Anti-variation clauses: Valid after all

21st May 2018

In 2016 the Court of Appeal ruled [1] that anti-variation clauses in commercial contracts had no legal effect and that contracts could be varied despite prior express restrictions to the contrary.  That has now been unanimously overturned by the Supreme Court in MWB Business Exchange Centres Ltd v Rock Advertising Ltd [2].  Walker Morris’ Head of Commercial Dispute Resolution Gwendoline Davies explains and offers her practical advice.

Anti-variation clauses – contractual red herring or legitimate device?

Clauses which expressly prohibit parties from varying contracts unless they comply with specified requirements (usually that amendments be made in writing and signed by both parties) are very common in modern commercial contracts. The purpose behind the clause is to preserve the integrity of the contractual terms by preventing informal or inadvertent amendments. However, whether or not such clauses have any binding effect has, for some time, been the subject of much legal debate.

The question arose in the MWB Business Exchange v Rock Advertising case when, in the context of accumulated licence fee arrears, the parties informally agreed a reduced payment schedule despite the existence of an anti-oral variation clause in the licence, but the licensor subsequently sued for the full amount.

The Court of Appeal had adjudged that contracts could be varied despite prior express restrictions to the contrary (and that, in the instant case, the informally agreed reduced payment schedule was therefore binding). Its decision was founded on the principle that the autonomy of commercial contracting parties to agree whatever they wish and however they wish (within the law and subject to public policy considerations) is the most important consideration, whereas anti-variation clauses are effectively a restriction on the fundamental principle of freedom of contract.  The Court of Appeal also considered that anti-variation clauses presented a conceptual problem, in that they could be rendered irrelevant by subsequent agreements by virtue of the application of basic formation of contract principles.  That is, where parties with the requisite legal authority and intention to enter into binding contracts reach any agreement that is supported by consideration, a valid contract comes into effect, regardless of any formality (or lack of it) and regardless of any prior express term to the contrary.

Until very recently, therefore, the key question was not whether an anti-variation clause existed nor what it said, but rather whether any agreed amendment amounted to a valid contract in itself.

The Supreme Court has now made an absolute about-turn, holding that anti-variation clauses are valid after all.

Interestingly, the Supreme Court has also relied on the doctrine of freedom of contract in reaching its decision (but this time to the exact opposite effect), stating that the law of contract does not obstruct the legitimate intentions of parties who wish to dictate their own rules restricting the ability to agree variations. The Supreme Court also states that there are international codes [3] which suggest that there is no conceptual inconsistency between a general rule allowing contracts to be made informally and a specific rule that effect will be given to a contract requiring writing or other specified formalities for a variation.

The Supreme Court’s judgment does acknowledge that the enforcement of anti-variation clauses involves the risk that a party may rely and act on what it believes is a valid variation or subsequent contractual agreement, but it notes that the safeguard against that injustice lies in the doctrine of estoppel – another area of the law entirely [4].

Practical advice

• The key takeaway from the Supreme Court’s finding in MWB Business Exchange v Rock Advertising is that, if a contract contains any anti-variation conditions, restrictions or requirements, then parties seeking to agree subsequent contractual variations or arrangements must ensure that they comply fully with those provisions.
• Commercial parties should now review their contracts – in particular any informal arrangements, settlements or other agreements or changes made subsequent to prior or underlying commercial contracts – to see where their arrangements might not comply with anti-variation clauses and may, therefore, be found to be ineffective.
• As a matter of general good practice (by virtue of the fact that the fundamental law of formation of contract does not require any particular formality), negotiations, whether oral or in writing (including via e-mail) should clearly record whether any contractual arrangement or amendment has been reached that is intended to have legal effect, or whether the parties require any such agreement to be documented and signed by the parties before it has contractual force.
• Commercial parties should also be aware that the lack of any legal requirement for formality means that contracts can be formed by conduct as well as orally or in writing. It is therefore important that parties should not act in any way that is inconsistent with their contractual intentions.
• It is vital that businesses educate their staff as to both the now-binding status of anti-variation provisions and, more generally, the risk of informal or inadvertent contract formation.

If you would like any further advice in connection with anti-variation clauses and your contractual arrangements, or if you would like assistance with staff training, please do not hesitate to contact Gwendoline Davies or any member of Walker Morris’ Commercial Dispute Resolution Team.

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[1] MWB Business Exchange Centres Ltd v Rock Advertising Ltd [2016] EWCA Civ 553
[2] [2018] UKSC 24
[3] such as the Vienna Convention on Contracts for the International Sale of Goods (1980) and the UNIDROIT Principles of International Commercial Contracts, 4th ed (2016)
[4] for example, where one party has unequivocally led another to believe that a variation was valid notwithstanding its non-compliance with an existing anti-variation provision, and then circumstances dictate that it would be unjust to allow that party to renege