How effective are variation clauses?
Most contracts contain clauses governing how variations to contract terms are to be agreed. Many of these simply provide that the parties must agree to the variation in writing, whilst some go further and require the variation to be evidenced or authorised in a particular way or state that certain variations (such as those made informally or those not signed off by a person at certain level of seniority) are not effective. And many contracts contain even more detail by using lengthy procedural requirements of a change control procedure. The question has always been, if the parties originally agreed to a particular manner of variation of terms, can they subsequently override that agreement or does the original agreement on how to vary prevail? In the last six months there have been a couple of cases on the effectiveness of variation clauses which throw some light on this question and in particular some of the limitations of wholly relying on those clauses to overcome more “informal” modes of communication of change. Reaffirming the need to remind those charged with contract management to take particular care with post contract communications.
The first case is that of C&S Associates v Enterprise Insurance Company where a fairly informal exchange of emails was sufficient to vary the terms of a contract, even where the contract included a clause providing that any contractual variation had to be in writing and signed by or on behalf of both parties. The Court held that as the email correspondence included signature blocks, this was enough formality to satisfy the terms of the clause, provided that there was intention to be legally bound. All that the variation clause achieved was to prevent oral agreements or informal, unsigned written documents from binding the parties.
This was not going so far as saying that an oral variation overrode the contractually agreed variation but a finding that what some might have seen
as too informal conduct was sufficient to satisfy the formality of the variation clause. The judge held that the variation clause which simply had a requirement of writing and signature by the parties did not mean that manuscript signatures, paper documents or both parties’ signatures on the same document were required. The requirement for a signature was satisfied by an email auto-signature by one party and a reply by the other in an email as “Many thanks Myles, much appreciated. Mike.” He held that the parties clearly did objectively intend to be bound by the exchange of emails, despite the fact that they also clearly contemplated that their agreement would subsequently be recorded in a formal contract. So, it may be that another exchange of emails would not include sufficient wording to make clear that the parties did intend to be bound.
The second case is the Court of Appeal decision in Globe Motors Inc v TRW Lucas Varity Electric Steering Ltd where the contract in question contained a similar variation clause: variations had to be in writing and signed by both parties. But here the Court of Appeal was not looking at what the variation clause prevented but a wider issue: can parties to a contract modify their terms orally or by conduct, even where their contract contains a clause requiring all variations to be in writing? The answer to this question in principle (because the Court did not need to consider this to reach their decision) was yes. Parties can agree at the outset in a contract that it can only be varied in a particular way but they are free to change their minds and if they do, the variation will be effective. In the past there have been conflicting cases on whether this was possible.
These cases are reminders of the limitations of any variation clause. You can clarify within your variation clause that, if you wish to prevent informal communications from giving rise to variations, variations have to be in writing and you can make clear that this excludes email or other forms of communication. You can agree these kinds of and other barriers to variation but they won’t stop a variation if it can be shown that the parties intended to make the variation, even if informally. But the key is that the parties must be able to show that they both intended to make the variation and be bound by it. And so there is still and will always be value in including variation clauses – and you should still include them with whatever level of formality you require – because, if there is a future dispute as to whether not there was a variation, the party alleging the variation will have to provide sufficient evidence of the informal variation, be it records of conversations, evidence of behaviour or email exchanges. The more a party relies on informal communications or behaviour the more likely it is that it will encounter difficulties in showing that both parties actually intended what was said or done was meant to alter their legal arrangements.