Anti-oral variation clauses: are they enforceable?
Anti-oral variation clauses are often found in contracts. The idea behind them is to prevent the parties to that contract from making any subsequent changes to the agreement unless those changes are mutually agreed in writing and signed by the parties. In other words, those parties are trying to prevent themselves from becoming bound by informal ad hoc verbal (or even email) exchanges.
As Reyhan Yilmaz explains, these clauses have been the subject of a number of Court decisions in 2016, where the Court of Appeal had to weigh the apparent certainty given by these clauses against more traditional freedom of contract principles.
Globe Motors Inc v TRW Lucas Varity Electric Steering Ltd1
Here, the appellants, TRW Lucas Varity Electric Steering Ltd (“Lucas”), produced electric power-assisted steering systems (“EPAS”) for cars. The first respondent, Globe Motors (“Globe”), designed and manufactured component parts of the EPAS system.
In June 2001, Lucas entered into a long term contract with Globe to purchase electrical motors (“Agreement”). The Agreement applied not only to the products identified in it, but also to products that “could and would have been produced by Globe making ‘Engineering Changes’ to the Products identified in the Agreement and detailed specification”. Globe Motors Portugal, the second respondent, was not a named party to the Agreement but supplied Gen 1 motors to Lucas.
On 23 February 2003, Lucas appointed a third party, Emerson, as the sole supplier for the development and production of second generation motors, known as Gen 2 motors. From around 2005, Lucas purchased around three million Gen 2 motors from Emerson. Globe commenced proceedings for breach of contract against Lucas on 1 June 2011.
Decision at first instance
In 2014, HHJ Mackie QC in the High Court considered that Lucas’s purchase of Gen 2 motors from another manufacturer was a breach of the exclusivity agreement between Lucas and Globe. Six issues were raised by Lucas on appeal, of which two are important:
- Whether the Agreement covered not only the products identified in it, but also the Gen 2 motors bought from Emerson to the extent that they “could and would have been produced by Globe…”
- Whether the Agreement was varied by conduct so that Globe Motors Portugal became a party to the Agreement (and therefore had a right of action against Lucas) in circumstances where Article 6.3 of the Agreement expressly required that any agreement had to be recorded in writing and signed by the parties:
Article 6.3 of the Agreement provided that:
“6.3 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.”
Arguments before the Court of Appeal
The Court of Appeal held that the first instance had erred in finding that the term “Products” extended to improved second generation motors that “could have would have been produced by Globe making ‘Engineering Changes’ to Products that were within the Agreement”. Accordingly, Lucas was not in breach of contract for buying such motors from a third party. Therefore, strictly the question as to whether Globe Motors Portugal became a party to the Agreement became irrelevant. However, due to the importance of this issue, the Court of Appeal went on address this point.
Lucas argued that the requirement in Article 6.3 meant that any amendment had to be in writing and signed by both parties and it was not open to the parties to amend the agreement orally. It relied on the Court of Appeal’s decision in United Bank Ltd v Asif.2 Lucas submitted that an anti-oral variation clause “promotes certainty and avoids false or frivolous claims” of an oral agreement and that such clauses can prevent parties from producing evidential documents that is inconsistent with such a clause and that it sets an evidential threshold.
Lucas, however, was unable to point to a common law principle that restricted the freedom of the parties to agree the terms of a contract and/or one which precluded an oral agreement where it was subject to another agreement which contains an anti-oral variation clause.
The Court of Appeal also had to consider the approach in a conflicting appellate Court decision in World Online Telecom v I-Way Ltd3 where it was decided that notwithstanding an anti-oral variation clause, the conditions in the contract in that case had been varied by oral agreement. The reasoning here was fuller reasoning than the United Bank case and the unsuccessful respondent in the World Online case had accepted that the purpose of an anti-oral variation clause “is not to prevent recognition of oral variations” but only to prevent “casual and unfounded allegations” of variation.
The Court of Appeal decision
The Court of Appeal, albeit with some hesitation, decided to adopt the approach in the World Online Telecom case which recognised that a contract can be varied by oral agreement or by conduct notwithstanding the existence of an anti-oral variation clause.
Article 6.3 did not prevent the parties from varying the Agreement orally in any other informal manner. The principle of freedom of contract entitled the parties to freely agree the terms subject to public policy restrictions. The Court of Appeal found that Article 6.3 was waived as it was “overwhelmingly clear” on the basis of “open, obvious and consistent” dealings that the parties acted for a long period of time as if Porto was a contracting party to the Agreement. Whether or not it is possible for parties to vary an agreement without a requirement such as that in Article 6.3 depends on the facts of each case, and “to decide so otherwise would be inconsistent with the principles of freedom of contract”.
The Court of Appeal, however, took pains to emphase that it does not follow that clauses like Article 6.3 have no value at all. In many cases, parties would be unable to rely on informal communications or course of dealings in order to modify their obligations.
Further Cases
Like London buses, you wait 15 years for a case on anti-oral variations and then three come along at once. Shortly after the Globe decision, the same issue came up before the Court of Appeal in the case of MWB Business Exchange Centres Ltd v Rock Advertising Ltd.4 Here the Court also considered whether the variation was supported by consideration for a variation to be valid and found that it had. Lord Justice Kitchen in his judgment referred to the words of Cardozo J nearly 100 years ago in the New York Court of Appeal in Alfred C Beatty v Guggenheim Exploration Company (1919) 225 NY 380 where he said that:
“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… What is excluded by one act, is restored by another. You may put it out by the door, it is back through the window. Whenever two men contract, no limitation self-imposed can destroy their power to contract again…”
The Court of Appeal decisions were then followed in the TCC case of ZVI Construction v The University of Notre Dame[5] where there was also a clause in the contract stating that it could not be varied unless the agreement to vary was in writing and signed. Following the Globe and MWB cases, the Judge simply accepted that the parties could vary the contract in other ways.
Conclusion
These decisions are welcome as they clarify the two substantially inconsistent Court of Appeal authorities on this topic. The cases serve to reduce uncertainty about the enforceability of agreements varied orally or by conduct. They further reaffirm the long-standing freedom of contract principle that parties have a continuing liberty to agree what they like. Therefore, where there is an anti-oral variation clause that is designed to stop parties from varying it other than in writing in accordance with the contract, the parties are still free to vary that particular term either orally or by conduct.
Practical tips
It is important to note that the Court of Appeal in the Globe case did acknowledge that anti-oral variation clauses have practical benefit and promote certainty between the parties and that it did not follow that anti-oral variation clauses had no value at all. Indeed, Lord Justice Underhill commented that:
“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.”
Parties should therefore still be take care to ensure they set out, sign and document any variation in order to avoid any dispute about what was agreed and not agreed to be varied.