A recent case has called into question the usual contract provision that agreements can only be varied in writing.
Parties who regularly negotiate commercial contracts, including construction agreements, will be used to seeing provisions which provide that the contracting parties can only vary the agreement between them if they do so in writing.
However, if one party subsequently claims that a variation has been agreed orally, will it be able to successfully argue before the courts that such variation is effective?
In a recent decision of the Court of Appeal – Globe Motors Inc v TRW Lucas Varity Electric Steering Limited  EWCA Civ 396 – the court has suggested that despite the parties reaching an agreement not to allow oral variations to the contract (by what is known as an “anti-oral variation clause”) the parties are in fact free to do so if they so agree.
The claim related to an alleged breach of a long-term exclusive supply agreement. The Court of Appeal was able to reach its findings without expressly considering the effect of an anti-oral variation clause which the parties had signed up to.
However, the court chose to comment on the effectiveness of the anti-oral variation clause in any event because, it appears, it wanted to provide some clarity on this point.
Its findings are therefore what is known as “obiter” in that they do not bind lower courts but the comments will have persuasive effect and do need to be considered.
The court said that parties who agree contract terms between themselves have freedom to do so. Ordinarily the courts are reluctant to interfere with this freedom.
On that basis, if the parties have expressly chosen not to allow their agreement to be varied orally then one might expect the court to allow the provision to be upheld.
Indeed, there are good reasons for having an anti-oral variation clause. It gives the parties certainty in their dealings together and prevents the contract from inadvertently being varied – for example, by junior staff in a telephone discussion.
However, the Court of Appeal went further and said that, while the parties have freedom of contract, this should not stop them from agreeing between them to subsequently allow oral variations to the agreement, despite the anti-oral variation clause, if that’s what they want to do. This may appear confusing.
It is apparent from the court’s reasoning that it had some reservations about reaching the decision it did.
“It is apparent from the court’s reasoning that it had some reservations about reaching the decision it did”
Its overriding concern, however, was to ensure the parties to a contract can maintain a “flexible approach” to their dealings together and that as a matter of principle the parties should not be able to “tie their hands so as to remove from themselves the power to vary the contract informally, if only because they can agree to dispense with [the anti-oral variation clause] itself”.
Where does this leave parties who have or want to include an anti-oral variation clause in their contract?
It might be thought that such a clause serves little purpose in light of the Court of Appeal’s decision. Can one party simply ride roughshod over the clause?
The Court of Appeal made clear that even if a party wanted to claim that there had been an oral variation, they still had to prove such an agreement was reached in the usual way, which is not always easy.
Indeed, that may become all the more difficult when, in context, the parties had said they should not be able to agree oral variations.
Therefore, while the court’s comments may appear confusing, its aim was to make clear that contracting parties have freedom of contract in their dealings throughout their contractual relationship.
Despite the decision, it seems that the parties should still include anti-oral variation clauses in their contracts if they want to do so. The clause serves a purpose in encouraging formality in the parties’ dealings.
Practically, if for some reason, in a long-term contract, there is a need to agree variations orally despite an anti-oral variation clause, then good practice would suggest that whatever is agreed orally is subsequently documented in writing in any event, so as to prevent a dispute on the point arising in due course with all that entails in terms of the time and cost of litigation.
Tom Collins is an associate at Weightmans