When is an oral variation of a contract binding?

A recent Court of Appeal decision provides new guidance on the effect of an oral agreement to vary a contract.

In MWB Business Exchange Centres Ltd v Rock Advertising Ltd there was a dispute relating to a claim for arrears of licence fees and other charges against Rock Advertising Ltd. The licence itself contained a clause, namely, Clause 7.6 which set out the following:

“This licence sets out all the terms as agreed…No other representations or terms shall apply or form part of this licence. All variations to this licence must be agreed, set out in writing and signed on behalf of both parties before they take effect.”

Rock Advertising Ltd, however, relied on an oral agreement made between one of its directors and MWB’s credit controller. This agreement between the two parties allowed Rock Advertising Ltd to pay the licence fees at a lower monthly rate for a certain number of months and then at a higher rate for the remainder of the licence.

The trial judge found that an agreement had been reached between the two parties meaning MWB’s credit controller had authority to bind the company.

Rock Advertising Ltd appealed this, stating that the licence or contract was open to both parties to vary the contract as a whole, in any way they choose, whether by an oral agreement.

The Court of Appeal agreed with Rock Advertising Ltd. Lord Justice Kitchen endorsed the comments of Lord Justice Moore-Bick in Globe Motors Inc v TRW Lucas Varity Electric Steering Ltd, stating:

“The parties are…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”.

Kitchen LJ also went further endorsing a quote from a US decision of the New York Court of Appeals in which Cardozo J said:

“Those who 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…What is excluded by one act, is restored by another. You may put it out by the door, it is back through the window. Whenever two men contract, no limitation self-imposed can destroy their power to contract again”.

This decision demonstrates that the principle of party autonomy will not just cover anti-oral variation clauses but also typical entire agreement clauses which seek to exclude any collateral agreements. It is therefore worth considering that if parties to a contract agree to dis-apply the existence of any collateral agreements, which run contrary to the contract itself, they may still remain enforceable.

Tolhurst Fisher has one of the largest specialist commercial teams in the region and is ideally placed to advise on this and any other commercial related matter.