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Oral variations strike back

Recent Court of Appeal decisions have re-opened the debate on oral variations to contracts containing a no amendment clause.

The first instance decision in C&S Associates UK v Enterprise Insurance Company plc [2015] EWHC 3757 was commented on in a recent article in Construction News.

That case concerned a clause that required variations to be in writing in a specified format.

However, in two cases this year – Globe Motors Inc v TRW Lucas Varity Electric Steering Ltd [2016] EWCA Civ 396 and MWB Business Exchange Centres Ltd v Rock Advertising Ltd [2016] EWCA Civ 553 – the Court of Appeal has gone further, holding that a variation not recorded in writing at all may be effective, even in the face of a ‘no writing’ clause.

The facts

Globe Motors concerned an exclusive supply agreement for electric motors and leadframe assemblies in the car manufacture business.

Article 6.3 contained an entire agreement provision which went on to state: “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.”

Argument then arose as to whether a new party had become a party to the agreement by conduct, as evidenced by orders and warranty claims being sent to that party.

MWB Business Exchange concerned a licence to occupy an office, which contained a provision stating: “All variations to this licence must be agreed, set out in writing and signed on behalf of both parties before they take effect.”

One of the parties sought to terminate the lease for non-payment, but the other party alleged and relied upon an oral agreement to re-schedule the licence fee payments due under the agreement over a given period.

The decisions

In Globe Motors, the court held that, in principle, parties have freedom to agree whatever terms they choose to undertake, and can do so in a document, by word of mouth or by conduct.

The careful barriers set up by the contract did not prevent a variation taking effect by an oral agreement or by conduct.

Strictly speaking, the views expressed in Globe Motors were not binding on future courts, but they were approved by the Court of Appeal in MWB Business Exchange.

Kitchin LJ (with whom the other members agreed) held at paragraph 34 that “the most powerful consideration is that of party autonomy”.

We therefore have Court of Appeal authority that variations, whether orally or by conduct, can be effective in the face of a clause which insists on such variations only being made in writing.

For good measure, we now also have a decision in the TCC itself.

In Zvi Construction Co LLC v Notre Dame University (USA) in England [2016] EWHC 1924 (TCC), the TCC considered a clause which prevented variations or any waiver of the terms of the agreement from being effective unless “it is in writing and signed by or on behalf of the party against which the enforcement of such modification, alteration or waiver is sought”.

The context was whether the parties had agreed that an expert under an expert determination provision had jurisdiction over their dispute.

Stephen Furst QC held, applying Globe Motors and MWB, that they had done so and that such agreement – or waiver – did not have to be compliant with the ‘in writing’ clause to have effect.

What they mean

So where does this leave us? None of the cases above referred to the decision in C&S Associates UK, but that does not mean it remains correct.

On the contrary, the logic of the Court of Appeal decisions in Globe Motors and MWB Business Exchange is that even oral variations would be legitimate.

It is too easy to say that ‘in writing’ clauses have no effect.

However, the court in Globe Motors specifically recorded disagreement with the comment of Judge Mackie QC in Spring Finance v HS Real Co LLC that “strong evidence” would be required before an oral variation would be upheld: the usual rules of contractual interpretation apply.

The end result is that parties need to be absolutely clear about what they are doing during the project as well as during the negotiation of the contract at the start.

Recording any variation in writing is still likely to be prudent, if only to provide the evidence which may have to be relied on in an adjudication hearing where witnesses do not attend a hearing.

However, there is no avoiding the reflection that decisions that make sense in principle may leave the position in practice open for confusion and contention.

John Denis-Smith is a barrister specialising in construction and commercial disputes at 39 Essex Chambers

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