In March we ran a webinar on ICT project failures. During the webinar we noted how, in almost every ICT project dispute we see, one of the issues in dispute is the extent to which one party has either waived its rights under the contract or has effectively varied the contract post-execution (orally or through conduct or otherwise simply without adhering to the contract's specified variation process).
After the webinar, one of our astute clients asked us the extent to which a no oral modification clause or no waiver clause might help with this problem - after all they are almost ubiquitous in ICT contracts (and indeed many commercial contracts). It's a very good question and one which we thought warranted a response that others might find useful. Hence this article.
No waiver clauses
"No party may rely on the words or conduct of any other party as being a waiver of any right, power or remedy arising under or in connection with this agreement unless the other party or parties expressly grant a waiver of the right, power or remedy. Any waiver must be in writing, signed by the party granting the waiver and is only effective to the extent set out in that waiver."
Clauses like the above are commonly referred to as 'no waiver' clauses. While they take a number of forms, a no waiver clause typically aims to protect the rights of a party who fails to exercise them, by stating that such a failure is not a waiver unless the party expressly says so. A no waiver clause may also be used to establish that a party has not waived a right merely through prior conduct. For example, in the Australian case of Agricultural and Rural Finance Pty Ltd v Gardiner and Another, the Court found that the previous acceptance of late interest payments did not constitute a waiver of the requirement for 'punctual payment'.
Unfortunately (or fortunately depending on your perspective) they are not always effective. Despite inclusion of a no waiver clause, a party may still unintentionally waive its rights under the agreement and the effectiveness of a no waiver clause will depend very much on its terms and the particular circumstances. A good example is the UK case of Tele2 International Card Company SA v Post Office Ltd. In that case, one party elected not to exercise its right to terminate an agreement following a breach by the other party. Nearly one year after the breach, the party wished to terminate the agreement and the Court found that the no waiver clause could not be relied upon due to the earlier election. That the existence of a non-waiver clause did not remove the obligation to make an election in express terms (and that it might not be able to do so in any event) and a no waiver clause was 'of no particular help' when dealing with an election other than to emphasise that an election must be clear and unequivocal. This decision was followed by the New Zealand High Court in Precast NZ Ltd v Anystep Ltd.
It's also worth noting that even if a no waiver clause is effective in particular circumstances, the doctrine of promissory estoppel is often argued as an alternative to waiver and may apply although the doctrine addresses different concerns. As the Court in Bell v BDO Spicers Manawatu Ltd noted, while “waiver focuses on the scope of the intention of the party (or parties) granting the forbearance … estoppel focuses on the conduct of that party and its effect on the other party”.
No oral modification clauses
"All amendments to this agreement must be in writing and signed by a duly authorised representative of each party."
Clauses such as this are known as 'no oral modification' or 'no oral variation' clauses. While they are relatively straightforward to draft, the issue of whether and to what extent they are enforceable is not.
After a number of cases coming to different conclusions on the issue, the leading UK judgment of the Supreme Court in MWB Business Exchange Centres Ltd v Rock Advertising Ltd found that no oral modification clauses were legally enforceable. There were legitimate business objectives for the use of a no oral modification clause, such as:
- Preventing attempts to undermine the contract by informal means
- Providing certainty by avoiding disputes about whether a variation was intended, which can easily arise from oral discussions
- Providing a measure of formality which makes it easier for companies to maintain internal procedures for authorising contractual variations.
Lord Sumption held that the law of contract usually did not interfere with legitimate business objectives except for clear public policy reasons. There were no such public policy reasons: if the parties intend to vary a contract with a no oral modification clause, it was very easy for them to agree to do so in writing. Beyond this, Lord Sumption noted that the principles of estoppel formed a sufficient safeguard in circumstances where one party has relied on a purported oral variation to their detriment.
However, Rock Advertising has been criticised by a number of commentators and New Zealand has not yet adopted the decision. The position in New Zealand prior to Rock Advertising was that a no oral modification clause was strong evidence against a non-compliant variation but did not prevent one as a matter of law. The Court of Appeal in New Zealand (while noting that in England no oral modification clauses may have greater prohibitory effect (citing Rock Advertising), has recently taken the same approach in Forest Holdings (NZ) Ltd v Sheung - on the basis that those who make a contract may unmake it. The logic goes that parties to a contract may deliberately agree not to comply with a no oral modification clause or may simply overlook it but nevertheless intend to be legally bound by the non-compliant variation. The burden of establishing that the parties intended to be bound by an informal variation, despite the existence of a no oral modification clause, of course lies with the party seeking to rely on the variation. In addition, the Federal Court of Australia has also suggested that it might be unfair to hold the parties to a no oral modification clause in relational contracts, which are 'evolutionary' in nature (for example, agile contracts for software development and systems integration).
Nevertheless, the legitimate business objectives discussed in Rock Advertising are relevant, as is the parties' conduct in effecting the alleged variation. Although in Forest Holdings the Court recognised that no oral modification clauses did not prevent a non-compliant variation taking effect, on the facts the Court held that the email allegedly constituting a variation was ambiguous, the documentary record was incomplete, and the consequential effect upon the contract was unclear. In such circumstances, the Court determined that there was no justification for going beyond the plainly worded no oral modification clause.
The key takeaway is that no waiver clauses and no oral modification clauses may work or at least there may be a strong evidential bias in favour of the party seeking to rely on them. However, in our view, it would be dangerous to rely upon them. The enforceability of both clauses depends on the intention of the parties in the particular circumstances and there are a number of cases where parties have been held to have waived or varied their rights notwithstanding the existence of such clauses in the relevant contract.
Prudent contracting parties should therefore focus their efforts on agreeing change processes that they will actually follow (and then making sure that they actually follow them) and on ensuring that subsequent decisions about the exercise of their rights are clearly expressed in writing. If all parties took this approach, ICT project disputes (and other commercial contracting disputes) might be a lot easier to resolve.