14 June 2016

Careless talk costs employers: Oral variation of written contracts

This article was written Tamsin Rickard, Professional Support Lawyer

A comprehensive written employment contract is usually a must-have for employers. Committing the terms of the deal to paper at the hiring stage, when goodwill is at its highest and disputes seem a remote prospect, allows employers to incorporate valuable protections, such as confidentiality and intellectual property provisions, and to clarify key details. Employers can then rest easy in the knowledge that the terms of employment - from pay through to post-termination restrictions - are locked down in black and white in a written employment contract or service agreement.

This sense of security is usually bolstered by a provision stating that the contract can only be varied in writing between the parties, to preclude arguments that new or different terms have been agreed verbally or informally (an “anti-oral variation clause"). This is particularly valuable to employers, who might at times be inclined to offer generous verbal reassurances, for example about pay or promotion prospects, but who may not wish to be held to them as a matter of contract. Such provisions seek to protect the employer against the incorporation of verbal commitments into the employment contract, where this was inadvertent or unintended.

Court of Appeal finds contract varied orally – despite anti-oral variation clause

Or so goes the theory. But the recent case of Globe Motors v TRMW Lucas questions such comforting certainties. This case arose in a non-employment context, but is highly relevant to employers.

The parties in the case were involved in a supply agreement, which included an anti-oral variation clause, which specified that variations to the agreement could only be made in a written document signed by both parties. The Court nevertheless found that the parties could vary the contract orally. This was on the basis that under fundamental contract law principles, binding terms can be concluded orally or in writing, provided the essentials of contractual formation are in place. The anti-oral variation clause did not affect this.

These comments were only obiter, and there is conflicting caselaw on this point, so it remains open to challenge.   However  it is a useful reminder to employers of the limited protection offered by contract clauses that seek to restrict the rights of the parties to vary the contract. Such clauses are useful but not bulletproof by themselves and employers need to take additional practical steps to avoid problems.

Oral or informal variation of contracts is a particular risk in the employment context.  In the 2013 case of Dresdner Kleinwort v Attrill and others, a verbal announcement regarding the size and intended distribution of a bonus pool in a "town hall" group meeting, broadcast on the intranet, was held to be legally binding, despite written provisions that variations could only be made in writing or by publication on the intranet or noticeboards.  The consequences for the employer were costly when it tried to change its mind about bonuses. This case underlined the particular risks for employers around this issue: because there is already a contractual framework in place between the parties by virtue of the employment relationship, courts can easily find that assurances whether verbal or written, are intended to be legally binding.

What does this mean for employers?

Our view is that anti-oral variation clauses remain an important and useful tool in employment contracts. They are a reminder to the parties that the contract is intended  to be a full record of contractual terms, and that major changes should be properly documented. Such provisions could also deter employees from asserting that casual conversations were intended to be legally binding, particularly as the employee will also face the evidential challenge of establishing precisely what was said.

However, employers would be well advised to avoid making statements that could be interpreted as binding commitments, in case they are bound to them as a matter of contract. Unless they mean to stick to them, of course, in which case it's worth documenting such agreements properly.

A well-drafted employment contract should also be sufficiently flexible to cover the developing employment relationship. Drafting which anticipates that duties will change and grow, for example, rather than reflecting the position only at the moment of hiring, will enable the contract to remain relevant.  This may preclude arguments that the facts no longer fit the document, and that it must somehow have been varied.   Nevertheless, regular reviews and updating of employment contracts is a valuable exercise, especially for business-critical provisions such as covenants, to ensure that the employment contract remains truly fit for purpose.

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