Do non-variation clauses really protect your agreement from informal changes?

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Do non-variation clauses really protect your agreement from informal changes?

Non-variation clauses

“No variation to this agreement shall be effective unless in writing and signed by a duly authorised individual on behalf of each party.”

Non-variation clauses like this one are a fairly standard way of protecting an agreement from being changed by accident, or without giving the change proper thought. Of course, no commercial agreement should be cast in stone, since the world of business requires flexibility. But it is useful to have a formal mechanism each party must use if they wish to change their agreement, to provide certainty and clarity as to what the latest state of the agreement is at any time.

Until fairly recently, we could generally rely on non-variation clauses to do what they said. However, the decision in Globe Motors Inc v TRW Lucas Variety Electric Steering Ltd

[2016] has cast doubt over the security that non-variation clauses provide.  The case, which involved an agreement for TRW’s exclusive purchase of certain parts for the production of power assisted steering units (‘Gen. 1 motors’) from Globe, revolved around whether the supply agreement extended to a particular part used in the production of another product, ‘Gen. 2 motors’.

The original contract for supply between Globe Motors and TRW Lucas did not include supply of parts for the production of Gen.2 motors. In practice, Globe had supplied the parts anyway, informally extending the original arrangement to include Gen.2.

Once TRW Motors began to purchase the parts required for Gen.2 motors from DEAS EMERSON as opposed to Globe Motors, questions arose as to whether TRW had breached the exclusivity provisions in the contract.

Muddy Waters

Whilst the original contract between Globe Motors and TRW Lucas did not include the supply of parts for Gen.2 motors, did their informal agreement to extend it, and the subsequent supply of Gen.2 motor parts by Globe Motors, serve to change that contract?

The Court of Appeal found that it could, and that the parties’ behaviour could be considered to have created a contractual variation even though they had not followed the written process set out in the contract.

In two previous cases based on similar facts, the courts ruled in opposing directions:

  1. In United Bank v Asif [2000] it was held that where the process set out in the non-variation clause was ignored, the earlier agreement would prevail over any subsequent informal dealings; and
  2. In World Online Telecom Ltd v I-Way Ltd [2002], it was found that a non-variation clause could be ignored where the variation was shown to be sufficiently agreed by the parties, either through express oral agreement or by their actions.

As is often the case with contract law, the courts attempted to determine the intentions of the parties by looking at their whole course of dealings, in order to determine the meaning of the agreement that they have. This approach can lead to ambiguity, with the result that you and I cannot be certain exactly how our situation will be viewed by a court.

‘Liberalising’ Non-Variation Clauses

As we can see from the case law, the approach of the courts when it comes to non-variation clauses is a very mixed bag, with different judgements pulling in opposite directions.

The law in its current form seems to support a more liberal approach to non-variation clauses than has previously been adopted. The courts will examine the conduct and relationship between the parties to see whether they should be bound to an informally agreed variation, rather than simply applying the letter of the contract to say that the original agreement remains intact unless the form of variation specified within that agreement is followed precisely.

Where does this leave my agreement?

If you have negotiated new or changed contract terms on top of your existing agreements, the liberal attitude of the court when it comes to non-variation clauses could spell good news if you have not followed the contractual process to the letter. It will allow for your respective actions and oral agreements to be taken into consideration alongside the substantive contract itself.

However, this does also mean that you must be extra careful about informal agreements to vary arrangements with suppliers or customers; while your staff might think the variation is not binding, because nothing has been formally agreed in writing, this may not be the case. You could find yourself bound by a change that was only ever intended as a one-off goodwill gesture.

For those entering the contracting process, non-variation clauses are still vital tools that allow for a smoother relationship if either of you wish to vary the agreement later on. Where both parties follow an agreed process for altering the contract, they are more likely to both have a full understanding of what they are agreeing to and therefore being bound by.

If you’re considering a change to an existing agreement or need help negotiating new terms please contact us to see how we could help.

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Callum Sommerton
The Butler, Devant

2017-02-19T13:49:46+00:00

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