This was a dispute arising out of a car component purchase agreement. Article 6.3 provided that:
“Entire Agreement; Amendment: This Agreement, which includes the Appendices hereto, is the only agreement between the Parties relating to the subject matter hereof. It can only be amended by a written document which (i) specifically refers to the provision of this Agreement to be amended and (ii) is signed by both Parties.”
One issue was whether or not a company known as Porto became a party to the Agreement, even though there had been no formal amendment as required by Article 6.3. The Judge at first instance decided that whilst it was possible for parties to agree to vary or waive a requirement such as that in Article 6.3, whether they have done so was fact-sensitive. To decide otherwise would be inconsistent with the principles of freedom of contract. Here the Judge held that the Agreement, including Article 6.3, had been varied or waived by the parties’ conduct because in their dealings under the Agreement over a long period they had operated as if Porto was a party. This overrode the requirement that the Agreement could only be varied in writing. On the facts, it was “overwhelmingly clear” that TRW treated Porto as a contracting party.
Having found in favour of the appellants on other grounds, the CA did not strictly need to consider this issue. However, all three judges commented on the issue because there were two conflicting CA cases. In United Bank Ltd v Asif (2000) the CA had held that a contract containing an anti-oral variation clause could only be amended by a written document complying with that clause. Two years later, however, in World Online Telecom Ltd v I-Way Ltd, the CA had reached a different conclusion.
TRW stressed the policy benefits of “anti-oral variation” clauses. They promoted certainty and helped avoid “false or frivolous claims” of an oral agreement. TRW also suggested that such clauses would prevent a person in a large organisation producing a document which “unwittingly and unintentionally” was inconsistent with a provision in an existing contract.
LJ Beatson said that the general principle of the English law of contract is that parties have the freedom to agree whatever terms they choose, and can do so in a document, by word of mouth, or by conduct. The consequence in this context was that in principle the fact that the parties’ contract contained a clause such as Article 6.3 did not prevent them from later making a new contract varying the contract by an oral agreement or by conduct. The CA noted that in an old Australian case, Liebe v Molloy (1906) 4 CLR 347, the High Court considered a building contract containing a clause that extra items should not be paid for unless ordered in writing. The court said that notwithstanding the clause, the conduct of the parties may mean that a contract to pay for the extra items is to be implied. It was all a question of fact. An oral agreement or the conduct of the parties to a contract containing such a clause may give rise to a separate and independent contract which has the effect of varying the written contract.
On the facts here, the CA agreed that the conduct of the parties was sufficient to mean that the Agreement had been varied by conduct. On the basis of “open, obvious and consistent” dealings over a long period, there was no other explanation but that the parties intended to add Porto as a party to the Agreement. Accordingly, Porto had a right of action against TRW.
This was not a decision the CA reached without some hesitation. LJ Underhill said that it seemed “entirely legitimate” that the parties to a formal written agreement should wish to insist that any subsequent variation should be agreed in writing (and perhaps also, as here, in some specific form), as a protection against the raising of subsequent, maybe ill-founded, allegations that its terms have been varied by oral agreement or by conduct. However, LJ Underhill continued that holding otherwise did not mean that clauses like the second sentence of Article 6.3 had no value at all. In many cases parties who want to rely on informal communications and/or a course of conduct to modify their obligations under a formally agreed contract will encounter difficulties in showing that both parties intended that what was said or done should alter their legal relations. There may also be problems about authority. Those difficulties may prove to be a significantly greater hurdle to overcome if they have agreed to a provision requiring formal variation.
LJ Moore-Bick agreed that the governing principle was that of party autonomy. The principle of freedom of contract entitles parties to agree whatever terms they choose, subject to certain limits imposed by public policy. This meant that:
“The parties are therefore free to 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, at any rate where to do so would not affect the rights of third parties.”
LJ Moore-Bick continued that one of the benefits of a clause such as Article 6.3 was that it was likely to bring to the forefront the question of whether the parties who were said to have varied the contract otherwise than in the prescribed manner really intended to do so. However, as a matter of principle, he did not think that parties can effectively tie their hands so as to remove from themselves the power to vary the contract informally. The Judge did not see that this was a matter of concern, given that nothing could be done without the agreement of both parties.