Adam Longney, partner in the finance team at REN Legal, cracks an enigma in leasing contracts
Towards the end of many contracts in the asset finance industry you are likely to find a ‘no variation’ clause along the lines of the following: "No variation of this Agreement shall be valid unless it is in writing and signed by the parties."
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Considered by many to be a standard ‘boilerplate’ provision, the purpose of a no variation clause is essentially two-fold:
To establish a formal procedure for varying the contract; and
To prevent inadvertent amendments to the contract.
A clause like this will often be included in the contract as a matter of course, without too much consideration given to
its effect.
Taken at face value, the meaning and intent of this clause appears clear: the contract cannot be validly varied unless the variation is set down in writing and has been signed by both parties.
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By GlobalDataHowever, this does raise the question of what ‘in writing’ and ‘signed’ actually mean in this context, particularly where emails and other forms of electronic communication have become the norm.
C&S Associates v Enterprise Insurance
In the recent English High Court case of C&S Associates Ltd v Enterprise Insurance Company Plc [2015] EWHC 3757 (Comm), the court examined the effectiveness of a very similar no-amendment clause and found that this clause does not necessarily provide all the protection that the parties may think.
The C&S Associates case concerned an insurance claims-handling contract made between C&S Associates Ltd and Enterprise Insurance Company PLC, pursuant to which C&S Associates provided claims-handling services to Enterprise.
The contract contained a typical no-variation clause which stated that: "Any variation of this Agreement shall not be effective unless made in writing and signed by or on behalf of each of the Parties to this Agreement."
Among other matters, the court was asked to consider whether an exchange of emails between a director of C&S Associates and Enterprise’s UK head of claims could amount to a valid variation of the contract in view of this clause.
In the circumstances, the court found that the exchange of emails was sufficient to validly vary the contract. In reaching his decision, the judge noted that:
The clause does not specify that manuscript signatures or paper documents are required, nor that both parties’ signatures must be on the same document. As a matter of contractual construction, the judge found that there was no reason why documents in electronic form – such as an exchange of emails – signed on behalf of both parties should not satisfy the requirements of the clause for a variation to be made "in writing" and "signed by or on behalf of each of the Parties" where the other requirements of contract formation and variation are also present.
There was no indication in the parties’ conduct that they had no intention to be bound by the terms agreed in the email exchange: the people sending the relevant emails had the necessary authority to bind their respective companies, they used the language of offer and acceptance and they did not use the expression "subject to contract" (or equivalent) to indicate that they did not intend to be bound by the terms set out in the correspondence.
The decision in the C&S Associates case may not be ground-breaking in the light of previous cases where the English courts have considered whether certain forms of electronic communication may satisfy statutory or contractual requirements for documents to be "in writing" and "signed" – see, for example, the Court of Appeal’s judgment in Golden Ocean Group Ltd v Salgaocar Mining Industries Pvt Ltd [2012] EWCA Civ 265 where the court found that a chain of emails setting out agreed terms was capable of satisfying the statutory requirement for a guarantee to be in writing and signed
However, it does provide a useful reminder that in a world where electronic communication has become the norm, the traditional contractual provisions that parties include in their contracts seeking to prevent inadvertent amendment may not in all circumstances provide the protection that the parties think they do.
If the parties to a contract wish to protect themselves from inadvertent variations to that contract by email, or if they want to prescribe specific formalities for varying the contract, then they may need to consider adopting a more prescriptive no variation clause – for example, by specifying that any variations must be documented in hard-copy paper documents that have been signed with "wet ink" manuscript signatures (although this will clearly need to be balanced against the nature of the contract and the need to be able to transact efficiently by electronic means).
The parties may also consider clarifying in the contract whether any forms of electronic communications are considered to be in ‘writing’ for the purposes of the contract, and whether the contract or any variations to it can be signed electronically.
However, even with a prescriptive no-variation clause, the effectiveness of any contractual provisions which seek to restrict what constitutes a valid variation will depend on the specific facts.
Conclusion
Since English law generally allows for contracts to be concluded quite informally – in many cases, even without the need for the agreement to be recorded in writing – the parties need to be mindful of how their conduct while negotiating contracts or variations could lead to the inadvertent creation of a binding contract, particularly where the negotiations are conducted by email or some other form of electronic communication.
Where the parties do not intend to be legally bound by a chain of correspondence in which they have negotiated terms, they should follow the advice of the judge in the C&S Associates case and make this very clear, perhaps by marking the relevant correspondence as "subject to contract" or in some other way which clearly indicates that they do not intend to be bound by it.<
