The English Courts Broaden The Scope For Oral Variation Of Contracts

In two cases this year, the Court of Appeal has held that a term in a contract that no variation shall be binding unless it complies with certain formalities (e.g. in writing and signed by both parties) does not necessarily prevent an informal variation. The English courts seem intent on eroding the effect of such clauses in the name of upholding party autonomy. The line taken in all cases where this issue has come before the courts in 2016 has been towards greater flexibility to the variation of agreements, even where the contracts expressly provide that they cannot be varied other than in writing which is signed by both parties.

The Court of Appeal handed down its decision in Globe Motors Inc v TRW Lucas Varity Electric Steering Ltd [2016] EWCA Civ 396 in April. The case concerned a long term contract for supply of automotive industry products by Globe to TRW. At first instance, the judge held that TRW was in breach of the agreement for purchasing improved motors from another manufacturer which Globe could have supplied if 'Engineering Changes' had been made. On appeal, the Court held that the definition of 'Product' did not include the improved motors, and TRW was not in breach by sourcing them from another manufacturer. The Court considered that the agreement was structured so that TRW either had to agree a new Product, or propose Engineering Changes to existing Products, but it was not obliged to do so.

Relevantly, the exclusive supply agreement contained the following clause:

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.

TRW argued that this clause meant it was not open to the parties to amend the agreement orally. They submitted that anti-oral variation clauses promote certainty and avoid false or frivolous claims of an oral agreement. This is in part because, while such claims may be disproved after a full trial, they might carry the day when the party making the claim is able to resist summary judgment. TRW also submitted that such clauses can usefully prevent a person in a large organisation producing a document which unwittingly and unintentionally is inconsistent with a provision in a contract between the organisation and a counterparty. They thus set an evidential threshold.

Perhaps surprisingly, the Court of Appeal disagreed. The judge at first instance found that the agreement had been varied by the parties' conduct because in their dealings over a long period of time they had operated as if a third party (the Second Claimant) was a party to the agreement. Although not obliged to deal with the anti-oral variation provision because of the decision in...