Informal contract variation cases are a bit like London buses – you wait years for one and then you get a convoy.
Last week’s Court of Appeal decision in MWB v Rock has settled the argument. Anti-informal variation clauses do not, as a matter of law, prevent informal variation of contracts. However, that is not quite the same as saying they are ineffective and it seems likely they will still have some useful purpose.
Anti-informal variation clauses come in essentially two flavours: clauses preventing any variation which does not comply with certain formal requirements (normally that it is in writing and signed by both parties) and a more limited but often much more complicated variant which prevents certain sorts of variation being contractually effective unless made using the agreed formalities. Probably the most common example of the latter is the change order procedure which is common in construction contracts, some of which say that they make the informal change wholly ineffective and others simply prevent the contractor from obtaining certain contractual benefits such as price increases or additional time.
Despite the fact that these clauses are so frequently used there were until recently few helpful decisions to indicate whether they were effective. Indeed, in last week’s decision the Court of Appeal commented that “there has for some time been a considerable degree of uncertainty in this country as to whether an agreement in writing which contains [such a clause] can be varied other than in accordance with the terms of that clause. That uncertainty may be attributed at least in part to two inconsistent decisions of the Court of Appeal”.
The pair of inconsistent decisions were considered by the Court of Appeal in a judgment handed down in April: Globe Motors v. TRW Lucas  EWCA Civ 396. TRW produced electric power-assisted steering (EPAS) systems. Globe designed and manufactured electric motors and lead-frame assemblies which were a component part of a vehicle’s EPAS system. Under an exclusive supply agreement, TRW agreed to purchase from Globe all its requirements of certain electric motors and lead-frame assemblies identified or covered by it. Globe agreed to sell TRW all such quantities of the products as TRW ordered from time to time and not to sell specified part numbers to a third party. To a substantial extent the contract was actually performed by Porto, a subsidiary of Globe. One of the issues was whether the contract had been varied informally to include Porto as a contract party. TRW denied this relying upon a clause requiring variations to be in writing and signed. Other points were decisive but the Court of Appeal indicated that a clause of this type could be waived, with the result that an informal variation was effective. Many commentators reported that case as settling the position but as the case actually turned on a different point, its analysis of this question was not strictly binding on later courts.
Fortunately the point came before the Court of Appeal less than six weeks later and we now have a binding Court of Appeal authority which makes clear that such clauses do not exclude the possibility of informal variation: MWB v Rock  EWCA Civ 553. MWB provided office space to Rock on the basis of a licence. Rock was unable to meet the licence payments in full and an agreement was made to reschedule the licence payments but MWB claimed that this was ineffective because a clause of the license agreement stated that all variations must be set out in writing and signed before they take effect. The Court of Appeal held that that clause was ineffective to prevent the agreement being a binding contract. The parties’ freedom of contract meant that were free to vary their contract and were not bound by an earlier agreement preventing that.
However, the fact that parties are able to vary such a contract informally does not mean that the Court will conclude that that is what has actually happened. What proof will be required to establish that the parties intended to override their earlier written agreement? There were suggestions in earlier cases that proof of such an oral variation in the face of a clause requiring greater formality would require “strong evidence”. It was for a time unclear whether that imposed something heavier than the usual civil burden of proof but both of this year’s Court of Appeal decisions have made clear that that is not the case. All that is required is that the agreement to vary notwithstanding the clause requiring greater formality should be proved on the balance of probabilities, that is that it is more likely than not that that agreement was reached. However, that does not necessarily mean that it will be easy to satisfy a judge that that standard has been reached. There have been a number of other important cases recently looking at informal creation of contracts in one way or another which have indicated that, when weighing the evidence in support of an allegation that an agreement has been reached informally, the court is likely to take into account factors which indicate that the parties expected and should be taken to have expected greater formality. It is inevitable that a party seeking to show that a clause requiring formality had not been varied will rely upon the existence of the clause to cast doubt on evidence suggesting that the clause had been varied.
In this way, it is possible that clauses of this type may remain useful in imposing rigour into contractual relationships. However, the recent cases make clear that a party wishing to ensure that the contract is only varied formally will need to be vigilant to ensure that he and anyone acting for him behaves consistently throughout in a way which ensures that the other party cannot reasonably proceed on any other basis.