What Happened to My Contract?

Alex Charlton QC, Matthew Lavy and Gideon Shirazi review the effect of recent Court of Appeal decisions on a common contract clause that seeks to prevent variations to contractual terms outside the specified change control procedure

It is generally acknowledged that IT projects can be difficult to manage and control. That is particularly so where the project is a large one, where the requirements are defined only at a high level and where, as well as defining more precisely what it wants, the customer has decided to re-engineer its business processes. The need for cooperation in such a project is generally high and it is (almost) inevitable that change will arise outside that which is contracted for.

Those that draft IT contracts have long been used to such challenges and, over the years, have developed sophisticated change control mechanisms and contractual terms regulating how and by whom the contract can be varied. From the contractor's perspective, discipline and adherence to these contractual processes is key if the project is to remain profitable. For the customer, cost and time certainty is likely to be of fundamental importance.

It is for these reasons that most IT contracts state that changes are not effective unless the change control process is complied with and the change request is signed by the parties; most IT contracts will say that variations must be in writing and signed by both parties before they come into effect.

But do these clauses actually prevent oral variations and changes agreed on the hoof from taking effect? Common sense might suggest that the formal, written contractual terms should reign supreme; after all, the parties spent a lot of money on lawyers devising terms to de-risk the project by ensuring that rogue decisions taken by those who had no business making them did not derail the project.    

Hitherto, the courts have not been too sure of the answer and the two Court of Appeal decisions on point decided around the turn of the century expressed opposing views. However, last year the issue was revisited by the Court of Appeal in two further decisions: Globe Motors Inc v TRW Ltd [2016] EWCA Civ 396 and MWB Business Exchange Centres Ltd v Rock Advertising Ltd [2016] EWCA Civ 553. These decisions have brought clarity as to the law, but are not a welcome development to those seeking to rely on the protection of contractual change control mechanisms.

Globe Motors

Globe Motors was a dispute about whether TRW had breached a long-term exclusive supply agreement with Globe Motors for the supply of certain car parts. In the early 2000s, TRW were working with some of the major car manufacturers in the development of certain parts for their new cars. As part of this, TRW awarded a project to develop and supply certain motors to a competitor of Globe, and Globe alleged that this was a breach of contract.

The Court of Appeal held that, as a matter of interpretation of the agreement, TRW was not in breach of contract. As a result, it did not need to consider the effect of a "no oral variations" clause. Nonetheless, because of the general importance of the issue, Beatson LJ gave a full judgment on it.

Beatson LJ observed that the Court of Appeal authorities on "no oral variations" clauses were inconsistent: in one case (United Bank), the court had held that it was "incontestably right" that such clauses were binding and variations would take effect only if they complied with the conditions set out in the clause; in another (World Online), the court held that "the parties have made their own law by contracting, and can in principle unmake or remake it" and so these clauses were not binding and could not prevent an oral variation. This inconsistency meant that the Court of Appeal was not bound by precedent but could reach its own conclusion on the point and lay down a definitive statement of the law.

Beatson LJ considered that the main argument in favour of upholding "no oral variation" clauses was that they prevent parties from manufacturing allegations of oral agreements. However, Beatson LJ also considered that the danger may be somewhat overstated given that an oral variation is generally difficult to establish. Beatson LJ also considered that English contract law's general policy was to support the freedom of the parties to contract in any way they chose, and this meant that they could not bind the way in which they might choose to contract in the future. It was difficult to see why the "no oral variations" clauses could not be waived or varied as any other contract term.

Beatson LJ concluded that English law does not give effect to "no oral variation" clauses – and so such clauses could not prevent an oral variation. However, Beatson LJ accepted that his decision was obiter and was itself not binding (at least, at the Court of Appeal level). Underhill and Moore-Bick LJJ agreed with Beatson LJ, and emphasised the importance of party autonomy and the practical difficulties of establishing that there has been an oral variation.

MWB Business

MWB involved a dispute about whether a contractual licence for Rock Advertising to occupy MWB's office premises had been varied by an oral agreement between the parties under which the licensee would make a part payment of his arrears. Among other points, MWB argued that the variation had no effect because there was a term of the contract stating "All variations to this licence must be agreed, set out in writing and signed on behalf of both parties before they take effect".

The Court of Appeal referred back to Globe Motors, summarised each Lord Justice's view on the "no variation" clauses and concluded that it was correct. Kitchen LJ summarised the position in a quote from Cardozo J in a 1919 ruling by the New York Court of Appeals:

"Those who make a contract, may unmake it. The clause which forbids a change, may be changed like any other. The prohibition of oral waiver, may itself be waived … What is excluded by one act, is restored by another. You may put it out by the door, it is back through the window. Whenever two men contract, no limitation self-imposed can destroy their power to contract again …"

The decision in MWB (until considered and overruled by the Supreme Court) is binding on all English courts and likely to represent the law in England for some time to come.

Consequences

Given these decisions, is there any point in including a "no oral variations" clause in a contract or change control process? We think there is. While a "no oral variations" clause will not prevent an oral variation, its presence in the contract will make the argument that a contract has been orally varied more difficult. This is because, rightly or wrongly, the presence of the clause may indicate to a court that the parties considered this issue at the outset and determined that it is the type of contract where variations should not be considered to have occurred lightly. The clause may also have negotiating value. Contracts are not written solely for lawyers (or those who know the law) and, at an operational level or between non-lawyers, this clause is likely to have significant value in negotiations.

It is perhaps unfortunate that the issue of the effectiveness of "no variation" clauses arose in both of the cases in the context of alleged oral variations, which (as the Court of Appeal observed) are difficult to establish in practice and thus did not pose much danger in practice. In the context of IT projects, most alleged variations are not oral but based on chains of emails; the issue that arises here is often whether legal effect was intended or whether the individuals responsible for sending the emails had authority to vary contractual obligations. Unlike an oral variation, the fact of an email chain is easy enough to prove. For many commercial managers on both sides of an IT project, the Court of Appeal's decisions will introduce unwelcome additional risks to their projects. Extra vigilance will be required.

Alex Charlton QC, Matthew Lavy and Gideon Shirazi are barristers at 4 Pump Court: http://4pumpcourt.com/

Published: 2017-01-06T10:19:28

    1 comments

    • Thanks for this. I would have thought presence/absence of consideration might often be the determining factor for establishing intended legal effect. Do the cases or authors have a view on this?
      Christopher Mann, 17:02:20 09/01/2017

    This site uses cookies. By using the site you agree to our use of cookies as set out in our Privacy Policy.

    Please wait...