had been made with MWB's credit controller to re-schedule the licence fee payments to clear the arrears and that Rock had paid £3,500 in accordance with the revised payment schedule.  MWB denied this, arguing that such an agreement would be unenforceable as it lacked consideration and that an oral variation to the licence was expressly prohibited by the written agreement.

Consistent with the line taken in Globe Motors, the Court of Appeal held that the anti-variation clause did not preclude variation of the licence other than in writing and in accordance with the terms of the clause.  The Court thus upheld the alleged oral variation to the agreement: there was no written evidence of this agreement but the defendant had paid the first instalment under the new schedule.  The Court found that this variation was supported by consideration - more will be said about the issue of consideration below.

The approach taken in Globe Motors and MWB was subsequently applied by the Technology and Construction Court in ZVI Construction Co LLC v Notre Dame University (USA) in England [2016] EWHC 1924 in August.  In that case, the TCC found that the parties had varied the dispute resolution mechanics in a written agreement to develop land by a course of conduct (participating in an expert determination) even though the agreement contained the following clause:

No modification, alteration or waiver of any of the provisions of this agreement, except as otherwise provided in this agreement, shall be effective unless it is in writing and signed by or on behalf of the party against which the enforcement of such modification alteration or waiver is sought.

Citing Globe and MWB, the judge determined that the parties were able to vary their agreement by conduct in spite of the anti-oral variation clause. He confirmed that:

"[The relevant passages in these cases] make clear that the issue in such cases is fact-sensitive, that the question has to be decided on a balance of probabilities and that one relevant factor to consider is the fact that the parties have agreed a specified manner in which their contract can be varied or modified. There is however nothing in these passages to suggest that the parties must have directed their minds to the relevant clause or that they must have intended to modify, alter or waive the terms of [their agreement], or the non-variation clause in particular. What must be determined by the Court is whether, by their actions, words or conduct they must be taken to have intended to modify or later or waive the term of [the agreement], bearing in mind that they agreed to the terms of [the anti-variation clause] in the first place."

The decision in MWB is interesting so far as it relates to the issue of consideration.  In MWB, the Court of Appeal held that the extension of the payment schedule variation was supported by consideration, on the basis that the licensor received a "practical benefit", applying Williams v Roffey [1991] 1 QB 1.  The practical benefit the court identified in MWB was that the licensor had the premises occupied. Williams v Roffey involved a contract between a builder and a housing association. The building company engaged a sub-contractor to carry out the carpentry on numerous flats and the roof for an agreed price. The carpenter found himself in financial difficulty, unable to complete the work and alleged he had agreed with the building company that he would complete the project for additional payment one flat at a time. In accordance with this agreement, the carpenter carried out some additional work. When he subsequently sued for monies he said were owed for the work done, the building company argued that the carpenter was obliged to complete the work in full for the original contract price and any alleged agreement to pay him more would be unenforceable for lack of consideration.

The Court of Appeal in Williams v Roffey held that there was consideration to support the variation and so the contract had been varied. The Court found that the oral arrangement was beneficial to both parties: completing one flat at a time allowed work across the project to be distributed more efficiently, the building company's position was secured commercially and it avoided the carpenter cutting his losses and walking away from the project. Purchas LJ described the position thus:

"I consider that the modern approach to the question of consideration would be that where there were benefits derived by each party to a contract of variation even though one party did not suffer a detriment this would not be fatal to the establishing of sufficient consideration to support the agreement. If both parties benefit from an agreement it is not necessary that each also suffers a detriment".

The usual rule is that part payment of a debt is no consideration even if it confers a practical benefit - "payment of a lesser sum on the day in satisfaction of a greater, cannot be any satisfaction of the whole": Foakes v Beer (1884) 9 App Cas 605; Re Selectmove [1995] 1 WLR 474. 

The Court of Appeal in MWB distinguished Foakes v Beer and Re Selectmove on the basis that the only benefit conferred was in the form of the payment of the debt whereas in MWB the licensor obtained  the benefit of having the premises occupied. It is difficult to see how parties are to apply this distinction in practice. Selectmove concerned an alleged agreement to repay outstanding taxes in accordance with a payment schedule. An agreement to pay the debt by instalments was found not to be adequate consideration even though it meant the Inland Revenue would receive more than it would by enforcing all of its rights and putting the company in liquidation. The court considered itself bound by the rule in Foakes v Beer.

Nonetheless, if a party to an agreement promises to make an additional payment in order to secure the other party's promise to perform an existing contractual obligation to provide services and thereby secures a benefit then that benefit is capable of constituting consideration for the promise (Williams v Roffey). The current position seems to be that a practical benefit will suffice in an arrangement to pay more for goods or services (Roffey), but not in an arrangement to accept less than the full sum sue (Foakes, Selectmove), unless there is some additional collateral benefit to the creditor (MWB).  While no doubt intending to clarify the position, there is tension between the different authorities  in this area and potentially also with commercial reality.

Conclusions

In summary, the English courts have clarified that:

  • if the court can be satisfied that, objectively, the parties have reached the stage where they intended to vary the contract, it will also be possible to hold that they intended to waive any formalities contained within the contract;
  • any contractual variation must be supported by consideration (unless effected by way of a deed); and
  • depending on the facts of the case, a practical benefit may be sufficient consideration to support an oral variation.

What are contracting parties to think? Is there any point in a clause providing the contract may not be varied unless in writing and signed by both parties? According to Underhill LJ in Globe Motors,

"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."

Even though the court may still find there was an intended variation in such a scenario, there may be some evidential value in including an anti-oral variation clause.  Further, while the relevant anti-oral variation clauses considered in  the cases set out above may contain familiar language and so be considered quite standard in commercial agreements, the agreements in the round were, in retrospect, not drafted as well as they might have been given the parties' ongoing commercial relationships.  Indeed, the court described the agreement in Globe Motors as "poorly drafted".  Therefore, it may be possible to achieve a different result with more considered wording throughout the contract as a whole.

In light of these decisions, contracting parties who wish to seek to prevent informal variation of contracts would be wise to:                           

  • continue to insert anti oral variation clauses into contracts;
  • ensure that the contractual framework put in place suits the commercial relationship and its possible future developments;
  • be aware that a counterparty wishing to resile from an unfavourable bargain may seek to argue that something different was agreed via informal means such as conversations, emails or conduct – an entire agreement and/or anti-variation clause will not automatically quash such a claim; and
  • ensure that all parties understand their rights and obligations and constantly monitor and document them throughout the life of a long term agreement.

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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