A contract can be formed orally or in writing. Evidentially, it is always preferable that terms are set out in the form of a written contract but this does not prevent oral agreements from being enforceable, where the terms are clear and unambiguous. Equally, an oral agreement which varies the terms of a written agreement can be enforceable. But what if the written agreement expressly states that any variation to a contract must be in writing?
This issue has been before the courts in two recent cases. Anti-oral variation clauses are not unusual and are often used to exclude the risk of agreements being reached accidentally and without clarity as to terms. There has legal uncertainty as to whether such clauses can exclude any agreed variations concluded orally. In an earlier case, United Bank v Asif , the Court of Appeal upheld an anti-oral variation clause but since that date the courts have suggested that parties to a contract can unmake or remake its terms.
In Globe Motors Inc v TRW Lucas Variety Electric Steering Ltd  the Court of Appeal considered an agreement which included the clause that the contract could only be amended by a written document signed by both parties. The Court considered the earlier conflicting decisions and made obiter comments that, despite the problems proving an oral agreement, there was more authority to support the argument that parties were free to change the terms of an agreement. Where an oral agreement was alleged, it would be for the court to decide on the balance of probabilities whether such a contract existed and what the terms were.
This case was then followed by the Court of Appeal decision in MWB Business Exchange Centres Ltd v Rock Advertising Ltd . This was not an employment case but the finding will have implications for variations concluded orally despite the existence of an anti-oral agreement clause. The court held that an oral agreement could validly vary a contract despite the existence of a clause that required variations to be in writing and signed. Quoting from a case decided 100 years earlier, the court stated that ‘those who may 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’.
Given that oral agreements pose difficult questions of proof it is important therefore that you think carefully before making oral ‘promises’ which may be relied on later as being contractually binding. Even where you intend to enter into legal relations, it is wise to set out the terms in writing to avoid argument as to what was intended. One party’s recollection may differ from the other’s. Anything done by either party after the oral contract has been concluded may be admissible to assist in construing the terms of the contract: this is in contrast to a written agreement where anything said after the contract has been concluded is irrelevant.
You should bear the following in mind when making an oral agreement with an employee:
- Conclude the terms in a written agreement as oral agreements are always subject to uncertainty
- Take care not to inadvertently enter into an oral agreement by making a promise to an employee (‘your bonus will be in the region of £X next year if you reach your target’)
- Remember that an ‘entire agreement’ clause in an employment contract has limitations. Such boilerplate clauses are used to ensure that parties to a written contract cannot later attempt to rely on statements made during contract negotiations that are not reflected in the final agreement. Such clauses do not prevent oral agreements being made subsequent to the main contract
- Remember that some contracts must be in writing and some written contracts must be signed as a deed (for example, where there is a grant of a power of attorney – common in service agreements where resigning directors authorise the Board to appoint a person to execute documents effecting the resignation from the office of director)