15 April 2002
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Is Luis Suárez right: does an oral agreement between parties vary the terms of their written agreement?
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No addition, amendment or modification of this agreement shall be effective unless it is in writing and signed by and on behalf of both parties."
Such words are commonly encountered in the 'standard template' clauses of commercial contract precedents. Practitioners might assume that the provision excludes subsequent variations (either orally or by conduct) by the contracting parties. But are such clauses always effective?
Perhaps surprisingly, English law on the point is not settled. The 'standard' contractual formulation has now been judicially considered in World Online Telecom (formerly Localtel)
I-Way (2002). The Court of Appeal handed down judgment in this interlocutory appeal last month. On the particular facts, the wording cited above was held not to preclude a contention that a subsequent variation had occurred, orally or by conduct.
In April 1999, internet service provider I-Way agreed to provide an internet access hardware platform to World Online Telecom (Wot) customers. I-Way would gain 20 per cent of the call charges rebate from the telecoms operator, with Wot taking the 80 per cent balance. Clause 21.1 of the contract contained the 'no variations unless in writing' provision.
I-Way soon realised it could only service the contract with additional equipment, rendering its performance uneconomic unless the rebate split could be renegotiated. I-Way contended that it had then agreed with Wot a contract variation (orally or by conduct), yielding 30 per cent of the rebate revenue. Wot refuted the amendment, characterising the 30:70 rebate split as merely a temporary and gratuitous gesture.
I-Way's principal claim was for misrepresentation and negligent misstatement of the likely internet user levels (and daily time of use). Wot counter-claimed for over £1.2m, the sums allegedly withheld by, or owing from, I-Way. Wot sought summary judgment, pointing to Clause 21.1. Notwithstanding that provision, Mr Justice Mitting at first instance rejected the application, holding that the issue merited a full trial.
The judge was satisfied that there was a real prospect of I-Way establishing the alleged variation as effective and that it was open to them to enter into a redistribution of the contract rebate revenue. The variation alleged by I-Way could either be treated as an oral agreement varying the original contract or as a freestanding contract. There was also a real prospect of overcoming any arguments about an absence of consideration, in view of Williams
Roffey Bros (1991).
The Court of Appeal rejected Wot's appeal, Lord Justice Sedley giving the main judgment. He characterised Wot's application for summary disposal (on the basis of a putative analogy with US law on variations) as "an essay in optimism which is doomed to disappointment". Judge Sedley doubted that any analogy could be found in Wot's reliance on a line of authority relating to the Statute of Frauds 1677. Those precedents concerned a law defined for all individuals, but in the present case, "the parties have made their own law by contracting, and can in principle unmake or remake it". Judge Charles concurred. Lord Justice Schiemann saw "a good deal of force" in Wot's contention that the purpose of a 'no variations unless in writing' clause is to prevent "casual and unfounded allegations of [oral] variations being made". Nevertheless, he dismissed the appeal for the same reasons as Judge Sedley.
The commercial legal community awaits the full High Court trial of I-Way with interest. Wot contends that it has been left in limbo until the full hearing is concluded. It maintains that such uncertainty is the very mischief against which the parties sought to safeguard themselves by expressly requiring variations to be reduced to writing.
What provisional lessons may be drawn from the Court of Appeal's decision? It remains open to agree in writing that subsequent variations to a contract (whether oral or by conduct) are ineffective. However, parties are apparently likewise free, thereafter, orally to agree that their previous written agreement (regarding variations) has itself been varied. Whether a given oral variation was truly intended to 'trump' an earlier written prohibition on unwritten variations will ultimately be resolved as an evidential matter. Ideally, such an important issue should always be contemporaneously minuted or recorded promptly by a formal amendment.