Oral changes to contracts - Beware!
27th June 2016
Negotiating contracts looks set to be tougher in future, with the news that clauses in contracts that require any variations to be made in writing and agreed by all the parties may not hold water. Anti-oral variation clauses often feature in both commercial agreements and employment contracts, but until now there have been conflicting decisions over enforcement.
In a recent case to reach the Court of Appeal, the Court has said that even when such a clause is included, it is still possible to amend a contract verbally or by conduct.
This opens the way to an increase in arguments over agreed contractual terms. However, variation by verbal agreement or conduct will have to be proven, so there will need to be strong evidence to show both parties understood and agreed to any change.
Whether for employment or commercial relationships, the clear message from this judgement is that parties to contractual agreements cannot rely solely on the written agreement, they must be careful about what they say and do as well.
But this case doesn't mean you should give up on "variation clauses" that require changes to be made in writing, as they encourage good practice and place the burden on a party to prove that a variation has taken place by other means. It remains important to put any changes in writing, signed by all parties, if you want to be able to rely on the variation at a later date.
In the case of Globe Motors Inc and others v TRW Lucas Verity Electric Steering Limited, TRW Lucas entered in a contract for the exclusive supply of Gen 1 motors with US-based Globe, who later transferred manufacturing and supply to a smaller subsidiary company in Portugal. When TRW Lucas later started buying Gen 2 motors from a different supplier, Globe sued for breach of contract. TRW Lucas argued that it was not obliged to buy the Gen 2 motors from them, as the original agreement related to Gen 1 motors, but even if it did, nothing had been signed to agree the change of supplier to the Portuguese subsidiary, as was required by the contract.
When the case reached the Court of Appeal, the ruling went in favour of TRW Lucas for the change of supplier for Gen 2 type motors, so there was no need to consider the variation clause, but the Court decided to clear up confusion from two earlier, conflicting rulings over the need for a signed variation in agreement and it decided that it was not necessary for variations to be made in writing, saying that TRW Lucas had agreed to the change, through its own conduct of accepting the supply of Gen 1 motors from Globe Porto, evidenced through the orders it placed with them and the invoices it accepted.
The general principle of English law is that unless there are statutory or common law restrictions, parties are free to agree whatever terms they choose. While the court could see the practical benefits of restricting how agreements can be varied, it said that the overriding principle of freedom of contract means that, "parties are therefore free to include terms regulating the manner in which the contract can be varied, but just as they can create obligations at will, so also can they discharge or vary them".
If you have any questions concerning the interpretation or variation of a contract, please speak to a member of our litigation team: Chris Bowler firstname.lastname@example.org and Rebecca Campbell email@example.com and for employment related queries, our employment specialist, Phil Hughes firstname.lastname@example.org or call us on 01491 572138.
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This is not legal advice; it is intended to provide information of general interest about current legal issues.