Boilerplate clauses: worth the paper they are written on?

November 15, 2016

Much of the work undertaken by the arbitration community is relatively straightforward - a considerable proportion of what is done at the merits stage is no more or less than a simple contract case albeit it in an international context. At the heart of many contract disputes are the so-called boilerplate clauses: the generic clauses invariably found at the end of a contract.

The English Court of Appeal has recently considered two such clauses: One concerned a no contractual effect clause as follows: “This [agreement] shall not be binding on [X] until executed by both [Y] and [X]” and the other concerned an entire agreement / anti-oral variation clause as follows: “This Agreement … is the only agreement between the Parties relating to the subject matter hereof. It can only be amended by a written document which (i) specifically refers to the provision of this Agreement to be amended and (ii) is signed by both Parties.” The purpose of such clauses is clear – to give certainty. Certainty in turn avoids false or frivolous claims of an oral agreement or variation and aids commerce: parties know where they stand and can manage risk accordingly. And there are other sound policy reasons to uphold such clauses but in each case the court found that the clauses did not ‘work’ and did so mainly as a result of party autonomy – the parties can agree what they like but can also agree to vary or change that agreement and can do so by established contractual mechanisms such as oral agreement and conduct.

In Reveille Independent LLC v Anotech International (UK) Limited [1] the no contractual effect clause was in issue. Anotech wanted its cooking utensils to appear in the Master Chef TV programme in the US made by Reveille. Reveille sent its standard form agreement to Anotech. Anotech amended and signed it and sent it back: a counter-offer. Thereafter, the parties performed: Anotech sent the cooking utensils, Reveille made the programmes featuring the utensils and Anotech promised to pay - but did not.[2] The court had little difficulty in finding Anotech liable – Reveille had accepted the counter-offer by conduct. In considering whether a contract has come into existence, “the governing criterion is the reasonable expectations of honest sensible businessmen. Contracts may come into existence, not as a result of offer and acceptance, but during and as a result of performance.” Reveille, as offeree, was waiving a prescribed mode of acceptance (execution by both parties), set out for its own benefit.[3] That was effective so long as there was no prejudice to Anotech as offeror. The prejudice of commercial uncertainty was insignificant in light of the benefit of Reveille’s performance.[4]

In Globe Motors Inc v TRW Lucas Varity Electric Steering Ltd[5]the entire agreement clause was in issue. Although the discussion was obiter the court sought to reconcile conflicting Court of Appeal authorities[6] and hence would have been seen as authoritative irrespective of the Rock Advertising case (see below). The case concerned a long-term supply agreement under which Lucas agreed to purchase components from Globe.

The court analysed the position from principle: the basis of contract is consent and the principle of party autonomy is that the parties can agree whatever they like.[7] It follows that whilst the parties can agree an anti-oral variation clause, they can also subsequently agree not to be bound by it. The court held that the clear weight of authority favoured that oral variations can be effective notwithstanding such clauses: “an oral agreement or the conduct of the parties to a contract containing [an anti-oral variation clause]… may give rise to a separate and independent contract which, in substance, has the effect of varying the written contract.” The court did, however caution that an anti-oral variation clause may still serve as evidence that a subsequent informal variation lacks contractual intent.

The court’s obiter comments in the Globe case have subsequently been considered and approved by the Court of Appeal in MWB Business Exchange Centres Ltd v Rock Advertising Ltd.[8] The case concerned a licence agreement under which Rock occupied premises managed by MWB, which included an anti-oral variation clause. Rock fell into arrears and MWB purported to terminate the agreement, which Rock challenged on the basis that it had orally agreed with MWB to re-schedule payment of the arrears.

The Court of Appeal unanimously agreed with the approach taken by the judges in Globe, concluding that the oral agreement to vary the contract was effective, despite the anti-oral variation clause. The court took the view that the most powerful consideration was that of “party autonomy” and cited with approval the words of famed US judge, Cardozo J, in Alfred C Beatty v Guggenheim Exploration Company and others,[9] where he said that:

Those who make a contract, may unmake it. The clause which forbids a change, may be changed like any other. The prohibition of oral waiver, may itself be waived … What is excluded by one act, is restored by another. You may put it out by the door, it is back through the window. Whenever two men contract, no limitation self-imposed can destroy their power to contract again…”

It does not, however, follow that anti-oral variation clauses have no value at all and the court makes express reference to the judgment in Globe, where it was said that parties who have incorporated such a clause are likely to face "significantly greater" difficulty in showing that both sides intended to vary a formal written contract by informal means (orally and/or through a course of conduct).

These decisions are consistent with a more general statement of party autonomy, for example, that: “There is no reason in principle why parties to a contract should not agree that a certain state of affairs should form the basis for the transaction, whether it be the case or not … Where parties express an agreement of that kind in a contractual document neither can subsequently deny the existence of the facts and matters upon which they have agreed … the contract gives rise to an estoppel …”[10].

Similarly: “It is possible for parties to agree that one party has not made any pre-contract representations to the other about a particular matter, or that any such representations have not been relied on by the other party, even if they both know that such representations have in fact been made or relied on, and that such agreement may give rise to a contractual estoppel.”[11]

It is unusual that the Courts have had so much to say on one subject in such a short time. These cases show that the doctrine of freedom of contract is alive and well and whilst parties are free to agree boilerplate clauses, the courts will not treat such clauses as necessarily meaning what they appear to say. It follows that the previous way of arriving at the same result: by upholding the clauses and then denying a party the right to exercise the right by estoppel, is on the decline. What the parties can do, they can undo on a conventional legal analysis.

[1] [2016] EWCA Civ 443

[2]The fact that the transaction was performed on both sides will often make it unrealistic to argue that there was no intention to enter legal relations” per Steyn LJ in G. Percy Trentham Ltd v Archital Luxfer Ltd [1993] 1 Lloyd’s Rep 25 (approved in RTS Flexible Systems Ltd v Molkerei Alos Muller GmbH [2010] UKSC 14)

[3] See The Botnica [2006] EWHC 1360 (Comm)

[4] Subsequent conduct is admissible to prove the existence of a contract, and its terms, although not as an aid to its interpretation.

[5] [2016] EWCA Civ 396

[6] In United Bank v Asif [unreported, 11 February 2000] the court held that “it was “uncontestably right in concluding that no oral variation of the written terms could have any legal effect …” whereas in World Online Telecom v I-Way [2002] EWCA Civ 413 it was held that: “ … the parties have made their own law by contracting and can in principle make or unmake it."

[7] Subject to established legal and statutory restrictions.

[8] [2016] EWCA Civ 553 (21 June 2016)

[9] [1919] 225 NY 380

[10] Peekay Intermark v Australia and New Zealand Banking Group [2006] Lloyd’s Rep 511

[11] Cassa di Risparmio della Repubblica di San Marino SpA v Barclays Bank [2011] EWHC 484 (Comm) at [505]

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