The Court of Appeal has overturned the High Court's interpretation of an exclusive Supply Agreement, finding that the judge's interpretation was not supported on the wording of the agreement: Globe Motors Inc & ors v TRW Lucas Varity Electric Steering Ltd & ors [2016] EWCA Civ 396.

Although it was not necessary in order to reach a decision in the appeal, the court took the opportunity to state its views on a significant point on which there is conflicting Court of Appeal authority – namely, the question of whether a clause stating that amendments will not be effective unless in writing and signed by both parties would prevent the agreement being amended orally or by conduct. The court unanimously expressed the view that, in principle, a contract containing such a clause may nevertheless be varied informally.

In light of this decision, commercial parties should not assume that a clause requiring amendments to be in writing will be effective to prevent their contract being varied by less formal means. However, as the court recognised, such a clause may still have value, particularly in making it more difficult to show that what was said or done was intended as a variation of the agreement. Heather Rankin, an associate in our dispute resolution team, considers the decision below.

Background

The defendant (TRW) was a manufacturer of electric power assisted steering systems for which the claimant (Globe) produced electric motors and lead frame assemblies. The parties entered into an exclusive Supply Agreement which provided that TRW would purchase all of its requirements for particular "Products" from Globe.

New items could be added to the class of Products by mutual agreement (under Article 1). In addition, there was a process by which the parties could propose "Engineering Changes" to an existing Product, following which (if agreed by TRW, in the case of changes proposed by Globe) the updated item would fall within the class of Products (under Article 4).

A dispute arose when TRW purchased a component (known as the "Gen-2" motor) from Globe's competitor. Globe commenced proceedings for breach of contract, alleging that, although it was not specified in the Supply Agreement and had not been added to the class of Products by agreement, the Gen-2 motor was nevertheless a "Product" that TRW was obliged to purchase from Globe alone.

At first instance the judge found in favour of Globe, holding that because Globe could have produced the Gen-2 motor for TRW by making "Engineering Changes" to existing Products, the Gen-2 was a Product even if the engineering changes process had not been followed. TRW was therefore in breach of the Supply Agreement by its purchase of Gen-2 motors from a third party. TRW appealed.

Decision

The Court of Appeal unanimously allowed TRW's appeal, on the ground that the judge had erred in finding that the Gen-2 motor was a "Product" within the meaning of the agreement. The judge’s approach had moved from the uncontroversial proposition that, if a change to a motor had gone through the “Engineering Changes” process it would become one of the “Products”, to the proposition that even if it had not gone through the process it would be a Product if it “could and would” have gone through the process.

Unless and until the motor had been through the "Engineering Changes" process TRW was free to purchase it from any party. TRW was not obliged to refer all "engineering changes" to Globe for production, which would have been the result of the first instance judge's decision.

The Court of Appeal noted that because of the long-term nature of the Supply Agreement it should be construed flexibly to enable it to meet changing circumstances. One manifestation of that flexible approach was that, in certain categories of long-term contract, the court might be more willing to imply a duty to co-operate or, in the language used by Leggatt J in the well-known Yam Seng case (outlined here), a duty of good faith. In the present case, the Court of Appeal commented, that flexibility of approach "might have given considerable force to a submission that there was an implied obligation on TRW to give Globe an opportunity to show that it could provide a Gen 2 motor". However, Globe had not sought to argue the case in that way, perhaps because a case based on a breach of a duty of good faith would have faced limitation difficulties.

Returning to questions of interpretation, rather than implied terms, the Court of Appeal considered it significant that the Supply Agreement put the purchaser, TRW, in a dominant position overall (in that it allowed TRW to impose engineering changes on Globe, whereas Globe could only propose changes). If it had been intended to oblige TRW to propose changes to Globe it would have done so. In these circumstances it was not possible to construe the words "Products" in such a manner as to impose that obligation. There was no basis for the judge's construction of the agreement.

Lord Justice Beatson commented that, in reality, Globe was seeking to achieve by interpretation what it might possibly have achieved in a contract such as this by an implied obligation to cooperate or act in good faith.

Having reached a decision on this ground of appeal there was no need to consider the other grounds.

The court did however comment (obiter) on a provision in the Supply Agreement stating that any amendment was required to be in writing and signed by both parties and TRW's contention that this prevented the parties from agreeing amendments orally or by conduct.

Beatson LJ noted the two conflicting Court of Appeal decisions on the subject in United Bank v Asif (unreported, 11 February 2000) and World Online Telecom Ltd v I-Way Ltd [2002] EWCA Civ 413 which were decided only two years apart. As the two decisions were inconsistent, the court was not bound to follow either.

Although there were policy considerations in favour of anti-oral variation clauses being effective, including to promote certainty and avoid false or frivolous claims of an oral agreement, there was no principled reason why an oral variation or agreement by conduct could not be formed. The general principle under English law is that the parties are free to agree whatever terms they choose, and can do so in a document, by word of mouth, or by conduct. That meant that, in principle, an anti-oral variation clause would not prevent them from later making a new contract orally or by conduct which varied the original contract.

Underhill and Moore-Bick LJJ agreed with Beatson LJ's reasoning, Underhill LJ noting that he could not find a "doctrinally satisfying" way of treating such provisions as entrenched. Moore-Bick LJ referred to the governing principle of the parties' autonomy to make such agreements as they wished.

The Court of Appeal was however unanimous in noting that these clauses do have some practical effect, in that parties who have incorporated one into their contracts might face greater difficulty in demonstrating mutual intention to reach an agreement orally or by conduct affecting their written obligations.