Type: Client Alerts
This Client Alert discusses the effectiveness of clauses which purport to prevent contracts from being amended without compliance with specified requirements, and how giving greater thought to their drafting in your contract can help avoid unintended variations of a contract’s terms. Most commonly, such clauses specify that, to be effective, any amendment must be made in writing and signed by the contracting parties. These so-called ‘no variation’ or ‘anti-oral variation’ clauses are particularly valuable in long-term contracts, which inevitably are likely to be affected during their terms by changing circumstances. They are particularly appropriate (and common) in long-term supply (and off-take) agreements and in construction contracts. While the practical effect of these clauses has been, until recently, a matter of some uncertainty under English law, two recent decisions (Globe Motors Inc. v. TRW Lucas Varity Electric Steering Ltd.  EWCA Civ 396 and MWB Business Exchange Centres Ltd. v. Rock Advertising Ltd.  EWCA Civ 553) have thankfully provided some valuable guidance for those responsible for negotiating and drafting contracts.
Importance of ‘no variation’ and ‘anti-oral variation’ clauses It is all too easy to pay less attention to ‘boilerplate’ wording than to heavily negotiated commercial terms. (For a discussion of a number of recent themes and developments relating to long-term supply and off-take agreements – including a number of provisions which might be regarded as ‘boilerplate’ – see our recent article.) But ‘boilerplate’ language – refined over years – generally provides very valuable protection and certainty for the parties to a contract. Whether, and to what degree, boilerplate ‘no variation’ and ‘anti-oral variation’ clauses are effective (i.e., whether they ensure that a contract can only be amended after the specified requirements are complied with) is of particular importance in contracts intended to apply over a significant period such as long-term supply (and off-take) agreements and construction contracts.
It is inevitable that a transaction’s underlying circumstances, and/or the parties’ positions and expectations will change over the life of contracts of this type. Prices may move significantly; pricing mechanisms or reference points may evolve or cease to operate; the characteristics and/or quality of the underlying commodity or the difficulty, cost or duration of a construction project may prove very different than originally anticipated. The list of potential issues is endless. The risk of one or both of the parties attempting to renegotiate the transaction mid-way through is therefore very real. And, once problems arise, the renegotiation attempts will likely be urgent and potentially confrontational – this is the last thing one wants in a long-term relationship.
Against this background ‘no variation’ and ‘anti-oral variation’ clauses aim to introduce certainty about when and how a contract can be amended, and to avoid false or frivolous claims that a contract may have been amended, perhaps in a discussion between junior personnel. Long-term contracts of this type will usually have taken months or even years to negotiate, often under the protection of ‘subject to contract’1, before final approval is given and a contract agreed. For the parties to find that the very same contract has been amended post-signature on the basis of a short discussion between different personnel might be considered perverse.
Globe Motors and MWB Business – the clauses’ effectiveness clarified Ironically, until recently the effectiveness of these clauses, designed to add certainty, was – as a matter of English law – itself uncertain! The uncertainty stems from the long-held – and logical – view in legal circles that notwithstanding an ‘anti-oral variation’ clause, it is still possible, in some circumstances, for parties to vary a contract orally and so circumvent the ‘anti-oral variation’ mechanism on the basis of the principle of freedom of contract (i.e., that parties should be free, insofar as possible, to reach agreements with one another as they wish). Reed Smith’s Sally-Ann Underhill and Alexander Sandiforth recently wrote about the Court of Appeal’s recent decisions in Globe Motors and MWB Business (their client alert can be accessed here), which, together, provide further clarity as to the English Court’s approach to these clauses and so provide lessons for the draftsman.
- In April 2016, the Court of Appeal in Globe Motors considered a clause requiring the amendments to be made “by a written document which (i) specifically refers to the provision of this Agreement to be amended and (ii) is signed by both Parties”. While the court did not need to decide the point, the judgment was unanimous that, in principle, the contract was still capable of amendment without compliance with the listed requirements. In reaching this conclusion the Court of Appeal focused on the importance of the already mentioned principle of freedom of contract.
