By: Shane Campbell
Published: 2/02/2018
Introduction

Is it possible to agree in writing that you will not alter that agreement other than by writing?  It is common for commercial contracts to have a clause proscribing oral variations (or variations by conduct), or at least attempting to do so.  It is also increasingly common for parties to enter into dispute about the efficacy of oral variations notwithstanding the presence of such clauses.  The question for practitioners is whether such clauses are enforceable.  It is this narrow issue which this paper confronts, first by reference to the development of the law in England, followed by the New Zealand legal position.

Position in England

In England there is recent Court of Appeal authority dealing with the efficacy of a 'no oral variation' clause in a written agreement.  The two most relevant cases are Mwb Business Exchange Centres Ltd v Rock Advertising Ltd (Mwb)[1] and Globe Motors Inc v TRW Lucas Varity Electric Steering Ltd (Globe Motors).[2]   In Mwb the Court of Appeal framed its issue for consideration as follows:
 
19           There has for some time been a considerable degree of uncertainty in this country as to whether an agreement in writing which contains an anti-oral variation clause such as clause 7.6 can be varied other than in accordance with the terms of that clause.  That uncertainty may be attributed at least in part to two inconsistent decisions of the Court of Appeal.  In the first (United Bank Ltd v Asif and anor.  11 February 2000, unreported), it was held that in light of such a clause no oral variation of the written terms of the agreement could have any legal effect.  In the second, World Online Telecom v I-Way Ltd [2002] EWCA Civ 413, it was held, apparently in ignorance of the decision in United Bank, that the law on this issue was sufficiently unsettled to render it unsuitable for summary determination.  These decisions, the principles underlying them, and other relevant authorities have now been considered in detail by the court in Globe Motors and it is convenient to address them in that context.
 
The decision in Globe Motors was used as the effective platform from which consideration of this issue moved in Mwb.  For present purposes it is therefore sufficient to focus solely on the decision in Mwb (noting, nonetheless, that the decision in Mwb was heavily derived from the reasoning in Globe Motors).  Having framed the issue, the Court of Appeal in Mwb went on to summarise the decision in Globe Motors as follows:

1.         Beatson LJ (the Judge in Globe Motors) approached the matter in a structured way considering principle and policy first, the existing authorities second, questions of proof third, and the issue of precedent fourth.[3]

2.         Beatson LJ reasoned that "as a matter of general principle parties have freedom to agree whatever terms they choose to undertake, and can do so in a document, by word of mouth or by conduct".  His Lordship considered that in this context, an anti-oral variation clause does not prevent the parties later making a new contract varying the original agreement.  That subsequent agreement could arise by writing, orally or by conduct.

3.         As to the question of authority, Beatson LJ noted that since the Judicature Acts, it had been possible to vary a deed orally.  His Lordship referred to Chitty on Contracts and to authority supporting the proposition that compliance with a no oral variation clause can be waived.[4]

4.         His Lordship considered the competing authorities of United Bank Ltd v Asif and anor and World Online Telecom v I-Way Ltd.[5]  

5.         Beatson LJ was alive to the issue of proof.[6]   His Lordship agreed with other statements that an oral variation would be effective only "when the evidence on the balance of probabilities established such variation was indeed concluded".[7]

6.         Beatson LJ then noted that he did not consider the Court of Appeal was bound by any earlier decisions. [8]

After considering the decision in Globe Motors the Court of Appeal summarised its decision as follows:
 
34         ...  The relevant principles, the material policy considerations, the earlier authorities and the issue of precedent were considered in depth and with the benefit of very full argument in Globe Motors and for my part I consider it would require a powerful reason for this court now to come to a conclusion or adopt an approach which is different from that of all members of the court in that case.  In my judgment and despite the attractive way Mr Darton developed his arguments, none has been shown. To the contrary, I respectfully agree with Beatson LJ that the decision of this court in World Online Telecom was correct and should be followed for the reasons he gave.  To my mind the most powerful consideration is that of party autonomy, as Moore-Bick LJ explained it.  Indeed that explanation seems to me to echo the words of Cardozo J nearly 100 years ago in the New York Court of Appeals in Alfred C Beatty v Guggenheim Exploration Company and others (1919) 225 NY 380.  In a judgment with which Hiscock Ch J, Chase, Collin and Crane JJ concurred (Cuddeback and Hogan JJ dissenting), Cardozo J said this (at pages 387 to 388):
 
 
"Those who make a contract, may unmake it.  The clause which forbids a change, may be changed like any other.  The prohibition of oral waiver, may itself be waived … What is excluded by one act, is restored by another.  You may put it out by the door, it is back through the window.  Whenever two men contract, no limitation self-imposed can destroy their power to contract again"…

Subject only to the United Kingdom Supreme Court reaching a different conclusion about such clauses, the position in England is that anti-oral variation clauses cannot prevent oral variation.  This is on the simple basis that what can be made can also be unmade and parties are free to create, alter or destroy agreements as they see fit.

