Facts
This was an appeal from an interim order of His Honour Judge
Mitting dismissing World Online's application for summary judgment.
For our purposes, the facts can be summarized quite briefly. I-Way
agreed to supply a hardware platform to World Online. World Online
wanted to use the platform to enable its customers to gain access
to the internet. The parties agreed a payment formula which was
based on a percentage of a rebate received from BT as a result of
use of fixed lines for the service.
Although there was good take-up of the product by consumers, the
payment arrangements proved uneconomic for I-Way. The parties had
various discussions about this, and I-Way subsequently claimed that
these discussions had resulted in a binding agreement that I-Way's
share of the rebate would be increased from 20% to 30%. World
Online disputed this.
Readers wishing to know the outcome of the dispute can read the
judgment in the full trial [2004] EWCH 244 (Comm). In
short, the Judge found for World Online. He decided that a key
letter which I-Way relied upon was not in fact sent and had been
prepared some time after its date. All of this meant that a point
raised in the summary judgment hearing did not have to be decided.
That point nevertheless remains of considerable interest in the
context of IT contracts. As part of its summary judgment
application World Online had relied on a clause in the contract
which stated:
"… no addition, amendment or modification
of this Agreement shall be effective unless it is in writing and
signed by and on behalf of both parties."
Judgment
At first instance HHJ Mitting ruled that World Online's summary
judgment application failed. There was an issue to be tried between
the parties as to the alleged variation. This would involve trial
of issues of fact to establish what was said, done and written
about any rebate increase. It would also involve an issue of law:
whether the parties could by agreement or conduct vary the
requirement for strict compliance with the contractual variation
clause.
The Court of Appeal agreed with the Judge. The Court found that
there was no binding authority on the point, and thus no authority
upon which to conclude that I-Way's arguments had no prospects of
success at the summary judgment stage. As the Court of Appeal said,
each side put forward a compelling proposition. World Online said
that to ignore the contractual clause would render the clause and
any clause like it worthless. I-Way said that the parties' ability
to vary the relevant clause was a matter of freedom of contract.
Faced with these two arguments there was undoubtedly an issue to be
tried. As it turned out, the trial Judge was able to resolve
matters without reaching a conclusion on this point.
Commentary
Clauses seeking to prescribe how variations will be dealt with
are common in IT contracts. It is also common that parties do not
follow the prescribed process or formalities in practice. Where
does this leave them? At present there is no clear authority on the
subject.
Some commentators suggest that there is no reason why
prescriptive variation clauses should not have effect. If this is
how the parties have agreed that their behaviour will be governed,
why should that stipulation be ignored? These commentators say that
the law has other principles with which to determine the effect of
non-compliance, such as the principles of waiver and estoppel. So
for example if a party's conduct suggests he will not rely on his
contractual rights but will accept performance in some other,
different way, that party may then be precluded from going back to
its original rights on the basis that he has waived his right to
rely on those original rights, alternatively he is estopped from
doing so.
There are, however, problems with this approach. It may work to
protect a party from aggressive action. For example, where the
supplier has "informally" been given more time to perform, waiver
or estoppel might prevent the customer from reverting to the
original position without notice, or at all in some cases. But
these principles work less well when a party is seeming to enforce
a positive variation in his favour, such as in the instant case
where I-Way was seeking an additional payment. In such
circumstances, if the contractual provisions limiting variation are
effective, a party in I-Way's position would probably have to rely
on the concept of promissory estoppel, a somewhat undeveloped and
uncertain area of the law.
There is another problem with this approach. As well as seeking
to restrict variation, many IT contracts also contain a "no waiver"
provision. This makes things even less clear by raising conceptual
questions about whether it is possible to waive by conduct a
non-waiver clause. All of this leads some other commentators to
question the value of such clauses. Their view is that it is
perfectly possible to vary a contract orally even if the original
contract calls for written variations. These commentators say that
it is a straightforward matter of freedom of contract.
The Court of Appeal has confirmed that the point remains
unresolved. If there is at some point a ruling on this issue, it
may well turn on the drafting of the clause in question, and the
conduct of the parties.
