“Anti-Oral Variation” Clauses in Contracts: do they really prevent variations orally and/or by conduct?

The relevant clause in that case was a standard boilerplate clause used in written contracts:-

Entire Agreement; Amendment: This Agreement, which includes the Appendices hereto, is the only agreement between the Parties relating to the subject matter hereof. It can only be amended by a written document which (i) specifically refers to the provision of this Agreement to be amended and (ii) is signed by both Parties.

Such ‘anti-oral variation’ clauses are intended to protect against a party raising subsequent ill-founded allegations that a contract’s terms have been varied by oral agreement or by conduct as such allegations may make the contractual obligations more difficult to enforce. They are therefore intended to promote certainty in contracts.

However there were two inconsistent judgments of the Court of Appeal on the enforceability of those clauses.

In the case of United Bank Ltd v Asif (11 February 2000) it was held that a contract containing an ‘anti-oral variation’ clause could only be amended by a written document complying with that clause. The subsequent case of World Online Telecom Ltd v I-Way Ltd [2002] EWCA Civ 413 was inconsistent with that case; the Court remarking that “…the parties have made their own law by contracting, and can in principle unmake or remake it”.

In light of these two inconsistent decisions, the Court of Appeal was entitled to decide which one it preferred and in doing so considered the principles and policy behind ‘anti-oral variation’ clauses.

The Court of Appeal considered the fact that such clauses pursue a legitimate aim by setting an evidential threshold. Whilst false claims of an oral agreement may be disproved after a full trial, such false claims may prevent a party obtaining summary judgment on the contract. Further, ‘anti-oral variation’ clauses can prevent a person in a large organisation producing a document which unintentionally is inconsistent with a provision in a contract between the organisation and a counterparty. Parliament has also required agreements in writing for the disposition of interests in land and guarantees and therefore parties too should be able to insist on the same.

Nevertheless, this does not sit easily with the idea that parties are free to agree whatever they choose (subject to certain limits imposed by public policy) and can do so by word of mouth or by conduct. Just as parties are free to include terms regulating the manner in which a contract can be varied, they should be just as free to agree to no longer be bound by the same.

In the end, the Court of Appeal held that freedom of contract was the governing principle and that, whilst it was entirely legitimate for parties to want to insist on variations in writing to protect themselves, there was no “doctrinally satisfactory way” to achieve that result.

This does not however mean that ‘anti-oral variation’ clauses will have no use. The existence of such a clause in a contract may still serve as evidence that a subsequent informal variation lacks contractual intent. Parties intending to rely on informal communications or conduct to modify their obligations will face greater difficulties in showing that both parties intended that what was said or done should alter their legal relations.

On the facts of the case, it was not necessary for the Court of Appeal to decide this point and therefore its comments are only obiter. However, pending the issue being considered again by the Court of Appeal or by the Supreme Court, it is likely that such clauses will not be enforced strictly. Parties should therefore take care when discussing and/or carrying out their obligations under contracts as they may end up varying the same, or at least leaving themselves open to an argument that the contract has been varied, despite the existence of an ‘anti-oral variation’ clause.

In the absence of case law to the contrary, it is very likely that the Isle of Man Courts will follow the English Court of Appeal's view in this case.