Anti Oral variation clauses - not as they appear
Thursday, 15th September 2016
After recent judgments on the topic, the Court of Appeal has confirmed that clauses stating that the terms of a contract can only be varied in writing (typically known as "anti-oral variations clauses") do not do exactly as they say on the tin:- contracts which include such a clause can in fact be varied orally. Parties to contracts should now be wary about post contract discussions, as a variation to the terms of the contract could arise.
The two cases below were recently decided in the Court of Appeal, and shed much needed light on the effect of anti-oral variations clauses in contracts, an area which had previously been unclear.
Globe Motors Inc & Others v TRW Lucas Varity Electric Steering Limited & Another  EWCA Civ 396
Globe Motors Incorporated ("Globe Motors") and TRW Lucas Varity Electric Steering Limited ("TRW") entered into an agreement with each other. The agreement stipulated that TRW was required to purchase first generation motors from Globe Motors. A disagreement arose as to whether TRW was in breach of the agreement by purchasing second generation motors from a third party. The agreement entered into contained a clause that required variations to the contract to be recorded in writing.
The Court of Appeal's decision was based upon the definition of "products" under the supply agreement as the second generation motors lay outside of the scope of the agreement. However, the Court went on to make some interestingstatements regarding the effect of anti-oral variation clauses. These statements were obiter, meaning they were not essential to the decision and therefore are not binding precedent on other Courts, but they will no doubt prove persuasive in future interpretation.
The previous case law
Beatson LJ provided an illuminating discussion of the conflicting case law regarding anti-oral variation clauses, dealing with two previous Court of Appeal cases; World Online Telecom v I-Way Limited ("World Online") and United Bank v Asif ("United Bank"), which had ruled contradictorily on this point. In World Online it was held that parties can always agree to modify a contractual requirement (in this case for variations to be written) whereas in United Bank it was held that anti-oral variations clauses were binding.
The Court's comments
Beatson LJ reviewed the competing arguments; on one side the importance of commercial certainty, and on the other the importance of protecting parties' freedom to contract. Despite concerns regarding weakened commercial certainty and the potential for frivolous claims, Beatson LJ held the principle of freedom of contract enabled parties to vary a contractual agreement despite previous contractual agreements to the contrary.
As such, even if a contract includes an anti-oral variations clause the parties have freedom to vary that provision (orally or otherwise) such that oral variations are permitted.
In his concurring judgment, Underhill LJ highlighted the importance of contractual flexibility for parties' dealings. His judgment will provide some solace to concerned parties, as his judgment stressed that anti-oral variation clauses were not worthless. Instead, they act as an evidential barrier for a party seeking to argue an oral variation occurred despite such a clause.
MWB Business Exchange Centres Ltd v Rock Advertising Limited  EWCA Civ 553.
MWB Business Exchange Centres Limited ("MWB") operated managed offices located in the centre of London. Rock Advertising Limited ("Rock") were a marketing company. For years before proceedings were brought, Rock had occupied premises managed by MWB as a licensee. Their contract contained an anti-oral variation clause.
After expanding to other premises also managed by MWB, Rock fell into license arrears. When MWB sought to terminate the license, Rock argued that a re-negotiated set of license fee payments had been agreed as an oral variation of the contract.
As in Globe, one question put before the Court of Appeal was whether the parties could orally vary a contract which contained an anti-oral variation clause.
The Court's comments
As discussed, the conflicting case law of United Bank and World Online had caused uncertainty. Illustrating the persuasive potential of Globe the Court of Appeal reserved its judgment in this case until after the decision in Globe was handed down.
Agreeing with the non-binding reasoning in Globe, the Court in this case held that "it would require a powerful reason for this court to adopt an approach which is different from that [in Globe]".
Lord Justice Kitchin was of the view that the prevailing consideration was one of party autonomy and quoted from a 1919 New York Court of Appeals case in which Cardoza J had stated "Those who make a contract, may unmake it. The clause which forbids a change, may be changed like any other. The prohibition of oral waiver, may itself be waived".
The crucial question is what lessons should parties take from Globe and MWB for their business dealings.
Firstly, where statute applies (such as the requirement for sales and dispositions of land to be via deed), these cases will not have an impact, as the statute must be followed.
The main point to draw from these cases is that even if there is a clause that states the parties can only alter the contract in writing, the contract can still be varied orally despite that clause.
However, neither case has made anti-oral variation clauses worthless. It is clear that the Court considers these clauses should encourage parties to follow a written variations procedure, and that they may act as an evidential barrier against claims for oral variations.
In practice, parties should be sure to fully understand the terms of their contracts before conducting any negotiation, as well as the ramifications of acting inconsistently with the terms of the contract. Consideration should be given to records being kept of any conversation altering a contract's terms.