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Contracts with 'no oral variation' clauses can "in principle" be varied orally, says Court of Appeal

Out-Law News | 24 May 2016 | 5:34 pm | 3 min. read

Clauses in commercial contracts preventing variation other than in writing are "in principle" unenforceable, given that parties to such contracts generally have the freedom to agree to vary whatever terms they choose, according to three senior judges.

Although not required to rule on the point, all three judges in a recent case decided by the Court of Appeal found that the presence of a so-called 'written variation only' clause did not prevent oral variation of the contract. Effectively, the parties would be able to "[make] a new contract varying the contract by an oral agreement or by conduct", according to Lord Justice Beatson.

Litigation expert Richard Twomey of Pinsent Masons, the law firm behind Out-Law.com, said that there had been "a real degree of uncertainty" about the effect of these clauses in recent years as a result of "apparently inconsistent" Court of Appeal judgments. The opinions of the judges in this case should therefore "substantially settle the point", he said.

"The governing principle behind this judgment is one of party autonomy and freedom of contract," he said. "Parties may incorporate terms into agreements that limit the ways in which the contract can be varied, but they can also agree to vary or discharge that term. In the judgment, this principle trumped any practical utility that such clauses may offer."

"However, this does not mean that 'no oral variation' clauses are valueless. It is hard to see any downside in continuing to include them in agreements, provided parties are aware of the degree of reliance that should be placed on them. Undoubtedly they will continue to provide some protection to parties seeking to prevent oral variations, if only because one of the judges identified 'greater difficulties' that might have to be overcome to prove variations had been agreed in certain circumstances where such a clause has been incorporated. However, it is clearly the case that it would be highly dangerous to place much reliance on such a clause generally," he said.

The dispute in this case revolved around a long-running exclusive supply agreement between TRW Lucas, a manufacturer of electric power-assisted steering (EPAS) systems, and Globe Motors, which supplied TRW Lucas with electric motors and other parts needed for its products. In 2014, a High Court judge found that TRW Lucas had breached this agreement from about 2005 by instead purchasing 'next generation' motors from DEAS Emerson, a firm that it bought in 2006.

The Court of Appeal overturned the High Court's judgment on the grounds that the new motors were a different product, and therefore not covered by the exclusivity agreement. Although there were "undoubted attractions in achieving a result which prevents the buyer from walking away from the agreement", there was no basis in the contract for extending the definition of 'products' beyond those mutually agreed by the parties, according to Lord Justice Beatson.

However, all three judges thought it necessary to explicitly address an argument put forward by TRW Lucas that Globe's Portuguese subsidiary, which actually supplied it with the motors, was not a party to the agreement and therefore was not entitled to sue it for breach of contract. Globe's position was that by dealing directly with the subsidiary, TRW Lucas had effectively varied the agreement regardless of a provision in the contract which stated that any variation had to be done in writing and signed by both parties.

The High Court judge had ruled that the conduct of the parties was sufficient to vary the agreement; and Lord Justice Beatson said that there was "ample evidence" to justify that conclusion. There had been "open, obvious and consistent" dealings between TRW Lucas and the subsidiary over a considerable period, to the extent that "there was no other explanation but that the parties had intended to add [the subsidiary] as a party to the agreement", he said.

In a supporting judgment, Lord Justice Underhill said that he had reached the same conclusion with "some hesitation", as it was "entirely legitimate" that parties should seek to prevent variations unless in writing.

"But the arguments in favour of a flexible approach are also strong; and in the end, even if it were desirable to treat provisions of this kind as entrenched, I cannot see a doctrinally satisfactory was of achieving that result," he said.

"It does not follow that clauses like [the one in dispute] have no value at all. In many cases parties intended 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," he said.