Non-variable variation – Never say never?

non variation clause
10 Jan 2017

In most jurisdictions non-variation clauses are commonplace in commercial contracts. They provide that any amendments parties wish to make must be reduced to writing. They are paradoxical because parties to these provisions exercise their contractual freedom in an effort to constrain such liberty in the future.

Whether non-variation clauses should be enforceable turns on whether one places greater emphasis on:

(i) the absolute contractual freedom of parties (allowing parties to amend their contracts orally or by course of conduct, in spite of such a provision); or

(ii) the sacrifice of absolute contractual freedom for the sake of certainty and formality.

This article considers the value of including non-variation provisions, having regard to English and South African case law.

South Africa – Paternalism and Public Policy?

The position in South Africa was confirmed by the Appellate court in SA Sentrale Ko-op Graanmaatskappy Bpk v Shifren 1964 (4) SA 760 (A) and was subsequently summarised by Cameron JA in the case of Brisley v Drotsky 2002 (4) SA 1 (SCA):

“contracting parties may validly agree in writing to an enumeration of their rights, duties and powers in relation to the subject matter of a contract, which they may alter only by again resorting to writing.”

The principle enunciated in Shifren confirms that contracting parties are able to limit their future contractual freedom by stipulating that any variation is only valid if done in the form prescribed in the relevant contract (typically in writing). This approach by the South African courts, although open to criticism for its paternalistic nature, suggests that courts will favour certainty and formality when interpreting contracts, and has come to be coined the “Shifren Shackle”.

The strict application of the Shifren principle creates potential for harsh and inequitable outcomes in individual cases. Grappling with this concern, South African judges have sought to mitigate potentially unjust outcomes by introducing public policy considerations based on the supreme nature of the South African Constitution and, in particular, the fundamental values of dignity, freedom and equality. In the Constitutional Court case of Everfresh Maket Virginia (Pty) Ltd v Shoprite Checkers (Pty) Ltd 2012 (3) BCLR 219 (CC) the court relied on section 39(2) of the Constitution which stipulates that all legislation, the common law and any court must promote the spirit, purport and objects of the Bill of Rights. Moseneke DCJ observed that the common law must be viewed “through the prism of the objective normative value system set by the Constitution.” Where the common law is found to fall short, it is the duty of the court to remedy such defects.

In subsequent cases that directly concern the enforceability of non-variation clauses, South African courts justified departures from the Shifren principle on the grounds of public policy, and took the view that it was not being relied upon for a legitimate purpose, or ran contrary to principles of good faith. In Nyandeni Local Municipality v Hlazo 2010 (4) SA 261 (ECM), the court held that a municipal employee attempted to invoke the Shifren principle for the purpose of delaying his dismissal (on the grounds of fraudulent activities) for his financial benefit. Another example is Steyn v Karee Kloof Melkery (Pty) Ltd (unreported case no. 2009/45448) in which the court expressly stated that the Shifren principle must yield when public policy demands.

Whilst the shift away from the strict application of the Shifren principle might go some way to ensure that justice prevails over strict formality, public policy is a fluid concept. Although this means that public policy is able to evolve to meet the prevailing market sentiment and commercial environment, a potential downside is that it is also capable of being defined in many forms. This may lead to a lack of coherence and consistency. Ironically then, a move to mitigate the harshness of giving primacy to certainty over contractual freedom could create more legal and commercial uncertainty.

United Kingdom – Freedom over form?

In comparison, the Court of Appeal in the United Kingdom, in Globe Motors Inc v TRW Lucas Variety Electric Steering Ltd [2016] EWCA Civ 396, recently concluded that a non-variation clause was not effective to prevent the subsequent variation of the contract by words or conduct. The leading judgment of Lord Justice Beatson, despite being obiter, removed the uncertainty that resulted from the conflicting earlier judgments in World Online Telecom Ltd v I-Way [2002] EWCA Civ 413 and United Bank Ltd v Masood Asif [2000] EWCA Civ 456 and provides useful guidance which is expected to be followed by other courts in the future.

Like South African courts, the arguments considered by the court as to whether or not to enforce a non-variation clause included the need for certainty, and acknowledged the inevitable evidential difficulties which accompany claims that an oral contract was concluded. Ultimately, however, the Court of Appeal held that the non-variation clause was not strictly enforceable. Referring to the clause under scrutiny, Lord Justice Beatson stated:

“The 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. The consequence in this context is that in principle the fact that the parties’ contract contains a clause such as Article 6.3 does C removed the uncertainty%ter making a new contract varying the contract by an oral agreement or by conduct.”

The result is that parties’ contractual intentions are not deemed to have been constrained by the non-variation clause. Concurring with the leading judgment, Lord Justice Moore-Bick emphasised that the foundations of this decision lay in that of “party autonomy”, and the ability of parties to choose whatever terms they see fit, whether this was creating or discharging obligations. An interesting counter-argument raised by counsel noted that the UK parliament was able to stipulate for formality despite the potential injustice that might result in specific cases and consequently parties, by consent, should be able to submit to a similar regime. Rebuffing this point, Lord Justice Moore-Bick preferred an alternate UK constitutional axiom, namely that “Parliament cannot bind its successors”.

Their Lordships did consider that there may be evidential difficulties in proving that a contract was varied, commenting [at 109] that the court would require “strong evidence” that there had been an oral variation of such a clause. This statement should go some way to mitigate concern that parties may unwittingly conclude oral contracts or any “casual or unfounded allegations” of variation. The advantage of this approach over that employed in South Africa is, perhaps, that the courts in the UK are guided by fact, rather than policy. This said, the slight shift away from certainty and formality in both jurisdictions is certainly preferable to the alternatives, which may result in unjust and inequitable results in individual cases.

Death of the non-variation clause?

Despite a shift away from the absolute enforcement of non-variation clauses in both jurisdictions, it is nevertheless submitted that there is merit in their retention as boilerplate provisions. Non-variation clauses encourage the concerned parties to follow the form stipulated by the agreement, which reduces the scope for disagreement about whether an amendment was concluded. In the UK, the Court of Appeal acknowledged that oral variations to contracts are subject to a high evidentiary threshold, whilst the jurisprudence in South Africa dictates that any departure from a non-variation clause must be grounded in public policy. It would seem sensible, therefore, for parties to continue to include such provisions as standard clauses in commercial contracts.

(This article is provided for informational purposes only and not for the purpose of providing legal advice. For more information on the topic, please contact the author/s or the relevant provider.)

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