Can your staff verbally modify your contracts?

It’s a common enough scenario.  You have a contract with one of your key suppliers, and youor one of your staffagree over the phone with that supplier to alter the quantity, or to reduce the price.

And in the event of a subsequent dispute, you might imagine that a judge would uphold those changes without question. But that’s not necessarily so.

How come? The answer lies in a quirk of English contract law, and in the ‘no oral modification’ clauses that many businesses are adding to their written contracts.

No oral modification

Under English contract law, there is no general requirement that contracts must be madeor updatedin writing. Both written and oral contracts are enforceable, and the most recent version of that contract normally takes precedence.

As a consequence, many written contracts include a ‘no oral modification’ clause, intended to make it clear that any changes must made be in writing.

Problem solved, you might think: there is only one valid contract, namely the originalwrittenone.

Not so, and for two reasons.

One, lawyers have always advised their clients to be vigilant, as oral agreements could potentiallyand sometimes inadvertentlychange a written contract, despite the existence of a ‘no oral modification’ clause.

And two, the Country of Appeal ruled two years ago that ‘no oral modification’ clauses were not enforceable.

The end of the affair?  No.  After a lengthy debate in legal circles, the matter went to the Supreme Court.

Clarityof a sort

In a recent Supreme Court ruling, the judges decided that a ‘no oral modification’ clause could be relied on, thereby overturning the Court of Appeal’s earlier ruling.

However, although the Supreme Court has ruled that the ‘no oral modification’ clause in this particular dispute was enforceable, it is worth noting that the wording of the clause strongly influenced the judges’ decisions. The clause stated that any variation in the contract’s written terms must be “set out in writing and signed on behalf of both parties before they take effect”.

These formalities had not been met in this case. Therefore, the terms of the earlier ‘written’ contract were upheld by the Supreme Court, while the terms of the latter ‘orally modified’ contract were rejected.

What does this mean for your business?

It may seem somewhat ironic that the Supreme Court’s decision, in an attempt to provide the certainty of a written contract, may instead have caused the opposite.

If you have ‘no oral modification’ clauses in your own contracts, for instance, do you now have to ensure that each and every change to a contract (no matter how insignificant) is made in ‘writing’? And what about changes agreed by e-mail: are both parties considered to have ‘signed’ the changes, in order to bring them into effect?

In short, it’s messy.

At the Legal Director we understand that businesses are run by people rather than automatons. And that people are by their very nature social animals, with a natural instinct to communicate orally.

What to do?  Here are three quick steps that you can take immediately:

  1. Review your ‘no oral modification’ clause, and make sure that you clearly understand what it saysin other words, is it legally enforceable?
  2. Ensure that you and your staff understand how it works
  3. Review your processes for changing orders and contracts.

Once you have this information, we suggest you ensure that any of the changes that have been made orally, and that you would like to rely upon, are followed-up and officially amended in writing. 

Finally, if your written and signed contracts don’t include ‘no oral modification’ clauses at all, or only include ‘no oral modification’ clauses that don’t match the Supreme Court-approved wording, then you may need update your contracts for another reason – they’re simply outdated and might not reflect how you operate in practice, making their enforcement more difficult.

And as always, The Legal Director can help with these issues, so if you wish to discuss this article further, or you wish to speak to one of our solicitors, please contact us.

 

Posted Saturday, October 20th, 2018 by Warren Ryland

 

 


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