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They do sound complex and many commercial contracts will have them- but, in reality, what is an ‘anti-oral variation clause’?
Anti-oral variation clauses aim to introduce certainty as to when and how a contract can be amended. They also attempt to avoid false or frivolous claims by parties that a variation has been agreed and such clauses seek to prevent the parties involved from making any subsequent changes to an agreement unless they have been mutually agreed in writing and signed.
These clauses for variation are popular with parties who may seek to prevent themselves being bound by informal verbal exchanges but their enforceability has been somewhat confusing until recently.
What’s changed?
Contracts, particularly those for a longer term, often specify that no amendments can be made without compliance with specified requirements – usually that an amendment must be made in writing and signed by all parties. It is inevitable that, over time, a transaction’s underlying circumstances will change so a clause allowing variation is valuable.
However, recent guidance from the Court of Appeal has led to a new consideration of the effectiveness of anti-oral variation clauses. The courts have suggested that, even where a contract contains an explicit requirement for amendments to be made in writing, a contract is still capable of oral amendment.
The justification for this is on the basis of freedom of contract i.e. the parties should be free insofar as is possible to reach agreements with one another as they wish. The only obligation is that it must be demonstrated that the parties waived all such requirements under the contract.
How does this affect you?
Despite the wording of any variation clause, oral and informal amendments to a contract are still possible. When entering any discussions with another party, you must bear this in mind and remain careful about what is said and how it is said throughout the entire contract duration, particularly in any post-signature negotiations.
Are Anti-Oral Variation Clauses still worthwhile?
Although the Court of Appeal has confirmed that such clauses aren’t effective, they shouldn’t be dismissed and it is still worth including them in a contract as they do send out the message that agreements must be sufficiently documented in writing as a matter of course.
How can you protect yourself?
- Keep a good contemporary record of all relevant conversations. It may be useful to put on record from the outset that any variations remain subject to signing a written amendment.
- Ensure the commercial teams tasked with implementing the contract are fully aware of its terms and understand the intentions of the contracting parties. It is important to try and avoid a disconnect between the legal framework agreed in a contract and its day-to-day commercial operation.
- Make sure commercial teams are aware of the potential consequences if they act in a way which is inconsistent with the terms of a contract – unintended amendments could be legally enforceable.
Conclusion
Going forward, anti-oral variation clauses should continue to be included in contracts as it should avoid ‘accidental’ amendments and it encourages the parties to follow a proper process in attempting to amend a contract. However, anyone involved in discussions with a third party should bear these recent decisions in mind. If a party proposes variation of a contract following signature, it’s important to seek legal advice before reaching any agreement.
For more information or advice, please speak to a member of our Corporate and Commercial team.
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