Non-oral variation clauses: When can they be orally varied?

The Background
Following the recent decision in MWB Business Exchange Centres Ltd v Rock Advertising Ltd, [2016] EWCA Civ 553, it would appear the law is finally settling down on the issue of how effective non-oral variation clauses in contracts are. According to the Court, where contracting parties agree to vary a contract orally, despite a clause prohibiting this, the variation will be valid.

The law has been in a state of turmoil since the leading, but conflicting, judgments from the English Court of Appeal in United Bank Ltd v Asif and Anor. and World Online Telecom v I-Way Ltd. These decisions were in turn examined in the Globe Motors case, a decision from April 2016. As we will see, the Globe Motors decision was instructive on the issue of non-oral variation clauses, and formed the basis of the decision in MWB v Rock Advertising.

A full list of cases referred to in this article, including citations, has been provided below.

The Facts of the Case
Rock Advertising was in arrears with its licence payments on a property which was operated by MWB. According to Rock, the contractual payments due to MWB were varied by Rock’s managing director and MWB’s credit controller, by way of oral agreement. MWB disputed this, and amongst other points, argued that such variation was not competent given that Clause 7.6 of the contract between the parties expressly prohibited any non-oral variation of the contract. Rock countered this argument by stating that the whole contract was open to variation by both parties, including the terms of Clause 7.6. Questions as to consideration and estoppel were also raised and dealt with in the judgment.

The Judgment
In the leading judgment, Lord Justice Kitchin followed the decision given by Beatson LJ in Globe Motors. This in turn confirmed the ruling in World Online Telecom as correct. Kitchin LJ held that non-oral variation clauses would not stop oral variations of contracts being effective. He emphasised the importance of party autonomy as opposed to regarding the original terms of the agreement as sacred. MWB accepted that whilst clauses such as this did not preclude the operation of the doctrines of waiver and estoppel, the operation of these doctrines should only apply where the enforcement of the original contract terms was unconscionable. Kitchen LJ disagreed, stating (at para 34):

“…I respectfully agree with Beatson LJ that the decision of this court in World Online Telecom was correct and should be followed for the reasons he gave. To my mind the most powerful consideration is that of party autonomy… Indeed that explanation seems to me to echo the words of Cardozo J nearly 100 years ago in the New York Court of Appeals in Alfred C Beatty v Guggenheim Exploration Company and others (1919) 225 NY 380…:

"Those who make a contract, may unmake it. The clause which forbids a change, may be changed like any other. The prohibition of oral waiver, may itself be waived … What is excluded by one act, is restored by another. You may put it out by the door, it is back through the window. Whenever two men contract, no limitation self-imposed can destroy their power to contract again… "

It was also determined that there had been consideration given by Rock to MWB in support of the oral variation. The consideration was a payment made by Rock, coupled with the promise of further payments being made. This constituted a benefit that went beyond merely receiving prompt payment of sums that were in arrears and conferred a practical benefit on MWB which amounted to good consideration. This rendered the oral variation agreement enforceable.

In addition, Kitchin LJ noted that whilst promissory estoppel was not relevant, given that the variation was effective, MWB would not have been estopped from enforcing their rights under the original contract had the variation not been valid. This was because Rock could be restored to the position it was in before the variation was made, and it could not say it had suffered any prejudice by relying upon it.

The effect
By agreeing with Beatson LJ in Globe Motors, Lord Justice Kitchin has confirmed that parties are able to vary contracts both orally and by conduct, regardless of the existence of non-oral variation clauses in a contract. Parties should be able, and free, to agree whatever terms they choose. In the absence of statutory or common-law restrictions preventing the operation of such oral variations, there is no reason that they should be ineffective. A key feature of the decision in Globe Motors was the need for strong evidence showing that a contractual variation had taken place, in turn limiting the ability to casually or accidentally vary a contract. Whilst not discussed by Kitchin LJ in MWB v Rock Advertising, the imposition of a high evidential requirement will surely act as a safeguard to unfounded allegations of variation between parties. This should in turn ensure that the existence of a non-oral variation clause in a contract is not undermined.

Important Cases