Case update (3): Contracts of employment – Watch out for inadvertent variations

case updates - small person sitting on large briefcaseSummary:  Can you change the terms of your contract orally or by conduct even if the contract says it has to be done in writing?

Yes, says the Court of Appeal in Globe Motors, Inc and others v TRW Lucas Varity Electric Steering Limited and another available here.

Background:  Although this case does not specifically deal with HR issues, this is an important case for employers in relation to all their contracts, including employment contracts.

Contracts (including employment contracts) often provide a clause that the only way to vary a contract is in writing, and some even go so far as to say that any verbal variation between the parties will be void. The parties to a contract are often happy to have such a clause as naturally a written variation to a contract provides far greater certainty than a verbal variation ever could.

However, things of course do change and it might be that both parties later agree to vary a contract verbally. Should they wish to do so, are they both still bound by the original anti-oral variation clause and therefore must they vary the clause in writing instead?  No, said the Court of Appeal in this case.

Facts:  This case involved a manufacturer, TWR, and its supplier, Globe, who entered into an exclusive Supply Agreement which provided that TRW would purchase all of its requirements for particular products from Globe.

A dispute arose between the parties in respect of this supply agreement and the case went all the way to the Court of Appeal.  Although the Court of Appeal did not need to consider the question of anti-oral variation clauses to reach its decision, it did make some useful findings in respect of these:

  • The Court took the view that a contract containing a clause that any variation of it can only be in writing can be varied by an oral agreement or the parties’ conduct (ultimately the Court of Appeal could find no good basis to restrict how a variation to contract should be reached);
  • However, the Court acknowledged that anti-oral variation clauses have practical benefit and promote certainty between the parties; and
  • In particular the Court of Appeal emphasised that it does not follow that anti-oral variation clauses have no value at all. One of the judges said that “In many cases parties intending to rely on informal communications and/or a course of conduct to modify their obligations under a formally agreed contract will encounter difficulties in showing that both parties intended that what was said or done should alter their legal relations; and there may also be problems about authority. Those difficulties may be significantly greater if they have agreed to a provision requiring formal variation”.

Implications:  Although the Court of Appeal’s comments on anti-oral variation clauses were outside of its decision (i.e. ‘obiter’) and therefore not strictly binding, in practice it is likely that future decisions by courts will arrive at the same decision.

So, in the employment context, even if an employer and employee agree in a written employment contract that variations to the contract can only be made in writing, such a clause may well be redundant as the parties can ultimately agree to discount this clause and verbally vary the contract anyway i.e. parties can agree at the outset in a contract that it can only be varied in a particular way but they are free to change their minds and if they do, the variation will be effective.

In practice employers should be careful about what it says to its employees, or does, about the terms of their contracts as you may find you’re stuck with the outcome, even if you have an anti-oral variation clause that you thought you could rely on!

In any event, it is still advisable to include such anti-oral variation clauses in contracts.  This is because if there is an inadvertent variation of a contract by an informal oral communication and/or a course of conduct, it will be easier to persuade a court that the variation was not effective if the parties have previously agreed that a variation could only be achieved in a particular way; i.e. in writing and signed by authorised representatives.