In view of the Supreme Court’s decision, it is clear that clauses restricting the parties’ ability to vary their agreement now take on greater significance than had been thought previously. To the extent that the objectives behind such clauses include control and certainty, the decision arguably means that contracts are less likely to be varied ‘by accident’: insofar as formalities need to be adhered to, in-house lawyers or senior management may be able to take comfort in knowing that, at least in theory, they should be able to exercise greater oversight over potential variations.
This, however, leads on to the question of what level of formality is desirable. While the case before the Supreme Court concerned a simple clause requiring variations to be in writing and signed by the parties, the principle enunciated by Lord Sumption was of general application: “…the law should and does give effect to a contractual provision requiring specified formalities to be observed for a variation”. Accordingly, the requirement that formalities be observed in order for a variation to take effect means that parties will need to think carefully about the terms of any such clause and what level of formality they will require. For example, if parties want to be able to act quickly to effect a variation, it might be that simple email exchange would suffice and that it would create undue burden to have to satisfy more prescriptive or extensive requirements.
Finally, it is worth noting that the effects of the decision are still to be worked out. The Supreme Court confirmed that the risk that a party may act on the varied contract but then find itself unable to enforce it is mitigated by various doctrines of estoppel, although how that would be applied in practice remains unclear. It is possible to imagine a commercial contract which has been varied orally in breach of a no oral modification clause and the parties have proceeded on the basis of the variation for a number of years. It would seem surprising that their continued, amended relationship could only be explained on the basis of estoppel. More generally, to the extent that the majority’s decision is influenced by questions of policy, such policy should apply irrespective of what legal doctrine is used. In this regard, it seems odd that estoppel could validate a variation which has been declared invalid as a matter of contract law.
Moreover, according to Lord Sumption, the circumstances in which estoppel could arise would be quite limited: “the scope of estoppel cannot be so broad as to destroy the whole advantage of certainty for which stipulated ... ”. It would need to be established that (i) there existed words or conduct unequivocally representing that the variation was valid notwithstanding the informality; and (ii) something more would be required for this purpose than the informal promise itself. On this analysis, in circumstances where parties have simply forgotten about the existence of the no oral modification clause, it would seem that estoppel is unlikely to provide an escape route.
While an alternative analysis might be the termination of the first contract and its replacement by an entirely new (oral) contract, this might not always be possible, for example, due to questions of priority or regulatory considerations.
In summary, the decision confirms that validity of no oral modification clauses and it will be incumbent of commercial parties to ensure that these are now drafted with care. On the other hand, parties should take care before disregarding informal variations of the agreement, even where they do not comply with contractual formalities. Where parties have acted in reliance of the purported variation, courts will likely be willing to give effect to it and it may prove difficult to insist on compliance with such formalities later.