The Enforceability of Anti-Oral Variation Clauses

Morgan Lewis

A recent ruling sets a precedent that no longer allows a contractual clause that purports to preclude variation other than in writing to be regarded as uniformly enforceable.

In a recent case concerning the breach of an exclusive supply agreement,the Court of Appeal has addressed the issue of the enforceability of clauses that purport to preclude contractual variation other than in writing. In Globe Motors Inc v TRW Lucas Varity Electric Steering Ltd [2016] EWCA Civ 396, the court held that including an anti-oral variation clause in a contract would not in principle prevent subsequent variation of the contract orally or by conduct. The enforceability of such clauses has been the subject of some uncertainty following two conflicting Court of Appeal decisions in United Bank v Asif (unreported, 11 February 2000), which supported the effectiveness of anti-oral variation clauses, and World Online Telecom Ltd v I-Way Ltd [2002] EWCA Civ 413, which suggested that informal variation was possible notwithstanding the presence of an express no-variation clause.

Background

The dispute concerned a long-term exclusive supply agreement (the Agreement) that the parties entered into in 2002, whereby TRW Lucas Varity Electric Steering Limited (TRW) agreed to purchase from Globe Motors Inc (Globe) components for steering systems (referred to as Gen 1 motors). In 2005, TRW started purchasing Gen 2 motors from a third-party competitor of Globe. Globe claimed damages for breach of contract.

The Agreement contained a clause requiring any subsequent variation to be in writing:

6.3 Entire Agreement; Amendment: This Agreement, which includes the Appendices hereto, is the only agreement between the Parties relating to the subject matter hereof. It can only be amended by a written document which (i) specifically refers to the provision of this Agreement to be amended and (ii) is signed by both Parties.

In its defence, TRW asserted that it had not breached the Agreement because Globe had transferred all its manufacturing to a subsidiary company in Portugal (Globe Porto) with whom TRW did not have a contractual relationship. Because no written amendment to the Agreement had occurred, TRW claimed that Globe Porto could not be a party to the Agreement.

In the High Court, HHJ Mackie QC held that TRW was in breach of the Agreement by purchasing improved second-generation motors from another manufacturer. The High Court also held that it was possible to subsequently vary the Agreement orally, despite the provisions of clause 6.3. TRW appealed this aspect of the decision, arguing that the court was bound by the earlier Court of Appeal decision in United Bank, which upheld an anti-oral variation clause.

Six grounds were raised on appeal, of which one is particularly significant:

  • Had the parties varied the Agreement by conduct to make Globe Porto a party in circumstances where the Agreement expressly required any variation to be in writing and signed by the parties?

On appeal, the Court of Appeal departed from the judgment given at first instance and held that the Gen 2 motors did not fall within the scope of the Agreement, and consequently TRW’s purchase of them from a third party was not a breach of contract. However, the Court recognised that in light of the substantial inconsistencies between the decisions in World Online and United Bank, it was necessary to address the issue of the enforceability of anti-oral variation clauses and decide between the two approaches. All three judges expressed a considered view (albeit obiter) on the effect of such clauses, with Beatson LJ providing the leading judgment.

The Decision

The Court unanimously accepted that no written document had amended the Agreement to incorporate Globe Porto as a party thereto. However, HHJ Mackie QC had found that the parties’ conduct over a prolonged period demonstrated the requisite elements necessary for a variation by conduct. This therefore prompted consideration of clause 6.3 of the Agreement, and whether the no-variation clause was effective in precluding variation by conduct.

The Court of Appeal found in favour of the decision in World Online: variation of an agreement was possible by informal means, despite the express wording to the contrary in clause 6.3. In reaching its decision, the court dismissed the arguments put forward by counsel for TRW that there were reasons of principle and policy for recognising express no-variation clauses and for preventing informal variation; such clauses promoted certainty and avoided false or frivolous claims that an oral agreement had been reached.

Beatson LJ stated as follows:

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. (paragraph 100)

Beatson LJ found that there was ample evidence of “open, obvious and consistent” dealings over a long period to conclude that Globe Porto was treated as a party to the Agreement. Accordingly, had TRW been found in breach of the Agreement, Globe Porto would have had a right of action against TRW.

The Court of Appeal did, however, recognise that issues could arise in practice if informal variation was outrightly accepted, including difficulties of proof where it is alleged that a contract had been made orally or by the conduct of the parties. Beatson LJ expressed that “the court would be likely to require ‘strong evidence’ before finding there has been an oral variation of such a clause.”

Conclusion

The decision in Globe Motors v TRW Lucas means that a contractual clause that purports to preclude variation other than in writing can no longer be regarded as uniformly enforceable. However, it is still worthwhile including anti-oral variations in contracts because they increase the threshold for establishing an oral binding variation. Although the decision is technically obiter, the fact that it has considerable appeal as a matter of principle means that it is likely to be highly persuasive. Indeed, the Court of Appeal more recently held in MWB Business Exchange Centres Ltd v Rock Advertising Ltd [2016] EWCA Civ 553 that a clause requiring contract variation to be in writing and signed did not prevent a valid variation by oral agreement, thus endorsing the obiter comments in Globe Motors v TRW Lucas. This suggests a judicial willingness to apply the approach adopted in Globe Motors v TRW Lucas to a broader range of scenarios.