Position in New Zealand

There have been few reasoned cases on this issue in the New Zealand courts.  However, the issue was recently the subject of consideration by Associate Judge Osborne in Beneficial Finance Ltd v Brown (Beneficial).[9]  His Honour first referred to the Law of Contract in New Zealand where it is stated:[10]
 
"A contract once made can be varied by agreement between the parties.  They can add terms, omit terms, or alter terms.  There is authority that a clause of a contract cannot validly provide that the terms of a contract cannot be varied:[11] it must logically be open to the parties to revoke that clause.  In other words, a contract cannot be entrenched for all time contrary to the mutual wishes of the parties.  A variation requires agreement between the parties". …
 
Associate Judge Osborne went on to refer to Treitel on the Law of Contract, which states that "[s]uch terms cannot entirely prevent an oral variation since 'there is no reason why the contract, including the clause requiring variation to be in writing, could not have been varied orally'".[12]  Having referred to the English cases, the Associate Judge then remarked as follows:
 
[74]       There has been a significant consideration of clauses prohibiting oral amendment in a number of recent decisions of the English courts.  Several are footnoted in the Treitel passage to which I have referred.  While I have not been referred by counsel to a similar body of discussion in New Zealand, I regard the English approach as likely to be applied in New Zealand.  It is sufficient that I refer to but one of the recent English judgments, that of Stewart-Smith J in Virulite.  His Lordship there dealt with a distribution and licence agreement which (following an "entire agreement" provision) contained a clause, providing:
 
"This Agreement shall not be modified in any way except by a subsequent written instrument signed by both parties."
 
[75]       Stewart-Smith J recognised, by reference to authority, that a subsequent variation may have effect notwithstanding such a clause.  His Lordship then referred to authorities which suggested either that there is an "evidential presumption" against variation being effective of that parties seeking to displace the effect of such a clause face a "very high evidential burden". …
 
[77]       Virulite is accordingly authority for the proposition that whether an oral variation becomes operative turns on the intention of the parties.  The burden of proof rests on the party alleging the variation.  The standard of proof is the balance of probabilities.  The Court will need to assess all relevant evidence relating to the parties' contractual dealings.  Finally, as recognised by Gloster LJ in Energy Venture Partners, there may be formal relationships (such as banking relationships) in which the factual matrix of the contract and other circumstances preclude the raising of an alleged oral variation to defeat an entire agreement clause.
 
On the basis of Associate Judge Osborne's analysis it might be surmised that the position in New Zealand is broadly similar to that prevailing in England.  That is, an oral variation can be valid even where a clause of the contract seeks to prohibit such variations.  While this is the start of the matter, it is not the end.

The fact that parties to a formal agreement have sought to include a term that prohibits oral variations must mean something.  When engaging in interpretive tasks, courts will generally want to ascribe a meaning to the clause.  In the case of oral variations that meaning in New Zealand jurisprudence has taken the form of evidential weight.  These principles were summarised by Keane J in Pendarves Packing Ltd v Baitworx Ltd:[13]
 
[79]       In Savvy Vineyards, McGrath J accepted for the minority that a term requiring any variation to be in writing did not rule out an oral variation.  But, he said, it did demonstrate a shared intent to be bound only by a formal variation.  It was an objective reason for questioning the efficacy of any oral variation.[14]  William Young J for the majority also said that such a term might be of “distinct evidential significance”.[15]
 
[80]       The principles engaged were helpfully described by Finn J in Australia in the Marconi Systems case.[16]  They rest on the premise that prescriptive terms like cl 10 are “self imposed” not “externally imposed" (that is, imposed by law).  And thus, as he said:[17]
 
"Notwithstanding the writing requirement, it is open to the parties by express oral agreement or by contract implied from conduct to impose further or different rights and obligations on each other from those contained in the original contract."
 
As he also recognised, however, in the face of such a prescriptive term, a propounded oral contract may suffer the “common, often fatal difficulty” that it is incapable of proof.
The upshot of this is that a court will be reluctant to hold that the terms of a written contract have been varied in the absence of cogent and compelling evidence.[18]  In Masport Ltd v Morrison Industries Ltd, the Court of Appeal stated that the courts will "react with caution to suggestions of oral variation".[19]   It also commented as follows:
 
…"the courts, although vigilant to ensure there is no persuasive or compelling evidence of an oral variation or alteration, must be mindful of the likelihood that such parties would want to avoid ambiguity."
 
