Summary
In MWB Business Exchange Centres Ltd v Rock Advertising Ltd [2016] EWCA Civ 553 and Globe Motors Inc v. TRW Lucas Varity Electric Steering Ltd. [2016] EWCA CIV 396, the English Court of Appeal has recently held that a contractual provision stating that the contract may only be amended by a written document signed by the parties is not enforceable. The court held that if it is proven that the parties actually have amended the contract by an oral agreement, then the contract is validly amended.
These decisions are of great importance to construction and other commercial contracts which contain “no oral variation” clauses.
There are lower court decisions in Canada which hold that a ”no oral variation” clause is enforceable. There does not appear to be any authority on this point in the Supreme Court of Canada. Should Canadian courts uphold such a clause, or hold that it is unenforceable?
Recent English Decisions
In MWB Business Exchange Centres Ltd v Rock Advertising Ltd [2016] EWCA Civ 553 and Globe Motors Inc v. TRW Lucas Varity Electric Steering Ltd. [2016] EWCA CIV 396, the English Court of Appeal considered whether a contractual provision stating that the contract may only be amended by a written document signed by the parties is enforceable. For example, in the MWB case the provision read as follows: “All variations to this licence must be agreed, set out in writing and signed on behalf of both parties before they take effect.” The Court of Appeal held that the provision was not enforceable.
In these lengthy judgments, the members of English Court of Appeal dealt with conflicting decisions on this issue in that court. The judges held that there was no binding precedent requiring them to decide either way. In the result, the judges in both appeals concluded that, on policy grounds, the “no oral variation” clause was not binding.
The policy ground for these decisions is party autonomy. In the MWB decision, the court quoted from one of the judgments in the Globe Motors decision as follows:
“The governing principle, in my view is that of party autonomy. The principle of freedom of contract entitles parties to agree whatever terms they choose, subject to certain limits imposed by public policy ……. The parties are therefore free to include terms regulating the manner in which the contract can be varied but just as they can create obligations at will, so also can they discharge or vary them, at any rate where to do so would not affect the rights of third parties. If there is an analogy with the position of Parliament, it is in the principle that Parliament cannot bind its successors.”
The English Court of Appeal in MWB also quoted from a decision of Justice Cardozo in in the USA:
“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… “
The English Court of Appeal recognized that there are considerations on the other side: no oral variation clauses may “promote certainty, avoid false or frivolous claims of an oral agreement and can usefully prevent a person in a large organisation producing a document which unwittingly and unintentionally is inconsistent with a provision in a contract between the organisation and a counterparty.”
Nevertheless, the English Court of Appeal accepted the basic principle that a party cannot contract out of its ability to make a new contract in the future, even one amending a past contract.
The English Court of Appeal noted that a “no oral variation” clause may still have an impact as a matter of proof of the alleged variation. One of the judges in MWB quoted from one of the judgments in Globe Motors as follows:
“It does not follow that clauses like the second sentence of Article 6.3 have no value at all. 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.”
Canadian Decisions And Discussion
There are a number of lower court decisions in Canada holding that a “no oral variation” clause is enforceable. For example, in Toronto Dominion Bank v. Turk 1997 CarswellOnt 2054, [1997] O.J. No. 2669, Justice Cumming of the Ontario Superior Court of Justice stated:
“Even if the said representations were to be considered as made, the provisions of the guarantee at paragraph 3 provide that no subsequent alteration or waiver of the guarantee or of any of its terms is binding on the Bank unless made in writing over the signature of a specific officer…Subsequent oral alterations or waivers of the provisions of the guarantee would be ineffective.”
Justice Cumming then cited six decisions which supported that conclusion. All of them were decisions of superior court judges or masters.
None of the cited cases contain any apparent analysis of the public policy issues which are relevant to the enforceability of a “no oral variation” clause, and in particular the autonomy of the parties to enter into a new agreement.
The validity of a “no oral variation” clause was recently upheld by Master Prowse of the Alberta Court of Queen’s Bench in Becker v. Jane Doe No. 1, 2015 CarswellAlta 351, 2015 ABQB 144.
