Anti Oral Variation Clauses

The Court of Appeal has recently injected some welcome clarity into a hitherto divided area of law. The question of whether variations to a contract may be concluded orally notwithstanding a contractual term to the contrary is one which has long been a source of dispute. A good measure of the difficulty arose from two decisions of the Court of Appeal which were materially inconsistent. In United Bank v Asif[1] the Court had found that an oral variation of written terms was impermissible. The contrary position was reached in World Online v I-Way[2]. Slightly unusually the decisions are both those of Sedley LJ.

Different constitutions of the Court of Appeal were then faced with the same predicament. The first in time was Globe Motors v TRW[3]. The second being MWB v Rock[4], which was heard after Globe but before the former was handed down.

Whilst the point was fully argued in Globe, the Court of Appeal was not required to answer it given the findings on the first limb of the appeal. However, a strong obiter judgment was given, which then formed the basis for the decision in MWB. Beatson LJ gave the only judgment. His view was that:

‘Absent statutory or common law restrictions, the general principle of the English law of contract is that to which I referred at [64] above. The parties have freedom to agree whatever terms they choose to undertake, and can do so in a document, by word of mouth, or by conduct. The consequence in this context is that in principle the fact that the parties’ contract contains a clause such as Article 6.3 does not prevent them from later making a new contract varying the contract by an oral agreement or by conduct.’

He recognised that the decisions in United Bank and World Online were inconsistent and the therefore the Court was in a position to elect which of them to follow. Beatson LJ plainly preferred the rationale in World Online and so would have followed it had he been required to so do.

Hot on its heels followed the decision in Globe. Argument on that case was heard prior to MWB being handed down but the parties provided written submissions before judgment. It comes as no surprise at all that the Court elected to follow the obiter decision of Beatson LJ.

Kitchin LJ said ‘To my mind the most powerful consideration is that of party autonomy’. He echoed the words of the New York Judge Cardozo J who, almost 100 years ago, said:

“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… ”[5]

It thus remains open to parties to a contract to amend terms in a manner not provided for by the original contract. Any such variations are subject to the usual rules on formation of contract, including consideration. However, the decision in MWB tends to suggest that the bar to proving consideration is not especially high.

The combined effect of the two judgments is that parties are free to negotiate amendments and further terms in any way they please, notwithstanding the precise wording of the original contract. It perhaps recognises the position that matters ‘on the ground’ are not always handled precisely in terms recognised by the contractual documentation and respects the parties’ autonomy to determine matters between themselves. The trade off is that it brings an element of uncertainty. Ultimately though, as so often, it is going to come down to a question of evidence. Contemporaneous records such as emails are, as ever, invaluable in such situations.

[1] United Bank Limited v Asif + 1 other (11.02.2000, unreported)

[2] World Online Telecom v I-Way Ltd [2002] EWCA Civ 413

[3] Globe Motors Inc and others v TRW Lucas Varity Electric Steering Ltd and another [2016] EWCA Civ 396

[4] MWB Business Exchange Centres Ltd v Rock Advertising Ltd [2016] EWCA Civ 553

[5] Alfred C Beatty v Guggenheim Exploration Company & otrs (1919) 225 NY 380 at 387