Oral variation of contracts – do actions always speak louder than words?
It is an established legal principle that parties to a contract can vary its terms by mutual agreement provided that the parties satisfy the same requirements that were needed to form the binding contract in the first place, which include:
- An offer and acceptance of terms having taken place;
- Consideration passing between the parties; and
- There being an intention to create legal relations.
However, it has become common for parties to a contract to try and control the circumstances in which variations can take place, particularly by use of “anti-oral variation clauses”. The Court of Appeal has recently commented on the effect of such clauses.
What is an anti-oral variation clause?
An anti-oral variation clause seeks to prevent any variation to a contract taking place orally. This can be achieved by the clause expressly prohibiting oral variations or by requiring any variations to be in writing and signed by the parties in order to be binding.
The logic behind such clauses is to try and avoid problems which can flow from informal variations being made to contract terms and enable parties to keep control over contract terms.
The previous position on the effect of anti-oral variation clauses
Up until last year there had been conflicting Court of Appeal decisions in relation to the effect and enforceability of anti-oral variation clauses.
In 2000 the Court of Appeal upheld the effectiveness of an anti-oral variation clause in the case of United Bank -v- Asif by determining that an oral variation to a contract was not binding on the parties in light of the anti-oral variation clause contained in the contract.
In 2002 the Court of Appeal indicated in the case of World Online Telecom -v- I-Way that an oral variation, along with variation by conduct, could be binding upon a party despite the existence of the an anti-oral variation clause in the contract.
The current position on the effect of anti-oral variation clauses
The issue of anti-oral variations clauses and their effect came before the Court of Appeal again last year.
The case of Globe Motors Inc -v- TRW Lucas Variety Electric Steering Limited involved oral variations made to a contract which contained (at clause 6.3) the following anti-oral variation clause:
“This Agreement….can only be amended by a written document which (i) specifically refers to the provisions of this Agreement to be amended and (ii) is signed by both Parties”.
The Court of Appeal confirmed that, despite the existence of the anti-oral variation clause, any oral variation which had been agreed by the parties would be binding upon them stating: “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 Clause 6.3 does not prevent them making a new contract varying the contract by an oral agreement or conduct”.
Put another way, an anti-oral variation clause will not work as, just as the parties can agree to such a clause, they can agree (either expressly or by implication) that it should no longer apply.
The decision in the Globe Motors case has been followed by the Court of Appeal in a subsequent case.
Conclusion – what does this mean in practice?
Based on the recent Court of Appeal cases, anti-oral variation clauses are unlikely to be effective in preventing parties to a contract from being bound by oral variations. This could cause problems for companies in relation to managing and monitoring variations to contracts and its contractual obligations, as there may be instances where, without realising it, contracts have been validly varied as a result of oral discussions.
However, it should be remembered that for any contract variation to be binding it will need to satisfy the same requirements that are required to show that a binding contract was entered in the first place. So, for example, if an oral variation is not supported by consideration it will not be binding upon the parties.
Finally, only those contracts which could be formed orally in the first instance can be varied orally. For example contracts relating to interests in land or contracts for guarantee must be in writing to be effective and as such cannot validly be varied orally.Back to Our Thinking →