UK – Court Rulings Heighten Risk of Employees Inadvertently Amending Contracts
An anti-oral variation clause is drafted into most commercial agreements. Typically, this boilerplate clause will say that any changes to the terms of the contract must be agreed in writing and signed by all of the contracting parties. The objective is to avoid the uncertainty, and potential for disputes, that would arise if the contract could be informally varied, either orally or by conduct.
However, a line of recent judgments has cast doubt on the effectiveness of these clauses. In each of these cases, the court found that the contract had been varied orally, or by conduct, despite the contract containing an anti-oral variation clause. The courts acknowledged the value of anti-oral variation clauses in promoting certainty, but said that the courts should give primacy to the principle of party autonomy and this meant that the parties could not, by a term of the contract, fetter their future ability to amend it.
Until these rulings, there was doubt around whether anti-oral variation clauses would be given full effect by the courts. These rulings have removed that doubt but, in so doing, have created concern for those drafting, or party to, commercial agreements. A consequence of the rulings could be, for example, that an employee of contracting party A could inadvertently alter the rights and obligations of party A under a commercial agreement in the course of face-to-face or telephone negotiations with an employee of contracting party B. For example, in MWB Business Exchange Centres v Rock Advertising, Rock leased premises from MWB but defaulted on rent payments. MWB wanted to terminate the contract for non-payment. However, Rock successfully argued that MWB was not entitled to do that on the basis that an employee of MWB responsible for credit control had orally agreed a contractually binding restructuring of the rent payments with Rock’s managing director, even though the contract contained an anti-oral variation clause.
So, how should contracting parties respond? For now, they should continue to include anti-oral variation clauses in their commercial agreements. These will provide the presumptive starting point for changes to the contract by encouraging parties to agree these changes in writing. But parties need to be aware that these clauses are not watertight. To minimise the risk of being inadvertently bound by an informal variation of a commercial agreement, parties should train those employees who engage with key suppliers or customers on this issue. They should be made aware that they should not agree to any changes to the essential aspects of a commercial relationship without seeking prior approval from a colleague in appropriate authority and familiar with the contract in question so as to be able to understand the likely wider business impact of the contractual variation being proposed.
Another risk worth mentioning here is that the courts could hold that negotiations, like those in MWB, or a course of conduct has created a collateral contract between the parties (a second contract running parallel to the main agreement) and for that reason the negotiations have created contractually binding obligations, effectively varying the original agreement. Parties can seek to protect themselves from this risk by using a well drafted entire agreement clause. They should also follow the advice on employee training as suggested above.