The Enforceability of Contractual Clauses Restricting Variation

In two recent cases, the Court of Appeal has considered the law regarding the enforceability of contractual clauses that purport to restrict the way in which the contract can be varied. These types of clauses are common, and often require any variation to be made in writing. There had previously been mixed decisions from the Court on the issue and we now have a useful analysis and clarity on previously inconsistent judicial approaches.

In Globe Motors Inc v TRW Lucas Varity Electric Steering Ltd [2016] EWCA Civ 396 (“Globe”) the Court of Appeal addressed, obiter, the enforceability of these clauses. It concluded that the principle of freedom to contract meant that such a clause could not prevent the parties entering a further contract so, in essence, would usually not be enforceable. Last month, the Court of Appeal upheld this view in the case of MWB Business Exchange Centres Ltd v Rock Advertising Ltd [2016] EWCA Civ 553 (“MWB”). We examine this in further detail below, and what it might mean for parties to commercial contracts.

Dispute

Globe concerned a supply agreement under which the Appellant purchased steering system components from the First Respondent. The Court’s decision was appealed on several grounds. The background and details of the dispute and appeal are not of great importance to the focus of this article, save that one of the grounds of appeal was in relation to the Court’s finding that the Second Respondent (a subsidiary of the First Respondent) had become a party to the agreement by virtue of an oral variation to the contract, whereas the contract provided that it could only be varied in writing, signed by the parties. The Appellant argued that this “anti-oral variation clause” meant that the contract could not have been varied in this way, and there were matters of principle and policy as to why the clause should be upheld.

Decision

As it was, the appeal was granted on one of the other grounds, an entirely separate point of construction, and the Court did not need to give judgment on the issue of the anti-oral variation clause. However, given the general importance of the issue and the inconsistent decisions to date, the point was considered in some detail. Had the Court needed to decide the appeal on this point, it would have failed.

The Court of Appeal’s view was that the fundamental principle of freedom to contract means that an anti-oral variation clause in a contract would not, in principle, prevent the parties from entering into a new contract to vary it, orally or by conduct. Freedom to contract cannot be limited or constrained by an earlier contract. In short, these clauses would usually not be enforceable. The clause would not be meaningless, in that it could be taken into account if the Court had to decide whether parties intended to vary their contract, but parties are free to contract to vary the anti-oral variation clause in the same way that they are free to vary any other clause. They hold no superior status.

Effect and Lessons

These clauses are common throughout all types of commercial contracts so the implication of the Court’s approach is likely to be widespread. It brings an element of clarity to the contradiction between parties’ rights to contract on whatever terms they wish, and the parties’ freedom to contract afterwards.

To some extent the decision means a lack of legal certainty, which contracts usually provide. Parties who do not wish to vary a contract should act with caution and take care to ensure that is clear; there will be more scope to argue that there has been a variation and the safety net of the original contract may no longer be there (though the existence of the clause may help strengthen an argument that there was no intention to vary). On the other hand, the decision offers far greater flexibility to parties who do intend to vary the contract; they are not confined by any previously-agreed restrictions.

Though the decision in Globe was obiter, it was considered by the three Judges in detail after hearing full arguments, and there was a consensus on the correct approach. It was expected to be followed, and it has been in MWB, though it is quite conceivable that this is an issue that could find itself before the Supreme Court in the future.

This article was prepared by Sarah Holland. If you'd like to discuss the issues in the article please contact Sarah.

*Note the MWB decision was overturned by the Supreme Court on 16 May 2018. See our article here.