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Non-Variation Clauses: actions speak louder than words

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Non-variation clauses are an evergreen boilerplate provision found in commercial contracts. They typically provide that a binding variation of a contract is generally limited to certain prescribed circumstances, most likely for the variation to be formalised in a written instrument and signed by the contracting parties. Most understand this to be the final word on the matter. However, recent case law has cast this into doubt, reflecting an apparent shift in the Courts’ attitude towards these types of clauses.

The New Case Law

1. In Virulite LLC (V LLC) v Virulite Distribution Limited (VDL) [2014] EWHC 366, VDL had developed a novel treatment for cold sores and launched the product in the UK, subsequently entering into a distribution agreement with V LLC. The agreement contained a standard non-variation clause stating that any modifications of the agreement had to be in written and executed form. V LLC was obliged to make various milestone payments to VDL under the agreement, which included a £25,000 payment upon the delivery of clinical information to V LLC. However, VDL was delayed and provided limited data to V LLC, so the parties negotiated by email and a conference call that the £25,000 payment would be deferred; however this was not formally recorded. VDL subsequently proceeded to serve notice to terminate the agreement based on V LLC’s failure to pay. The court concluded that there were three instances where the original agreement had been varied, most notably in the conference call, and that the conduct of the parties indicated that there had indeed been a variation relating to the payment date. Notwithstanding this, the judge noted that in any event, VDL would have been estopped from insisting on the payment of £25,000 on the basis that VDL had made a representation to V LLC in the conference call, which V LLC had then relied on.

2. This approach was developed further in C&S Associates (C&S) v Enterprise Insurance Company (E) [2015] EWHC 3757 (Comm). In 2012, C&S started providing claims handling services to E and an agreement was drawn up with a non-variation clause included. In 2013,the parties exchanged emails and E accepted a proposal by C&S to increase the fee payable to them. E emailed C&S to say that it would submit a revised agreement to include the agreed terms which C accepted by return. However, no formal variation was ever produced, but E duly commenced paying the higher fee as invoiced by C&S. The Judge concluded that objectively, the parties clearly intended to be bound by the email exchange while contemplating that a formal variation would later be drawn up. So again, conduct ultimately determined the outcome of the case, even when no formal written instrument had been produced, only contemplated.

3. More recently, in Hughes (H) v Pendragon Sabre (PS) [2016] EWCA Civ 18, the courts took a more direct and practical approach. In 2011, Porsche began to manufacture a limited edition car model. H made contact with a garage, PS, and sent an email confirming he would like to place an order, which PS acknowledged the same day. PS subsequently contacted H to confirm it could accept a deposit of £10,000, which H paid on that day and signed a Vehicle Order Form containing terms and conditions to the effect that he agreed to purchase the vehicle. This contained a non-variation clause stating that no variation or modification would be effective unless made in writing. In March 2011, H received an email confirming he would have the first vehicle from the garage as and when allocated. It transpired that when the garage had finally been allocated a vehicle, it was sold to another customer. H brought a court action for specific performance. The Court of Appeal concluded that on the date H had paid the deposit and signed the terms and conditions, a contract had been entered into. The email from March 2011 was evidence of a collateral contract to the effect that H would be first in line as and when a vehicle was allocated to PS. The effect of the collateral contract was to alter the terms of the main contract, notwithstanding that it did not comply with the strict requirements of the non-variation clause (this was consistent with the Sale of Goods Act 1979 which states that there could be an agreement to sell future goods to be acquired by the seller after the contract of sale had been made).

4. The latest judgment comes from Globe Motors (Globe) v TRW Lucas Varity (TRW) [2016] EWCA Civ. Globe supplied TRW with components used in the production of power assisted steering units, for certain types of motor. The supply agreement was exclusive and long term. However, Globe Motors Portugal was in practice the supplier of the parts, but was not a named party to the agreement. TRW then started purchasing a different type of motor from DEAS Emerson, a company which TRW acquired after the supply agreement with Globe commenced. The principal issue here was firstly the question of whether the agreement extended to catch the second type of motor which would mean TRW was in breach of the original contract, and secondly whether the agreement had been amended by conduct. The Court of Appeal decided there was no breach by TRW, so the question of whether Global Motors Portugal had been a party to the original agreement was irrelevant. However, it was observed that the parties’ conduct over a prolonged period demonstrated all the factual elements necessary for a variation to that effect. The Court reasoned that it should be open to the parties to make and unmake their agreements and their freedom to negotiate after a contract has been agreed should not be fettered.

Essentially, this means that parties should be permitted to vary their agreements at the expense of contractual certainty afforded by a pre-negotiated non-variation clause. While this observation is reasoning is not conclusively binding, it nevertheless serves to challenge the validity of these clauses.

Advice to Clients

The starting point for the court will be to consider the situation objectively on the basis that the parties did intend to vary the contract only in prescribed circumstances through the use of a non-variation clause. This sets the evidential bar high from the outset, so it is therefore highly likely that these boilerplate clauses will remain popular. However, they are no longer conclusive as definitive.

Here are some pointers for advising clients on this issue:

  • Make them aware that their conduct after an agreement has been made can be taken into account when determining whether a variation took place. This extends to staff of the company too – you could find yourself bound by a change which was only intended as a one-off goodwill gesture by someone within the company.
  • Make it clear in the contract those individuals with the requisite authority to make contractually binding decisions.
  • Carry out contract reviews to ensure that business relationships are being conducted in accordance with relevant contractual provisions.

Clients’ actions really do speak louder than their lawyers’ words.

This article was written by Paul Herbert, Partner, Corporate, with assistance from Becky Minear, Trainee Solicitor.

This guide is for general information and interest only and should not be relied upon as providing specific legal advice. If you require any further information about the issues raised in this article please contact the author or call 0207 404 0606 and ask to speak to your usual Goodman Derrick contact.