Stuart Pemble reports that the Court of Appeal has decided the answer to this conundrum appears to be “no”
Key point
- The Court of Appeal’s robust endorsement of contracting parties’ ability to revisit the terms of their contractual agreements is to be welcomed
I suspect that a significant number of contracts drafted by commercial lawyers the length and breadth of the UK contain a clause which purports to limit the parties’ ability to vary the contract’s terms orally. The contract in Globe Motors Inc v TRW Lucas Varity Electric Steering Ltd [2016] EWCA Civ 396 certainly did.
The clause in question – which prohibited any amendment unless it was in writing, referred to the agreement being varied and was signed by both parties – appeared in a contract for the supply of car components. Similar clauses are very common throughout the construction sector.
Although they might merit the description of boilerplate (the seemingly interminable list of standard clauses that us lawyers love to cram into contracts but which are rarely the subject of much negotiation), there is some merit to their inclusion. First, if the parties have spent significant time and expense negotiating an agreement, they do not want all of that good work wasted by off-the-cuff amendments which are not recorded anywhere. Parties also want to maintain control over who has the authority to agree to any amendment; and additional certainty is provided by a clause which requires any variation to be in writing.
One potential downside to such clauses is that they ignore reality; contracts in the modern commercial world often need to be varied. Another is that they create a potential unfairness: if, as a matter of fact, the parties had agreed to a change, why should one party be able to renege on its side of the deal (often to pay an increased sum in return for additional work) when the other has complied with its side of the varied agreement?
Conflicting authorities
To make matters worse, there were conflicting Court of Appeal authorities on this issue. United Bank Ltd v Mahood Asif [2000] EWCA Civ 456 had upheld the efficacy of a clause prohibiting the oral variation of a deed of guarantee. However, two years later, in World Online Telecom Ltd v I-Way Ltd [2002] EWCA Civ 413, the Court of Appeal allowed an oral variation despite a contractual prohibition against it. Sedley LJ stated that in “a case like the present the parties have made their own law by contracting, and can in principle unmake or remake it”. To make matters even more confusing, Sedley LJ appeared to have reached a different view when refusing permission to appeal on paper (it was subsequently granted at an oral hearing) in United Bank. It was an issue crying out for some judicial clarity.
The solution
It fell to Beatson LJ, who gave the leading judgment, to resolve the issue in Globe Motors. The trickiness of the task he faced is evidenced by the fact that, although both of his fellow judges (Underhill and Moore-Bick LJJ) agreed with him, Underhill LJ admitted to “some hesitation” in reaching that conclusion.
Despite the leading (and influential) contract law textbook – Chitty on Contracts – preferring the approach in World Online, it was no means certain which decision would apply. One significant concern arose from the doctrine of judicial precedent. Strictly speaking, an earlier decision of the Court of Appeal binds other Court of Appeal judges until the ruling is overturned by the Supreme Court. On that analysis, United Bank should take precedence.
Beatson LJ showed some nifty legal footwork to get around that problem. First, the principle only should not apply where there are inconsistent decisions. In that scenario, as here, a subsequent Court of Appeal can resolve the issue. Further, the court cannot bind itself when (as was the case in World Online, despite the involvement of Sedley LJ in both cases), the later court decides the issue in ignorance of the earlier decision.
Having decided that they were free to revisit the issue, Beatson LJ was able to review a number of judicial and academic authorities and relatively easily decided that it was preferable to allow parties to a contract to change the bargain they had made previously.
While Underhill and Moore Bick LJJ both acknowledged that there was also some force to the opposite argument, they both ultimately agreed with the World Online approach. Underhill LJ explained the dilemma: “It seems to me entirely legitimate that the parties to a formal written agreement should wish to insist that any subsequent variation should be agreed in writing (and perhaps also, as here, in some specific form), as a protection against the raising of subsequent ill-founded allegations that its terms have been varied by oral agreement…” However, on balance, he felt that was a lesser benefit than allowing the parties the freedom to vary a contract informally.
The consequences of the decision
Strictly speaking, the decision is obiter as the issue between the parties was resolved on a different point. However, the endorsement of the World Online approach is very clear and should be considered as having decided the conundrum for the foreseeable future.
This does not mean that any purported oral variation will be upheld by the courts. Any specific case will be determined by a consideration of the evidence; if the courts are not persuaded that the alleged variation was actually agreed, then the decision in Globe Motors is of no assistance.
The legal anoraks among you may also appreciate the fact that Beatson LJ’s judgment contains judicial confirmation of a little-understood point of principle: you do not need a deed to vary a deed. The courts’ clear preference is for the parties to have as much freedom as possible to vary their agreements.
Stuart Pemble is a partner at Mills & Reeve LLP
