Effectiveness of requirement for written variations of contract
GLOBE MOTORS v LUCAS VARITY (CA) [2016]
The Court of Appeal (“CA”) indicated that including a clause providing that any variation of the contract should be in writing will not prevent subsequent variation of the contract orally or by conduct.
Facts:
- Lucas Varity (“L”) agreed to purchase all its requirements for certain electric motors for cars (“Products”) from Globe Motors (“G”). The agreement was intended to be ‘long-term’.
- However, orders were placed over some time with another company in the G group called Porto (“P”) using the prices and specifications in the agreement; invoices were also raised by P.
- The contract contained a clause requiring any variation to be in writing:
“Article 6.3 Amendment: This Agreement … 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”.
- In the High Court it was held that L was in breach of the agreement by purchasing improved second generation motors from another manufacturer. G maintained they were ‘Products’ and L was bound to purchase them exclusively from G.
- L appealed. One of the questions before the CA concerned the extent to which the original contract had been varied either orally or by conduct to add P as a party to the agreement.
Decision:
- The CA allowed the appeal. Accordingly, L was not in breach of contract by buying motors from a third party. It then went on to make comments on the effectiveness of anti-oral variation clauses. These comments are strictly non-binding because they were not essential to the judgment. However, the CA did so because it said that there appeared to be directly conflicting precedents from the CA on the point and it wished to clarify the law.
- It decided that the fact that the parties' contract contained a clause such as Article 6.3 did not prevent them from later varying the contract by an oral agreement or by conduct. There had been an effective variation of the contract based on evidence of “open, obvious and consistent” dealings with P over a long period.
- The leading judge in the CA made a number of interesting comments on the interpretation of the contract and the basis for the implication of terms. He emphasised that the starting point for contract interpretation should be that contracting parties are free to determine for themselves what obligations they will accept; interpretation of contracts and implication of terms are “different processes governed by different rules”.
- Crucially G had argued its case only on the basis of interpretation. However, the CA said given that the agreement was for an exclusive supply and was a long-term arrangement, an argument that there was an implied obligation on L to give G an opportunity to show that it could provide an improved second generation motor might have had considerable force.
- The judgment suggested that where issues have not been covered by express drafting the long-term nature of an agreement may be relevant to interpretation and implication of terms. The judge proposed that a more ‘flexible’ approach may be appropriate for the interpretation of longer term contracts. This flexibility might also, for example, be appropriate when considering whether or not to imply a provision obliging the parties to cooperate or abide by a duty of good faith. The CA commented, apparently favourably, on the Yam Seng case from 2013 as an example of such ‘flexibility’ and certainly thought that in the present case of a very long-term agreement, a flexible approach was appropriate particularly to meet changing circumstances so as to best match ‘the reasonable expectations of the parties’.
- The CA also suggested that broad duties to cooperate may be best argued as terms to be implied rather than based on principles of interpretation.
Points to note:
- This decision on the effectiveness of clauses which require formal amendments to be in writing and signed is somewhat alarming in terms of the certainty of contract terms that contracting parties desire. It may potentially lead to greater scope for disputes but it is not a surprise (at least to regular readers of the TRG Update). Although not mentioned in this case, the High Court in BT Cornwall v Cornwall Council [2015] seemingly had no problem recognising the possibility that a senior level ‘Executive Forum’ could in theory and despite formal change control provisions, bind the parties to a contract variation. Equally, the CA itself in Hughes v Pendragon [2015] (and similarly not referred to in this judgment) recognised that a ‘collateral contract’ (formed through a combination of various oral and email communications) was effective to amend an agreement. This would be the case even though the original contract terms had a clause which prohibited amendments unless in writing signed on behalf of the car dealer.
- If necessary, consider carefully whether an argument is best supported either through a process of interpretation of the words used or by implying an additional term. The best chance of success is by considering both options and the different tests involved.
- It seems that the Courts feel they have greater scope for flexibility in relation to long-term arrangements and this should be borne in mind although exactly what qualifies as ‘long-term’ was not made clear.