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Supreme Court holds that clauses preventing informal variations of contracts are valid

  • United Kingdom
  • Commercial agreements

22-05-2018

The Supreme Court has issued a judgment in Rock Advertising v MWB Business Exchange Centres Ltd which makes clear the effect of clauses that set out their own conditions for varying the terms of a contract. Previously there was always the possibility that parties could informally agree changes to their contracts and bypass a contractually agreed variation procedure. Now the Supreme Court is saying if the parties were happy to sign up to a particular procedure for variations then this should override their attempts to vary the contract by less formal means.

The question put to the Supreme Court was whether a contractual term prescribing that an agreement may not be amended except in writing and signed by the parties overrode a telephone discussion which agreed a revised schedule of payments under a particular licence agreement. Earlier, the Court of Appeal had ruled in favour of the party wanting to rely on this telephone discussion on the basis that it was an oral agreement to vary the originally contractually agreed schedule of payments and amounted to an agreement to dispense with the variation procedure in the contract.

The reason the case went to the Supreme Court was the tension between the fact that at English common law there are no formal requirements for the validity of a simple contract (other than statutory exceptions for example for sale of land or for certain regulated consumer contracts) and express agreed terms governing how variations should be agreed. On one side of the argument is the principle that, as those who make a contract may also unmake it, so a clause which prevents change or makes it subject to certain conditions may itself be waived or changed. On the other side is the fact that the parties have expressly agreed that variations should be dealt with in a particular manner. Now the Supreme Court has come down on the side of the express terms of the original contract: the law should give effect to a contractual provision requiring specified formalities to be observed for a variation. This is on the basis that:

  • if the Court of Appeal’s earlier reasoning is followed, its effect would be to override the parties’ intentions. For the Supreme Court, the parties’ freedom to vary operates up to the point when the contract is made and after that point operates only to the extent that the contract allows;
  • the argument that parties who agree an oral variation in spite of a contractual variation clause must have intended to dispense with that clause does not follow as what the parties have actually agreed is that oral variations will be invalid;

One of the judgments of the Supreme Court came to the same conclusion but on different grounds: the particular telephone discussion in this case which purported to vary the original contract made no specific reference to the variation clause that was to be overridden and so the variation clause remained in force until the parties agreed to do away with it. This analysis meant that the effect of the variation clause was to deprive the purported oral variation of any binding force unless and until either the oral variation was reduced to writing or the variation clause in the contract was itself removed or suspended by agreement of the parties.

Impact

The purpose of a variation clause has always been to prescribe a method for varying terms and to minimise the possibility of inadvertent information variation such as by telephone discussions as in this case. Now, following this Supreme Court decision, if a contract contains its own procedure for agreeing variations, whether they are detailed change control procedures or simply a clause that states variations must be in writing and signed, then that procedure will operate to prevent informal variations outside that procedure. This is not to say that these procedures will work in all scenarios: if the informal variation was clearly intended to vary or do away with the previously agreed contractual procedure for variations or if one party behaves in a particular way following an informal variation, there remains the possibility that the informal variation will have effect or give rise to rights of one party to rely on it.

How Eversheds Sutherland can help

Commercial parties now have more certainty that contractual variation procedures will be upheld and there is less risk of internal controls on authorisation of variations being circumvented. However, the case also means reviewing post-signing operation of important contracts is more important: if longer term contracts are no longer being operated to the letter, it is now more important to make sure any changes are documented in accordance with the contract’s own procedure for change. If you would like any advice on variation mechanisms within contracts or on authorisation of changes to agreed terms, please contact Richard Prowse or your usual Eversheds Sutherland contact.

To read the case in full click here.


May 2018. This briefing is not intended to be a full or comprehensive summary or update and is not a substitute for taking legal advice.

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