Verbal variations to contracts

  • Posted

We explain a new trap to avoid when negotiating your contract

A ‘non-written variation’ clause is a contractual term prescribing that the agreement may not be amended, except in writing, signed on behalf of the parties.

The generally accepted position in English law has been that these clauses permitting a commercial contract to be varied verbally were ineffective, because a verbal agreement to vary the contract was treated as impliedly agreeing to vary the ‘non-written variation’ clause itself.

However, following the Supreme Court decision discussed below this is no longer the case.  Clauses permitting a verbal variation can now be enforced.

We have summarised the position for you as it may be that you should review your existing commercial contracts.

Commercial contract review points:

  • Do you have a clause permitting verbal variation? Should you insert one?
  • Consider whether to allow verbal changes in future business contracts.
  • Do you check the business contract for applicable clauses when agreeing a variation? Are your staff trained to do this?
  • Have you already agreed variations to existing business contracts which might not have complied with clauses excluding verbal variation? You might want to go back and agree a written variation, or perhaps it may be better to let sleeping dogs lie.  Alternatively, might you want to go back on a verbal commercial contract you agreed?

Why include a verbal variation clause?

  1. It prevents attempts to undermine the written agreement by informal changes – this reduces the risk of abuse of power by a party or its employees.
  2. Where verbal discussions can easily give rise to misunderstandings and crossed purposes, variation in writing clauses avoid disputes, not just about whether a variation was intended but also about its exact terms.
  3. A degree of formality in recording variations makes it easier for companies to police internal rules restricting the authority to agree such variations with the other party.

Important decision relating to variation clauses in commercial contracts

In a recent judgement, the Supreme Court overturned the fundamental principles relating to clauses excluding verbal variation of written business contract (“No Oral Modification” clauses). These changes have retrospective effect so will have widespread consequences not only for future business contracts, but also for existing agreements which address verbal contract variation.

Rock Advertising Limited v MWB Business Exchange Centres Limited

Rock Advertising was granted a licence to occupy office space owned by MWB. Rock Advertising then accumulated arrears of licence fees due. A discussion was held by telephone between members of each company to vary the licence in accordance with a revised schedule of repayments proposed by Rock Advertising. MWB denied agreeing to vary verbally the written contract with this new schedule and continued to treat it as merely a proposal, which was subsequently rejected. MWB then terminated the licence for Rock Advertising’s failure to pay arrears. The question before the Supreme Court was whether the verbal discussion by telephone constituted an effective variation of the licence.

The Supreme Court said that clauses preventing non-written contract variation are “very commonly included in written agreements. This suggests that the common law’s flexibility has been found a mixed blessing by businessmen and is not always welcome…It is not difficult to record a variation in writing, except perhaps in cases where the variation is so complex that no sensible businessman would do anything else. The natural inference from the parties’ failure to observe the formal requirements of a No Oral Modification clause is not that they intended to dispense with it but that they overlooked it. If, on the other hand, they had it in mind, then they were courting invalidity with their eyes open.”

Do verbal discussions constitute an effective contractual variation?

Clauses permitting parties to change a commercial contract by verbal agreement have previously been treated as ineffective. This reason for this was that a need to comply with specific formalities in order to vary the contract was felt to be inconsistent with the common law concept that contract creation required no such specific formalities.

The Supreme Court has overturned this principle so that clauses requiring written changes are now enforceable. It is now possible to have a contract made with a specific rule that effect will be given to a contract variation, only if the specified formalities are observed. For example, where a business contract specifies that its terms may only be varied by written notice from all parties, this term will be upheld and changes made to the contract otherwise than in accordance with this will not be valid.

The parties’ freedom to vary commercial contractual terms operates up to the point when the contract is made, but thereafter only to the extent that the contract allows. The court held this to be the best way to uphold the contracting parties’ business intentions. So, if a contract is drafted to include a ‘no written variation’ clause, this provision will bind the parties from the date of the written agreement and will mean that the business contract cannot be varied verbally. All variations to the contract, including to the variation clause itself, will have to comply with the formalities required by the agreement. This will apply even where the parties would be in complete agreement.

This decision establishes a new precedent and will apply to all cases that are pending or awaiting trial; cases already finally determined will not be affected by this change.

This new principle will be used to interpret all existing and future business contracts containing variation clauses.

Is there any way around a verbal variation clause?

The provisions of a variation clause may be varied in the same way as any term in the agreement, although varying the variation clause will itself require adherence to the specific formalities. There may also be scope for an estoppel argument where a promise made with consideration by one party was relied on by the other, although the Supreme Court noted that the scope of such an argument would be limited so as not to destroy the advantage of certainty provided by written terms.

Alex Kleanthous, leading business litigation lawyer, comments: “In my dealings with business contracts, people often get very confused over if and how they can vary the terms. Whilst the Supreme Court’s recent decision marks a fundamental change in the principles of contract law, in practice it will still remain hard to prove any verbal agreement where there is no written document.”