Richard Osborne of 4 Pump Court reflects on a contract dispute in which the Supreme Court made it clear that anti-oral variation clauses will be enforced.
Terms seeking to restrict the manner in which contracts may be varied are extremely common. In my experience they are almost inevitable in major IT projects - inserted in the hope that they will promote certainty as to the terms on which the parties are dealing at any given time, and their respective rights and obligations. Many organisations insert such clauses into their standard terms for similar reasons. Often, however, they run squarely into the realities of on-going projects. Timescales are amended, requirements are tweaked, and often it is assumed that commercial issues can be resolved later. However, despite the ubiquity of anti-oral variation clauses, there has been long-standing doubt as to how effective (if at all) they were. Last year the Court of Appeal appeared finally to resolve it, by confirming what had generally been the indications in the decided cases: such clauses were generally ineffective to prevent non-compliant changes to contracts (see the article by my colleagues at 4 Pump Court in the February/March 2017 edition of Computers & Law).
The Supreme Court has now reversed that decision, in a ruling with very significant implications for those involved in IT projects. The case was Rock Advertising Limited v MWB Business Exchange Centres  UKSC 24.
The clause facing the Court provided that:
"All variations to this Licence must be agreed, set out in writing and signed on behalf of both parties before they take effect."
The dispute involved a licence to occupy premises. The licensee got into fee arrears, and an employee of the landlord orally agreed to a staggered series of repayments. However, the landlord subsequently disregarded this agreed rescheduling and evicted the licensee.
The Supreme Court concluded
that the landlord was entitled to do so: the anti-variation clause meant that
the renegotiated payment schedule was not binding.
The Supreme Court identified that the traditional objection to anti-oral variation clauses was a conceptual one. English law, save in exceptional circumstances, does not impose formal requirements on the making of contracts, nor on their amendment. Thus, if parties wished to agree a variation orally, they would be free to do so, and would implicitly agree to waive the anti-variation provision as they did.
The Supreme Court rejected this view for several reasons. Firstly, the Court recognised that anti-oral variation clauses serve a legitimate and understandable commercial purpose. Businesses continued to include them in contracts despite their uncertain legal status, and the law ought not to determine that such agreements should have no effect in the face of the apparent wishes of the parties. Secondly, the majority found that there was no contradiction between freedom of contract and the freedom to restrict future changes to an agreement: respecting their determination as to how changes were to be controlled acknowledged the parties’ autonomy rather than undermining it (Lord Briggs dissented on this point, though not on the ultimate result).
The Supreme Court also observed that, generally, parties agreeing oral variations are not consciously agreeing to dispense with anti-oral variation provisions. They are generally forgetting such provisions exist. This is certainly my experience.
The argument against such a change is the injustice which might well result from allowing a party to go back on an agreement as to how a contract ought to be performed. The obvious answer is that estoppel will step into the breach to prevent injustice. As many reading this will know, estoppel is the doctrine by which courts will prevent a party from going back on representations it has made to another party in circumstances where it would be unjust to permit it to do so (generally because the other party has relied on the representation to its detriment). It is easy to imagine many situations in which this might operate to prevent a party which has permitted, or even encouraged, a counterparty to perform differently from the way required by the contract from subsequently seeking to accuse such a party of breach of contract.
However, the Supreme Court gave a clear warning in this regard. It stated that estoppel could not be allowed to operate so broadly that anti-oral variation clauses were deprived of any real effect. As such, the bar to establish an estoppel will be high. The Supreme Court said that a party seeking to establish an estoppel will need to identify "words or conduct unequivocally representing that the variation was valid notwithstanding its informality". That is clearly a high bar, and it was made expressly clear that simply entering an agreement notwithstanding the anti-oral variation clause would not suffice. Nor, the Supreme Court made clear, did having paid lesser sums than those owed to a new timetable amount to a necessary detriment to found an estoppel or make revisiting the agreement unconscionable.
The approach of the Supreme Court will doubtless be welcome to those tasked with drafting and policing performance of IT contracts. Anti-oral variation clauses have an obvious commercial rationale yet, until now, have been of limited and doubtful effect. Parties can now anticipate being held much more closely to what they have agreed at the outset, and lawyers can sleep somewhat better at night knowing that the risk of employees varying contracts without proper authorisation to do so (or informing the lawyers of what is happening) has diminished. In theory, arguments about what contractual obligations are or were mid-way through a project (with contractual dates missed and the parties having adopted, worked to and revised a number of plans in the interim) should be easier to predict and simpler to resolve.
However, there seems to be a real risk of injustice and a need for heightened vigilance if those involved in projects are not to be seriously caught out. The first message is one familiar in these pages: parties who put the contract in a drawer at the start of a project and return to it only when deep in dispute run a serious risk: it will be important to be conscious of what the existing contractual commitments are and the requirements to change them. If changes are genuinely desired by both sides, formal processes will need to be complied with. Perhaps uncomfortably, suppliers will need for their own protection to insist on formal changes (or an unambiguous acknowledgement that such a requirement is waived) and steel themselves for the difficult conversations which may accompany them. Where previously a little ambiguity and fudge may have eased difficult relationships along, that is no longer likely to be an acceptable approach given the risks involved.
An interesting aspect for the future will be how the courts approach claims of estoppel in light of the Supreme Court’s comments. It seems to invite considerable injustice if both parties can agree (informally) to a change and act on it only for either party to be free to insist that the change was of no effect and, on the contrary, opens the other to a claim for damages. The Supreme Court strongly implies that this will be the outcome unless there is express acknowledgement of the anti-variation provisions and the fact that they are being waived. However, it seems probable that first-instance tribunals will seek to avoid injustice as far as possible, through a generous approach to finding compliance with formal requirements or refining the requirements of an estoppel in such circumstances. Given the ubiquity of anti-variation clauses, we are unlikely to need to wait long to see these questions further explored in the courts.
Richard Osborne is a barrister specialising in information technology disputes practicing at 4 Pump Court. He is ranked as a leading junior in IT and telecoms by both Chambers & Partners and the Legal 500.