Say it isn’t so – the oral variation of contracts which prohibit oral variation

If a contract says that it can only be varied in writing, then it can only be varied in writing, yes? Well, actually (under Australian law), it ain’t necessarily so.  Perhaps surprisingly, Australian law will give effect to oral variations of contracts even if the contract contains a “no oral variation” (or as it is sometimes called, a “no oral modification”) clause.  However, as the contrary position has recently been adopted by the highest court in the United Kingdom, the issue might be ripe for reconsideration in Australia.

The facts of the UK case provide an example of why “no oral variation” clauses are so popular (even if, in Australia, the  popularity wildly outstrips the efficacy).  A company which was the licensee of a serviced office fell behind in the amount which it owed the landlord.  The director of the licensee claimed to have reached an oral agreement with the landlord as to a repayment schedule; the landlord denied that there had been any agreement, and locked the licensee out of the premises.  The landlord then sued to recover arrears, and the licensee cross-claimed for wrongful exclusion from the premises.  The fate of the cross-claim hinged on whether an oral agreement as to a payment schedule was capable of varying or modifying the requirements of the license.

The “no oral variation” clause in the license was in the following terms:

“This Licence sets out all of the terms as agreed between [the landlord]  and Licensee. No other representations or terms shall apply or form part of this Licence. All variations to this Licence must be agreed, set out in writing and signed on behalf of both parties before they take effect.”

So no writing signed by both parties, no variation, yes?  Well, not so fast.  The English Court of Appeal found that this clause did not prevent effect being given to an oral variation.  Adopting the same reasoning which informs the current position under Australian law, the Court of Appeal noted that if parties can make one contractual promise (in the form of a “no oral variation clause”), that does not prevent those same parties from making a second contractual promise (namely, to vary the contract). So, the question is not a simple question of upholding the parties’ bargain, but a question of which of the two bargains to uphold.  As the later bargain (to vary the contract) is more likely to reflect the parties’ wishes than the earlier bargain, an oral variation of the contract can still be given force.

The UK Supreme Court, however, rejected this position (and, thus, rejected the alleged oral agreement).  Lord Sumption, writing for the majority of the Court, certainly knows the power of a strong opening, as the first three sentences of the judgment attest:

“Modern litigation rarely raises truly fundamental issues in the law of contract. This appeal is exceptional. It raises two of them.”

The Supreme Court went on to note that the effect of a “no oral variation” clause was not to forbid oral variations, but to deprive them of validity unless the further condition of writing was supplied (which supply is not, of course, a difficult task).  The Court also noted that in circumstances where a party sought to rely upon a “no oral variation” clause to defeat a variation on which the other party had relied, the law of estoppel would provide relief without the need to ignore the “no oral variation” clause. Interestingly, in reaching this conclusion, the Supreme Court referred to the Vienna Convention on the International Sale of Goods (the CISG) to which the United Kingdom is not a party.  The CISG contains a provision giving effect to “no oral variation” clauses, although the CISG also provides that reliance on such a clause may be precluded where the conduct of one party has induced reliance by the other party (in effect, estoppel by another name).

So, what does this mean for Australian contracts? The High Court of Australia has clearly stated that decisions of UK courts (up to and including the UK Supreme Court) are not binding in Australia. To that extent, there is no immediate change in the law.  However, there are a number of reasons why it would be unwise to assume that  “no oral variation” clauses can safely be ignored in Australia.

First, such a clause may be useful on an evidentiary basis (namely, as to the question of whether the court can conclude that there was sufficient evidence of a mutual intention to vary the contract).  Secondly, Australia (unlike the UK) is a party to the CISG, so Australian lawyers drafting contracts to which the CISG applies will need to recognise that the CISG position is different to the Australian position.  Thirdly, it may be that in due course, Australian appellate courts can be persuaded to follow the reasoning of the UK Supreme Court.

The case provides a useful reminder of the old saying that oral contracts are just as binding as written contracts; the problem is that they are much harder to prove.  This is just as true of course, when it comes to written or oral variations of contracts; so the lesson is that while it’s good to be able to talk the talk, there are times when there’s just no substitute for having the write stuff.

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June 15
Commercial Law Litigation and dispute resolution