Is your non-variation clause the ultimate legal safeguard?

You may be curious about the answer to this question. The answer is, fortunately or unfortunately, the often frustrating answer to many legal questions: it depends. In the world of commercial contracts, a non-variation clause, often nestled among what is colloquially known as ‘boilerplate terms’, promises stability and predictability, and is seen as a bedrock provision, ensuring that any changes to an agreement meet specific and predefined criteria.

However, a recent Supreme Court of Appeal (SCA) judgment in the case of Phoenix Salt Industries (Pty) Ltd v The Lubavitch Foundation of Southern Africa (Phoenix case) has cast a spotlight on the true extent of protection offered by such a clause, particularly whether a non-variation clause precluded a gratuitous waiver of a right by one party in favour of another. This judgment challenged the strength of non-variation clauses which are not drafted cautiously.

The principle behind a non-variation clause is straightforward: once parties agree that their contract cannot be altered without meeting certain conditions, no amendment is valid unless those conditions are satisfied. But what happens when one party decides to waive a right, voluntarily abandoning a benefit or privilege that they would otherwise enjoy? The SCA’s decision emphasised the significance of intent, conduct of parties to an agreement, and surrounding factors in contrast to its written terms, clarifying non-variation clauses’ limits and the importance of careful drafting and context.

Synopsis of the facts

In the Phoenix case, Phoenix Salt sought repayment of a loan from Lubavitch, pursuant to a loan agreement concluded on 12 August 1994, and in terms of which Golden Hands Property Holdings (Pty) Ltd (Golden Hands) stood as surety and co-principal debtor with Lubavitch. Golden Hands further concluded a sale agreement with Lubavitch, whereby Lubavitch would transfer certain immovable property to Golden Hands for a purchase price equal to the loan. These properties were to be developed with proceeds ceded by Golden Hands to Phoenix Salt as repayment of the loan. A portion of the loan was repaid, with the balance remaining outstanding for approximately two decades until 25 July 2017, when Phoenix Salt demanded repayment of the outstanding balance of the loan. Lubavitch contended that Phoenix Salt waived its rights to enforce a repayment of the balance of the loan, whilst Phoenix Salt asserted that it did not waive such right, and that even if it did waive such right, the waiver is not valid as it is precluded by the non-variation clause contained in the loan agreement.

Non variation clause versus a waiver clause

The principle of a non-variation clause is that once parties to a written contract agree that the contract cannot be altered unless certain formalities are met, no amendment to the contract will be valid unless the prescribed formalities have been met. The usual formalities are reducing the amendments to writing and demonstrating your assent to the amendments by signing.

A waiver is a voluntary abandonment of an existing right, benefit or privilege which the party would otherwise have enjoyed. A waiver requires an element of intention, in that the abandonment must be deliberate and can either be an express indication of intention to abandon, or through conduct which clearly indicates a lack of intention to enforce such right.

In the Phoenix case, the SCA agreed with the High Court’s view that Phoenix Salt waived, through verbal statements made to Lubavitch and other conduct, the right to bring a claim to enforce the repayment of the balance of the loan. Having said that, the SCA went on to consider whether the non-variation clause in the loan agreement precluded Phoenix Salt’s waiver. The non-variation clause did not make specific reference to a waiver, but merely stated that “no addition, variation or cancellation” may occur without the signed written consent of both parties. The implied interpretation derived from the judgment is that if a non-variation is too specific, then any item that is not explicitly stated would be covered by the protection afforded by the non-variation clause. Conversely, if a non-variation clause is too general, it may fail to adequately protect the parties from variations (such as a tacit waiver) which a party may assert have amended the agreement. It would have been interesting to learn of the Court’s views, had Phoenix Salt pleaded a revocation of the waiver in the alternative to its assertion that it did not waive the right to claim a repayment of the loan, if found to have waived its rights, as was the case.

The SCA specifically noted that, in the interpretation of contracts, the extent to which a written agreement is binding may be negated by the parties’ conduct in implementing the agreement, relevant facts, circumstances, and contextual framework of the contracting parties.

Key takeaways

When drafting an agreement, boiler plate clauses must be reviewed with the same vigour as clauses containing key commercial terms and, if appropriate, updated, having regard to the commercial terms, identity of the parties, relationship of the parties, and/or other acts or omissions typically prevalent when building business relationships, such as suspension, relaxation, indulgence or extension.

Furthermore, the wording of a contract cannot be divorced from its contextual framework, which will play an important role in the interpretation of such contact. A party may have difficulty relying on a written agreement in order to claim ‘agreed’ rights when they have consistently acted contrary to their rights or obligations in the agreement. Similarly, a party may have difficulty enforcing rights or compliance with obligations when they have consistently condoned non-compliance.

Gabi Mailula is an Executive, and Asanda Lembede and Nina Gamsu are Candidate Legal Practitioners in Corporate & Commercial | ENS.

This article first appeared in DealMakers, SA’s quarterly M&A publication.

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