No Variation clauses – are they cast iron?
The Court of Appeal decision of Globe Motors and others v TRW Lucas and others considered the effectiveness of no variation clauses which we so often see in contracts. These boilerplate clauses are not as "nailed on" as they appear.
No Variation clauses
Contracts often include no variation clauses such as the following clause (considered by the Court of Appeal in Globe Motors):
“Entire Agreement: Amendment: This Agreement, which includes the Appendices hereto, is the only agreement between the Parties relating to the subject matter hereof. It can only be amended by a written document which (i) specifically refers to the provision of this Agreement to be amended and (ii) is signed by both parties”
These boilerplate clauses aim to prevent variation of contracts by oral agreement or by conduct and seek to prevent assertions that the agreement has been varied and therefore maintain contractual control and certainty.
Whilst not strictly necessary for the determination of the case, as a result of previous inconsistent authorities, the Court of Appeal considered the effect of the clause. Whilst the Court’s comments regarding the effect of these types of clauses are only observations, the judges gave considered opinions will have strong persuasive effect.
So, are these clauses cast iron?
In short, the Court said no.
- The fact that a contract contains a no variation clause does not prevent parties making a new contract by an oral agreement or by conduct. The parties have freedom to agree whatever terms they choose to undertake and can do so in a document, by word of mouth or by conduct.
- Whilst the Court acknowledged that difficulties of proof may arise where a party alleges variation by oral agreement or conduct, where on the balance of probabilities the variation can be established, it can be effective notwithstanding a no variation clause.
- The Court did however observe that parties may still wish to insist upon a no variation clause as protection against ill founded allegations that its terms have been varied.
- The Court noted that it is not the case that no variation clauses have no value at all and that parties may encounter significantly greater difficulties in proving a variation has been made if in the first instance they have agreed to a no variation clause.
- It is still worth including no variation clauses in contracts. As the Court mentions above it will be more difficult for a party to prove it varied a contract when it agreed to a no variation clause.
- Ultimately however, conduct or oral agreement could have the effect of amending a contract. Parties need to be careful when discussing any amendments to a contract. In particular, when discussing amendments remember to:
- Reserve your rights (expressly);
- Make sure you confirm in discussions that any conduct or oral agreement are not intended to waive the contract;
- Make amendments “subject to contract” until these are agreed;
- Parties should also consider who can/cannot agree variations to the contract. This sounds easy but in many lines of business, it is easy to see how many staff would inadvertently agree to a variation of contract (for example, "can I have another 7 days to pay?"). A review of the lines of authority may be required.
- Consider having a particular mechanism or document process for a variation to be effective. If an express mechanism is provided in the contract, this may assist in defeating an assertion that a purported variation is effective.
- If in doubt, seek legal advice.