Things Are Not Always What They Appear in UK Commercial Contracts

The Court of Appeal in Globe Motors Inc v TRW Lucas Variety Electric Steering Ltd (“Globe Motors”) recently provided much overdue clarification on the effectiveness of anti-oral variation clauses - that parties can orally vary contract terms notwithstanding the existence of an anti-oral variation clause in that contract. 

The Facts 

The parties, Globe Motors Inc (“Globe”) and TRW Lucas Variety Electric Steering Limited (“TRW”), entered into an exclusive supply agreement by which TRW was required to purchase certain products from Globe. There was disagreement as to whether TRW was in breach of the Agreement by purchasing certain of the specified products from a third party. 

The Agreement contained the following standard clause: 

"6.3 Entire Agreement; Amendment: This Agreement, which include 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.” 

Despite this clause, the Court of Appeal unanimously opined that, in principle, the contract terms could be varied orally. In essence, it held the fundamental principle of freedom of contract demanded that an anti-oral variation clause in one contract would not in principle prevent parties from making a new contract varying the first contract by an oral agreement or conduct. 

Conflicting Court of Appeal Judgments 

Whilst it was not necessary in Globe Motors for the Court of Appeal Judges to decide on the matter of anti-oral variation clauses, they saw value in clarifying the law in light of two substantially inconsistent Court of Appeal decisions on this issue. In United Bank v Asif (2000) the Court of Appeal upheld the anti-oral variation clause, upholding the ‘incontestable’ right that no oral variation of written terms could have any legal effect: hence, the contract could be varied only by way of written agreement, in line with that clause. However, in World Online Telecom Ltd v I-Way Ltd (2002) a variation of the contract was permitted despite the anti-oral variation clause, concluding that “the parties have made their own law by contracting, and can in principle unmake or remake it”. 

Policy vs Principle 

There is tension between the underlying justifications for honouring or not honouring anti-oral variation clauses: the general English law principle that parties have freedom to agree whatever terms they wish, by any method they wish, against the certainty provided by abiding by the terms of the contract. Lord Justice Moore-Bick in Globe Motors stated that whilst there may be practical benefits to restricting the manner or form in which an agreement can be varied, there is no principled basis on which it can be achieved. Ultimately, it was unanimously agreed, albeit reluctantly, that the principle of freedom to agree and alter contractual terms must trump that of certainty. 

Conclusion 

Despite the decision in Globe Motors, we still see merit in including anti-oral variation clauses in commercial contracts. Their existence poses an evidential hurdle to a party claiming that the contract was varied orally and goes some way to protecting the terms agreed by the parties. A party will face much greater evidential difficulty in demonstrating that there was a mutual intention to vary the contract orally in the face of an anti-oral variation clause as the court is likely to require strong evidence before finding that there has been an effective oral variation. 

Nevertheless, contracting parties ought to take caution in their contractual relationships and be alive to actions and exchanges which may sow the seeds for an argument that the contract terms have been varied.

Read "Things Are Not Always What They Appear in UK Commercial Contracts"