The requirement is that the plaintiff establishes proof of the oral variation, and its essential elements, on the balance of probabilities.[20]  If such an allegation is to be made, it will need to be pleaded in a particular way with details of time, date, location etc. as to when and how the oral variation came into existence.[21]

There are New Zealand cases which indicate that no oral variation clauses will be effective according to their terms.  In Air NZ Ltd v Nippon Credit Bank Ltd, the Court of Appeal seems to have rejected an argument for oral variation on the simple grounds that there was a no oral variation clause.[22]  Similarly, in Stevens v ASB Bank Ltd the Court of Appeal refused to entertain the notion of an oral variation in the context of a banking relationship.[23]  The Court stated:
 
"As Mr Kennedy submitted, in Air New Zealand Ltd v Nippon Credit Bank Limited this Court declined to give effect to what was argued to be an oral variation of contract in the face of a “no variation unless in writing” clause.  If the parties had intended to bind themselves to some new arrangement, we have no doubt that ASB would have documented that appropriately.  In the absence of such documentation, we see no justification for going behind these plainly worded provisions, which are intended to prevent the uncertainty and dispute that so often arises where written agreements are said to have been varied orally."
 
At present it would appear that the New Zealand position is not settled.  When it is to be resolved, the likely conclusion would appear to be that the clauses are not effective on their terms, but that they create a presumption that the parties did not intend for any oral variations to be permissible; compelling evidence will be demanded to rebut that presumption.

The other important matter to bear in mind is that where an oral variation is alleged, the usual elements of a valid contract must be present.  There must be agreement on essential terms, certainty, and potentially consideration.

Avoiding the reasoning of the courts

In light of the reasons for not accepting the efficacy of a clause prohibiting oral variations, the question arises as to whether there is any contractual mechanism that could be deployed to avoid the courts' reasoning.  There are several potential options which fall under the following heads:
  • Clauses setting out the authority of persons to vary contracts.
  • Clauses addressing the proof required to establish an oral variation.
  • Indemnity clauses.
  • Intention clauses.

For example, in the case of two companies dealing with each other a section could be added in providing the following:
 
X          Variations of contract
 
X.1       The parties agree and acknowledge that no person (including all employees, agents, contractors and other representatives) have any power or authority (actual, ostensible or otherwise) to vary any term of this agreement save for the following people (Specified Persons):
 
(a)        John Doe (Senior Project Manager) for Unknown Males Ltd; and
(b)        Jane Doe (Project Manager) for Unknown Females Ltd.
 
X.2       For the purposes of clause X.1 the parties further agree and acknowledge that the Specified Persons' authority is strictly limited to agreeing to variations recorded in writing and that they have no authority to vary this agreement orally or by conduct.
 
X.3       In the event that one party to this agreement (Party A) attempts to hold the other party (Party B) liable for, or to enforce, a variation that does not comply with clauses X.1 and X.2, then Party A agrees to fully indemnify Party B and hold it harmless for all costs incurred, loss suffered, or any other negative consequence including, but not limited to, the following:
 
(a)        the costs of denying liability and/or defending or resisting enforcement of the alleged variation (including solicitor-own-client costs);
 
(b)        the costs of any finding by a court, tribunal, adjudicator or arbitrator that the variation is effective notwithstanding the terms of this clause X; and

(c)        any award of damages entered against Party B by any competent court tribunal, adjudicator or arbitrator.

X.4       The parties acknowledge that the purpose of this clause is to:

(a)        render ineffectual any purported variations that do not comply with the requirements of this clause X, including variations which are not in writing (such as oral variations and variations by conduct); and

(b)        require any party seeking to enforce a variation that is not compliant with this clause X to hold harmless the other party for all consequences, loss and harm flowing from that attempt.
 
It is not by any means clear whether a clause such as the one set out above would have the effect of avoiding oral variations.  It is also obvious that such a clause would be going to significant lengths to avoid variations.  It is unlikely to be necessary for most contractual relationships.

There is also the question of whether it would be possible to alter the standard of proof in such cases.  For example, instead of the standard being the balance of probabilities (as is usual in civil cases), could a party agree that the standard of proof would be beyond reasonable doubt (the usual measure in criminal cases) or somewhere in between.  This is not discussed further here but is simply noted. 
 
Comment

In England, the Court of Appeal has averred that a no oral variation clause cannot prevent oral variations.  This is based principally on precepts of party autonomy and freedom of contract.  The proof required to establish an oral variation is the balance of probabilities.

In New Zealand, the prevailing judicial thought on such clauses appears to be equivocal.  When the issue is resolved, it seems that the courts will conclude that they are not enforceable, but that they create an evidential presumption.