In dealing with this issue in an earlier decision in Toronto Dominion Bank v. Turk, 1992 CarswellOnt 3185, [1992] O.J. No. 2053, Justice Lane of the Superior Court of Ontario relied upon a decision of the Supreme Court of Canada upholding and applying an “entire agreement” clause: Hawrish v. Bank of Montreal, 1969 CarswellSask 9, [1969] S.C.R. 515. An “entire agreements” clause states that no representations or agreements prior to or at the time of the contract are binding on the parties, and that the sole agreement between the parties is that which is contained in the contract they are signing. Justice Lane’s decision was upheld by the Ontario Court of Appeal but without any consideration of the validity of or public policy behind the “no oral variation” issue: Toronto Dominion Bank v. Turk, 1994 CarswellOnt 2646, [1994] O.J. No. 353, 46 A.C.W.S. (3d) 72.
Similarly, in Sportsco International, L.P. v. Rogers Blue Jays Baseball Partnership, 2003 CarswellOnt 90, [2003] O.J. No. 189, Justice Pepall of the Superior Court of Ontario held that a “no oral agreement clause” was binding. In doing so, she relied on the Ontario Court of Appeal decision in Gutierrez v. Tropic International Ltd., 2002 CarswellOnt 2599, 63 O.R. (3d) 63. The contract in the Gutierrez case contained an “entire agreement” clause, not a “no oral variation” clause and the case concerned the enforceability of agreements made at the time of or before the written agreement in question, not a later varying agreement.
The Ontario Court of Appeal gave some consideration to this issue in Shelanu Inc. v. Print Three Franchising Corp., 2003 CarswellOnt 2038, 64 O.R. (3d) 533. There, the Court of Appeal refused to apply a “no oral variation” agreement on the ground that the new agreement was separate from, and could stand with, the original agreement, and because it would be unfair to apply the “no oral variation” clause. The court did not directly deal with the public policy issue, but it did say:
“Indeed, J.M. Perillo, ed., Corbin on Contracts (St. Paul, MN: Western Publishing Co., 1993) states at para. 1295 that an express provision in a written contract forbidding oral variation of the terms of a contract or its discharge is generally unsuccessful with respect to subsequent agreements. The reason he gives is that:
‘Two contractors cannot by mutual agreement limit their power to control their legal relations by future mutual agreement. Nor can they in this manner prescribe new rules of evidence and procedure in the proof of facts and events.’”
And in Colautti Construction Ltd. v. Ottawa (City), 1984 CarswellOnt 731, 46 O.R. (2d) 236, the Ontario Court of Appeal found that the contract was amended by the parties’ conduct notwithstanding the existence of a “no oral variation” clause.
An “entire agreement” clause is, or course, very different than a “no oral variation” clause. The “entire agreement” clause assures the parties that no past or present agreements exist at the time that the contract is signed, and that the only contract is the contract which the parties are then signing. That clause is really just an affirmation of the parole evidence rule which prohibits the admission of evidence that contradicts the wording of a written contract. The “no oral variation” clause purports to prohibit the parties from making a new agreement in the future that would vary or amend the written contract.
Obviously, there are good public policy reasons to support “entire agreement” clauses. However, the public policy that would support “no oral variation” clauses is more difficult to ascertain, and the English Court of Appeal and Justice Cardozo have eloquently expressed the public policy to the contrary.
In light of the frequent use of “no oral variation” clauses, it is hoped that this issue will be dealt with shortly by Canadian appellate courts, including the Supreme Court of Canada.
See Heintzman and Goldsmith on Canadian Building Contracts, 5th ed., chapter 1, part 3(d)
Amendment of Contracts – Variation and Amendment – Validity of “no oral variation” clauses
Thomas G. Heintzman O.C., Q.C., FCIArb September 25, 2016
This article contains Mr. Heintzman’s personal views and does not constitute legal advice. For legal advice, legal counsel should be consulted.