Verbal Variations: Court of Appeal decision confirms that contract variation clauses are not watertight

English law provides that, as a general principle, the parties to a contract can agree to vary that contract in writing, orally or by conduct.

In order to provide certainty for the parties to a contract and to exclude unintentional variations orally or by conduct, it is common for contracts to include a clause expressly requiring any variations to the contract to be agreed in writing and signed by the parties’ authorised representatives.

There has been conflicting case law on the enforceability of such variation clauses but a recent Court of Appeal case has clarified the position.

Globe Motors Inc v TRW Lucas Variety Electric Steering Ltd [2016] EWCA Civ 396

Whilst the judgment in Globe Motors did not turn on the effect of the variations clause which sought to preclude oral variations, the Court of Appeal held that such clauses will not prevent subsequent variations of the contract orally or by conduct.  This is because the parties have the freedom to contract however they choose, so the clause does not prevent them from later making a new contract varying the original contract orally or by conduct.  The Court of Appeal did however state that strong evidence would be needed to establish an oral variation. This decision was subsequently confirmed to be correct by the Court of Appeal in MWB Business Exchange Centres Ltd v Rock Advertising Ltd [2016] EWCA Civ 553.

Whilst the decision may not be helpful to parties who have included such a clause for the very reason that it provides certainty, it is difficult to fault the court’s reasoning as it ultimately upholds freedom of contract, a key principle of English law.  Just as the parties can make an agreement as to how to regulate their future conduct, it follows that they must also be able to agree to change or waive that agreement later on.

Should contractual variation clauses still be used following Globe Motors?

Although the decision in Globe Motors demonstrates that such clauses are not conclusive, they still serve a useful purpose:

  • They are strong evidence of the parties’ intentions when agreeing the contract that it may be varied in writing only.
  • As stated in Globe Motors, it can be difficult to successfully argue that an oral variation has occurred and the presence of such a clause will make it even more difficult for a party to make such an allegation.
  • From a practical point of view, such clauses set out a clear procedure to be followed, which can be helpful for those managing the contract ‘on the ground’ or ‘at the coal face’.
  • They may also deter those managing the contract from making any variations by oral discussions or conduct.

Practical guidance

There are various steps that a party can take to minimise the risk of a contract being found to have been varied informally and some suggestions are set out below.

These matters can be particularly important in IT contracts where the scope of services may be expected to evolve during the life of a project, once requirements are more clearly identified and where detailed ‘change control’ processes are commonly used to address these issues.

  • Ensure that there is a clear procedure in the contract for requesting and agreeing changes.
    • A requirement for all variations to be agreed ‘in writing’ could be interpreted as including email exchanges, so you may want to expressly state that variations by email are excluded.
  • Implement internal contract management policies and procedures, which require staff to:
    • Keep a full and accurate written record of discussions regarding potential changes.
    • Ensure that all agreed variations are set out in writing and signed by both parties and follow any contractual change control procedures.
  • Provide training for relevant staff which:
    • Emphasises the need to follow the agreed contractual procedures and comply with internal policies and procedures.
    • Makes clear that individuals should not agree to changes, or purport to agree to changes, unless they are properly authorised to do so.

Finally, it is worth noting that there are some exceptions to the general principle that parties can agree to vary a contract in writing, orally or by conduct (e.g. deeds, consumer contracts and contracts for the sale of land, for which specific formality requirements or limitations apply as a matter of law).

Cannings ConnollyCannings Connolly
26 June 2017

Disclaimer:
This Legal Update is published as a general guide only and it is not intended to contain definitive legal or professional advice, which should be obtained as appropriate in relation to any particular matter. This publication relates to matters prevailing at the date of its original publication and may not have been updated to reflect subsequent developments.

For further information or advice on the matters addressed in this Legal Update or any other related matters please contact:

Matthew Sillett on 020 7003 8116 or email msillett@cclaw.co.uk 

Claire Walsh on 020 7003 8119 or email cwalsh@cclaw.co.uk

Mili Khoda on 020 7003 8128 or email mkhoda@cclaw.co.uk