Anti-Oral Variation Clauses: A Written Analysis

Introduction

Despite the saying that 'a verbal contract is not worth the paper it is written on' (attributed to the American film producer Samuel Goldwyn), there is no shortage of cases in the English courts based on alleged oral agreements, or oral variations of written contracts. Such claims may well face evidential difficulties, and they might ultimately fail. But they inevitably introduce risk and uncertainty for the party resisting such assertions, who will be exposed to legal costs. Leaving alleged oral understandings to one side, another way in which written agreements may be varied is by subsequent conduct. One regularly encounters situations where after signing the contract, the parties both fall into the habit of performing it in a manner that is inconsistent with its terms.

To protect the written bargain, most commercial agreements contain an anti-oral variation clause as part of the 'boilerplate' clauses. Anti-oral variation clauses state that no variation shall be effective unless it is in writing and signed by the parties through their duly authorised representatives. For a number of years, it was unclear whether such provisions were effective under English law, with apparently conflicting Court of Appeal decisions on the point.

Now, in Globe Motors Inc v TRW Lucas Variety Electric Steering Ltd [2016] EWCA Civ 396, the Court of Appeal has provided the most detailed consideration of the authorities, both for and against, so far. Although obiter, the Court of Appeal concluded that anti-oral variation clauses were flawed as a matter of basic legal principle. That view may prove persuasive in future cases. This article considers the authorities leading up to, and the decision in, Globe Motors, and outlines how the parties nevertheless might protect themselves against claims based on an oral variation or implicit understanding.

The case for: United Bank Ltd v Asif (Court of Appeal, 2000)

Parties relying on anti-oral variation clauses tend to cite the Court of Appeal decision in United Bank Ltd v Asif. In that case, in January 2000, the Court of Appeal denied permission to appeal from a summary judgment against a guarantor, who had been held liable to repay a loan of £6 million on which the debtor had defaulted. At first instance, the guarantor had advanced a defence based on an alleged oral variation of the guarantee. He claimed that the bank had (orally) agreed to extend time for payment, and (even better) had also significantly reduced the amount that was guaranteed.

The deed of guarantee provided that "no variation ... shall be valid or effective unless made by one or more instruments in writing signed by the parties ...". When granting summary judgment for the bank, Wright J kept his reasoning brief. He rejected the submission that an officer of the bank had simply disregarded the anti-oral variation clause in the deed. The judge also found that the allegations of fraud (described as 'somewhat Byzantine' on appeal) were unsubstantiated, and that the bank's officer accused of letting the guarantor off the hook had lacked the authority to bind the bank. On appeal, Sedley LJ upheld the judge's decision "that no oral variation of the written terms could have any legal effect". He also found (separately) that the bank's officer had not had actual or ostensible authority to make the concessions in any event. Neither the judge nor the Court of Appeal however explained why the anti-oral variation clause was itself effective to preclude any variation: it seems the point had not been argued in any kind of detail. Despite the brevity of the Court of Appeal's judgment, United Bank Ltd v Asif has subsequently been treated as authority for the proposition that these clauses do work.

Before moving on to the next Court of Appeal decision on anti-oral variation clauses (which went the other way), it is worth noting that the alleged oral variation in United Bank also failed because the relevant officer of the bank who had allegedly acceded to the variation, acting as agent of the bank, had lacked any authority to bind his principal in this manner. This point takes on greater significance for parties in the wake of Globe Motors v TRW, as will be seen.

The case against: World Online Telecom Ltd v I-Way Ltd [2002] EWCA Civ 413

Two years later, the Court of Appeal heard another appeal from a summary judgment decision, in World Online v I-Way. The dispute concerned the payment that I-Way, an internet service provider, would receive from World Online in return for providing hardware necessary to ensure that World Online's customers would be able to access the internet. The contract was signed in April 1999. I-Way argued that as early as May 1999, it became clear that the hardware requirements to enable internet access were in fact more extensive than had been anticipated, so that I-Way asked for, and was granted, an additional 10% of the relevant amount from World Online. I-Way said that an oral agreement had been concluded to that effect, and that the extra 10% was then paid regularly by World Online.

World Online applied for summary judgment in reliance on an anti-oral variation clause, which provided that:

"... no addition, amendment or modification of this Agreement shall be effective unless it is in writing and signed by and on behalf of both parties."

The judge refused summary judgment. He found that I-Way had a reasonable prospect of overcoming the provision, and neatly summed up the logical conundrum that casts doubt on whether these clauses bite. Irrespective of such a clause, in theory parties are free to conduct themselves as they wish, and enter into a new agreement:

"... orally or by conduct, for that matter, if they chose. That agreement can either be treated as an oral agreement varying the original agreement, or as a free-standing contract, and I know nothing in case law that prevents such an event having effect."

On appeal, Sedley LJ found that the judge was right to have ordered a full trial. Having had the benefit of argument on the point, his view was that "... the parties have made their own law by contracting, and can in principle unmake or remake it ...". Reaching a subsequent oral...