Have You Just Accidently Varied Your Contract?
– A: “That term in the contract that says that “the Agreement can only be varied in writing” is enforceable, isn’t it? Surely? Why else would it be there?”
– B: “Well, I know it says that in the contract, but we trust each other right? So we can just agree a little amendment between us and make that the case going forward. It just makes things easier doesn’t it?
You may fall into one of the two mindsets above and depending on which one applies, you probably haven’t considered that the other mindset exists. You either favour the ‘black and white’ aspect of business dealings (i.e. what is on paper is the firm position agreed between the parties), or you favour the ‘fluid’ approach of just agreeing to changes informally as and when, required, for the purpose of efficiency.
This article looks at what happens when parties of these opposing mindsets find themselves in dispute.
It recently took two companies, three attempts in the Courts to have an approach finally decided upon by the Supreme Court and depending on which mindset you have, the decision will either seem obvious or frustrating. In Rock Advertising Limited (Rock) v MWB Business Exchange Centres Limited (MWB)  UKSC 24 it was decided that those in the ‘black and white’ camp can sleep easier at night.
By way of background as to how the dispute arose in the first place, a licence agreement between the parties included a ‘no oral modification’ clause that stated that any variations were to be “…agreed, set out in writing and signed on behalf of both parties before they take effect”. The procedure agreed upon was very clear in its wording and intent.
The licensee proposed a revised payment schedule for the rent when they missed payments. This was done over the telephone and when they began making payments in accordance with the new payment schedule, the licensor terminated the agreement for non-payment of rent under the agreement. The licensor was in the ‘black and white’ camp; the licensee favoured the ‘fluid’ approach. The ‘black and white’ approach was favoured by the Courts in the first instance, but when the licensee appealed the decision, the Court of Appeal favoured the ‘fluid’ approach. Consequently, the Supreme Court was tasked with reaching a binding decision on the point when the licensor appealed.
The Supreme Court were unanimous in their verdict, but even then, they were not unanimous in the rationale for their decision. Despite all five Judges agreeing with the licensor that the terms had not been varied and they were therefore entitled to terminate the agreement for non-payment of rent, only four reached their view on the basis that the agreement needed to be varied in writing by applying the clause.
The fifth Judge reached the verdict on the basis that the clause was capable of being expressly overridden orally, it just wasn’t done so in this case (i.e. had the discussion gone “let’s disapply the need to vary the agreement in writing and carry on in this manner going forward” this would have been binding in his view). The decision of the other four judges takes on precedential value as the majority opinion in the matter, but if even the foremost legal minds in the country disagreed on this point, it shows the level of conflict in this area.
What does this mean for you?
Whilst this case does not bring about ‘new law’, it is undoubtedly an important decision in English Law. It represents a move from the judiciary in England to ensure that certainty is at the forefront of contractual relationships. So, whilst the decision relates primarily to the validity of ‘no oral modification’ clauses in contracts, it should be taken as a very strong indication to contracts in general that the Courts are willing to take an approach that ensures commercial certainty for the parties to a contract.
But perhaps more importantly in a practical sense, it shows that taking a chance without the appropriate advice is a very high risk strategy. Do not assume that a ‘gentleman’s agreement’ will bind the parties in the event that the relationship between the parties ‘goes south’.
The key take-away points from this case are:
- to watch out for any conversations with any customers, suppliers or third parties that seem to be in conflict with the contractual terms, particularly if they start referencing disapplying the variation clause orally; and
- if you do want to agree to a change to the contract, use a Variation Agreement to document and sign-off the relevant amendments to ensure that they are binding.
If you need a template Variation Agreement of if you have any queries in relation to how to avoid accidently varying a contract, please get in touch by calling us on 01603 339044 or emailing firstname.lastname@example.org.
Please note: the content of this article is for general information only and does not constitute legal advice. Specific legal advice should be taken in each individual circumstance.