I-Way v World Online Telecom

Out-Law Guide | 02 Nov 2007 | 8:31 am | 3 min. read

Clauses prescribing the procedure by which a contract may be varied are typical boilerplate provisions. There is no binding authority on whether such clauses are effective – this case looked set to consider the point but is ultimately inconclusive. Despite this, the arguments advanced by each side may be of interest.

I-Way Limited v World Online Telecom Limited

  • Court of Appeal (Civil Division)
  • PMCLR May 2007

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Facts

This was an appeal from an interim order of His Honour Judge Mitting dismissing World Online's application for summary judgment. For our purposes, the facts can be summarized quite briefly. I-Way agreed to supply a hardware platform to World Online. World Online wanted to use the platform to enable its customers to gain access to the internet. The parties agreed a payment formula which was based on a percentage of a rebate received from BT as a result of use of fixed lines for the service.

Although there was good take-up of the product by consumers, the payment arrangements proved uneconomic for I-Way. The parties had various discussions about this, and I-Way subsequently claimed that these discussions had resulted in a binding agreement that I-Way's share of the rebate would be increased from 20% to 30%. World Online disputed this.

Readers wishing to know the outcome of the dispute can read the judgment in the full trial [2004] EWCH 244 (Comm). In short, the Judge found for World Online. He decided that a key letter which I-Way relied upon was not in fact sent and had been prepared some time after its date. All of this meant that a point raised in the summary judgment hearing did not have to be decided. That point nevertheless remains of considerable interest in the context of IT contracts. As part of its summary judgment application World Online had relied on a clause in the contract which stated:

"… no addition, amendment or modification of this Agreement shall be effective unless it is in writing and signed by and on behalf of both parties."

Judgment

At first instance HHJ Mitting ruled that World Online's summary judgment application failed. There was an issue to be tried between the parties as to the alleged variation. This would involve trial of issues of fact to establish what was said, done and written about any rebate increase. It would also involve an issue of law: whether the parties could by agreement or conduct vary the requirement for strict compliance with the contractual variation clause.

The Court of Appeal agreed with the Judge. The Court found that there was no binding authority on the point, and thus no authority upon which to conclude that I-Way's arguments had no prospects of success at the summary judgment stage. As the Court of Appeal said, each side put forward a compelling proposition. World Online said that to ignore the contractual clause would render the clause and any clause like it worthless. I-Way said that the parties' ability to vary the relevant clause was a matter of freedom of contract. Faced with these two arguments there was undoubtedly an issue to be tried. As it turned out, the trial Judge was able to resolve matters without reaching a conclusion on this point.

Commentary

Clauses seeking to prescribe how variations will be dealt with are common in IT contracts. It is also common that parties do not follow the prescribed process or formalities in practice. Where does this leave them? At present there is no clear authority on the subject.

Some commentators suggest that there is no reason why prescriptive variation clauses should not have effect. If this is how the parties have agreed that their behaviour will be governed, why should that stipulation be ignored? These commentators say that the law has other principles with which to determine the effect of non-compliance, such as the principles of waiver and estoppel. So for example if a party's conduct suggests he will not rely on his contractual rights but will accept performance in some other, different way, that party may then be precluded from going back to its original rights on the basis that he has waived his right to rely on those original rights, alternatively he is estopped from doing so.

There are, however, problems with this approach. It may work to protect a party from aggressive action. For example, where the supplier has "informally" been given more time to perform, waiver or estoppel might prevent the customer from reverting to the original position without notice, or at all in some cases. But these principles work less well when a party is seeming to enforce a positive variation in his favour, such as in the instant case where I-Way was seeking an additional payment. In such circumstances, if the contractual provisions limiting variation are effective, a party in I-Way's position would probably have to rely on the concept of promissory estoppel, a somewhat undeveloped and uncertain area of the law. 

There is another problem with this approach. As well as seeking to restrict variation, many IT contracts also contain a "no waiver" provision. This makes things even less clear by raising conceptual questions about whether it is possible to waive by conduct a non-waiver clause. All of this leads some other commentators to question the value of such clauses. Their view is that it is perfectly possible to vary a contract orally even if the original contract calls for written variations. These commentators say that it is a straightforward matter of freedom of contract.

The Court of Appeal has confirmed that the point remains unresolved. If there is at some point a ruling on this issue, it may well turn on the drafting of the clause in question, and the conduct of the parties.