Oral variations of commercial contracts - Court signals a flexible approach

Many commercial contracts contain a clause requiring that variations to the contract must be agreed between the parties and made in writing. It is a common contractual provision intended to provide certainty and security to the contracting parties.

Although decided on a different point of law, in the recent case of Globe Motors Inc v TRW Lucas Variety Electric Steering Limited, the Court of Appeal was asked to consider whether such a clause in an agreement would prevent subsequent oral variations to the contract being valid. All three judges were unanimous in concluding that the overriding English law principle of freedom of contract means that parties can “include terms regulating the manner in which the contract can be varied, but just as they can create obligations at will, so also can they discharge or vary them”. The court considered that there may be practical benefits to restricting the form of variations to an agreement, but concluded that “there is [not] a principled basis on which that can be achieved”. Therefore, even where parties have agreed to a variation-in-writing clause, there is nothing to prevent subsequent oral variation or deemed variation by conduct.

Although the court’s comments do not create binding precedent, the position is expected to be taken into account in future cases where variation is a contested issue. It is still sensible to include variation-in-writing clauses in contracts to encourage the parties to ensure variations are properly documented and signed off and help counter any argument that an oral variation or variation by conduct is valid by a contracting party but as has been shown this is by no means conclusive. Parties must take care in the way they conduct themselves in the trading relationship to avoid any argument that they have varied the terms of an agreement by their conduct.

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