- In June 2016, the approach adopted in Globe Motors was confirmed by the Court of Appeal in MWB Business. The court held that an amendment falling short of the pre-agreed requirements will still be effective provided that it can be demonstrated that the parties waived all such requirements (a fact-sensitive question). For clarity, such an amendment would still have to possess all the usual elements necessary to create a valid legal contract, i.e., the intention to create legal relations, an offer, acceptance of that offer, consideration (although the practical benefits flowing from the amendment can constitute good consideration in law) and the requirement that those entering into the variation agreement have capacity to do so.
How does this affect you? The upshot of these two recent decisions is that, no matter how carefully drafted the clause, oral and informal amendments to a contract are still possible. One has to keep this in mind at all times and remain careful about what is being said, and how it is being said, throughout the contract duration, especially in any post-signature negotiations.
- It is important to keep a good contemporary record of all relevant conversations. In some circumstances it may even be advisable to put on record, from the outset, that any variations remain subject to signing a written amendment.
- Care should be taken to ensure that, insofar as is possible, the commercial teams tasked with implementing the contract are fully aware of its terms and understand the intentions of the contracting parties. In our experience, there can sometimes be a disconnect between the legal framework agreed in a contract and its day to day commercial operation. These recent cases should be heeded as a warning that such a disconnect may potentially result in claims and costly litigation if not addressed early on.
- Commercial teams should also be made aware of the potential consequences of their actions if they act in a way which is inconsistent with the terms of the contract in meetings, over the phone or by email or owing to inconsistencies between the contract and other documents relating to the commercial deal.
Drafting contracts One might legitimately wonder whether, in light of these decisions, there is any point including ‘no variation’ or ‘anti-oral variation’ wording in your contracts. In our opinion, the answer is “yes”. While the recent decisions confirm that this type of clause does not make it impossible for the parties to amend a contract without complying with the prescribed requirements, they should make ‘accidental’ amendment less likely, so ensuring that it is harder for one party to succeed with false or frivolous claims regarding allegedly agreed amendments. There remains an important evidentiary and practical value in the inclusion of a variation clause in a contract. It encourages the parties to follow a process in capturing an intended amendment – ensuring that any variation is set out, documented and signed off by all the parties, thereby helping to avoid future disputes about what was and was not agreed to be varied.
That being so, there are ways in which your contract can be drafted to strengthen the application of an ‘anti-oral variation’ clause and make it more likely to be effective. The premise behind the recent decisions is that the rule of freedom of contract must be preserved, i.e., that parties should be free, insofar as is possible, to reach agreement with one another as they wish. It will, therefore, always remain open to the courts to find that the parties have agreed to do away with the previously required procedures.
That being said, our recommendation is that careful drafting of an ‘anti-oral variation’ clause, supported by the inclusion of detailed variation mechanisms within a contract, will reduce the likelihood that the parties are later found to have waived the prescribed requirements and so create a further hurdle for the party seeking to rely on a variation; that party will need to show (i) that there was a valid agreement between the parties to vary the terms of an existing contract, and that this fulfilled the requirements of a legally binding agreement and (ii) in addition, that the parties have waived the prescribed (procedural) requirements in the contract.
- Some commercial agreements include prescriptive variation or change mechanisms. These mechanisms can set out the specific procedures that must be followed when either of the parties wishes to make a variation or change to a contract.
- Variation mechanisms can be tailored to suit individual contracts and include as much detail as is suitable and necessary. For example, these can specify exactly how a variation must be proposed (e.g., on a pro forma document), what details the party proposing the variation must provide, whom it must be proposed to and approved by (e.g., by reference to their level of seniority) and how long that approval process will take.
- In our experience, certainty can be improved by including a requirement in the contract that any variation to its terms which has either ‘time or money’ implications must be requested in writing and subject to the parties’ approval within a specified period of time, e.g., 14 clear days.
In summary, although it is not possible to predict the commercial future of a deal, when negotiating long-term contracts the parties should: (i) at the contract drafting stage, consider whether their particular circumstances would benefit from a contractual mechanism to deal with any future need for variation or amendment to the contract and (ii) at the contract implementation stage, ensure that their commercial teams are well appraised of the potential consequences that their actions may have on the terms of the contract itself.
For more information or guidance in relation to this topic please feel free to contact one of the authors of this alert or your usual Reed Smith contact.
- Our recommendation is to ensure the consistent marking of all letters, emails, handwritten notes and any other form of written documents sent during the contract negotiation stage as ‘subject to contract’ to avoid the unwitting formation of a binding contract.
Client Alert 2016-214