The starting point seems to be that the parties have contracted for certainty, and laid bare their intent that any variation of their contractual arrangements will be in writing.  It is on this basis that the New Zealand courts have said that strong and compelling evidence will be required before this starting point can be displaced.  Such clauses therefore have evidentiary effect, rather than substantive effect.

It is noteworthy that some New Zealand authority has suggested that contracts (e.g. banking contracts) would require adherence to the strict terms of such a clause.  The basis for this distinction is not apparent and would certainly require a proper juridical foundation before it was accepted.

From a procedural point of view, if such a claim is going to be brought then it ought to be pleaded with sufficient specificity to actually make out the claim (i.e. dates, times, places and people).  This may not be an easy threshold to cross, but will always be heavily fact-dependent.

There may be means to avoid the operation of the principles which the courts in England and New Zealand have expressed.  The outcome would not be clear.  However, the question remains whether such a clause would be necessary for usual contracts.


[1] Mwb Business Exchange Centres Ltd v Rock Advertising Ltd [2016] EWCA Civ 553, [2017] QB 604 [Mwb].
[2] Globe Motors Inc and ors. v TRW Lucas Varity Electric Steering Ltd [2016] EWCA Civ 396, [2016] All ER 17 Apr [Globe Motors].
[3] Mwb, above n 1, at [22], citing Globe Motors, above n 2.
[4] At [23] of Mwb, noting that Beatson LJ referred to Energy Venture Partners Ltd v Lalabou Oil & Gas Ltd [2013] EWHC 2118 (Comm) at [271]–[274]; Virulite LLC v Virulite Distribution [2014] EWHC 366 (QB) and Liebe v Molloy (1906) 4 CLR 347.
[5] At [24]–[26].
[6] At [28].
[7] At [28], referring to Spring Finance Ltd v HS Real Company LLC [2011] EWHC 57 (Comm) at [53]; World Online Telecom v I-Way Ltd [2012] EWHC 3134 (QB) at [33].
[8] At [29], citing Globe Motors Inc and ors. v TRW Lucas Varity Electric Steering Ltd [2016] EWCA Civ 396, [2016] All ER D 171 Apr at [113], [117] and [119].
[9] Beneficial Finance Ltd v Brown [2017] NZHC 964 [Beneficial].
[10] At [70], citing J Burrows, J Finn and S Todd Law of Contract in New Zealand (5th ed, LexisNexis, New Zealand, 2016) at [19.3.1], relying on the Canadian authority in Shelanu Inc v Print Three Franchising Corp (2003) 226 DLR (4th) 577 (Ontario CA).
[11] Shelanu Inc v Print Three Franchising Corp (2003) 226 DLR (4th) 577 (Ontario CA).
[12] Beneficial, above n 9, at [72], citing E Peel Treitel on the Law of Contract (14th ed, Sweet & Maxwell, London, 2015) at [5-036], in turn citing Westbrook Resources Ltd v Globe Metallurgical Inc [2009] EWCA Civ 310, [2009] 2 Lloyd's Rep 224 at [13] and Virulite LLC v Virulite Distribution Ltd [2014] EWHC 366 (QB), [2015] 1 All ER (Comm) 204 at [60].
[13] Pendarves Packing Ltd v Baitworx Ltd [2014] NZHC 3327, (2015) 10 NZBLC 99–718.
[14] Savvy Vineyards 3552 Ltd v Kakara Estate Ltd [2014] NZSC 121, [2015] 1 NZLR 281 at [41].
[15] At [112].
[16] GEC Marconi Systems Pty Ltd v BHP Information Technology Pty Ltd [2003] FCA 50 at [216].
[17] At [217].
[18] Housing New Zealand Ltd v Claverdon Developments Ltd HC Auckland CIV-2009-404-6292, 19 February 2010.
[19] Masport Ltd v Morrison Industries Ltd CA362/92, 31 August 1993.
[20] MacFarlane v Independent Real Estate Limited [2016] NZHC 404 at [9] and [26]–[27].
[21] See generally Caltex Oil New Zealand Ltd v Coogee Investments Ltd (in liq) HC Dunedin CP172/89, 18 May 1989.
[22] Air NZ Ltd v Nippon Credit Bank Ltd [1997] 1 NZLR 218 (CA) at 227.
[23] Stevens v ASB Bank Ltd [2012] NZCA 611.  In Fitzgerald Construction Ltd v Forests Road Developments Ltd HC Nelson CP14/01, 5 March 2002 at [19] Master Venning stated that the evidence adduced to establish a purported oral variation was "general in the extreme" and that it fell "well short of establishing a concluded agreement".

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