Developments in contract: "no oral variation" clauses

The principles

Many commercial contracts contain a clause stating that any variation to the terms of the agreement must be in writing and signed by both parties.

This is designed to prevent disputes arising out of informal exchanges that may waive particular requirements, change deadlines, etc.

By seeking to limit effective amendments to those made in writing, parties also seek to avoid arguments over apparent authority, as more junior employees may reach oral agreements on a day to day basis that companies do not wish to be bound by.

The effectiveness of these clauses has long been uncertain: English law recognises oral contracts and a party cannot bind itself in future from varying the terms of a contract through oral agreements that waive the requirement to be in writing.

Recent developments

In the June 2016 case of MWB Business Exchange Centres Ltd v Rock Advertising the Court of Appeal finally gave a binding judgment on the issue, finding that an oral agreement to vary the contract was effective, despite the contract containing a no-oral variation clause.

The Court approved the obiter comments of Beatson LJ in Globe Motors v TRW Lucas Varity, where he commented that “The parties have freedom to agree whatever terms they choose to undertake, and can do so in a document, by word of mouth, or by conduct. The consequence in this context is that in principle the fact that the parties' contract contains a [no oral variation] clause ….. does not prevent them from later making a new contract varying the contract by an oral agreement or by conduct”.

What this means

It is now certain that “no oral variation” clauses in themselves cannot prevent a later oral agreement being effective.

Parties must therefore guard against employees with apparent authority varying the terms of agreements through waiving deadlines, changing prices or other amendments.  In MWB Business Exchange Centres Ltd v Rock Advertising the court found that the employee involved in the oral agreement had “at least ostensible authority to do so”. It may be helpful to set out in the agreement exactly who has authority to contract on behalf of each party.

There remains no downside in including a “no-oral variation” clause in an agreement, however. A party seeking to rely upon an alleged oral variation may find it more difficult to show that both parties intended a legally binding change to their relations where such a clause was used.