Summary: Construction contracts commonly contain a clause which provides that all variations must be in writing. In a recent case, the Court of Appeal called into question the validity of such clauses, stating that the parties were not precluded from varying the contract by oral agreement, or by conduct. This decision clarifies an unclear area of the law and has important implications for all parties to construction contracts.

The facts

Globe Motors v TRW Lucas Varity [2016] is not a construction case. TRW makes electronic power-assisted steering systems.   Globe entered into a supply agreement for the supply of electric motors, a component of the electronic power-assisted steering systems, to TRW.  At first instance, the court held that TRW had been in breach of the supply agreement by buying motors from another company.

Porto was a subsidiary of Globe, which had been set up for the sole purpose of supplying motors to TRW.  The judge found that Porto had become a party to the agreement by its conduct in carrying out all of Globe’s obligations under the contract.  TRW appealed, on the ground that the judge had erred by finding that Porto had become a party to the contract.  TRW argued that the existence of clause 6.3 of the supply agreement, which stated that any variations had to be in writing and signed by both parties, prevented the parties from agreeing to vary the contract by their conduct.

The Decision

The Court of Appeal considered two previous conflicting Court of Appeal decisions on the subject (United Bank Ltd v Asif [2000], and World Online Telecom v I-Way Ltd [2002]) and stated that it preferred World Online Telecom.  The court confirmed that the existence of a clause requiring all variations to be in writing did NOT preclude the parties from making a new contract, in which they varied the existing contract by agreement.  Parties’ freedom to contract could not be restricted by an earlier contractual provision.  In the process of considering the law their lordships cited some construction cases, including Liebe v Molloy [1906] and Virulite LLC v Virulite Distribution [2014].

Conclusions

Because the Court of Appeal allowed TRW’s appeal on other grounds, its findings on this point are obiter. Nonetheless this aspect of the decision has important implications for contractors and employers alike. 

Clauses in construction contracts commonly provide that all variations must be recorded in writing. Such clauses are intended to provide certainty. Employers should be aware that if they instruct additional work orally they will not be able to rely on “variations in writing” clauses as a way of avoiding payment.  Contractors may have a new argument to run, but they should be aware that the court confirmed that strong evidence would be required that the parties had varied their agreement.

The case doesn’t affect the usual power of the contract administrator to instruct work in writing, but rather is directed at the parties to the contract orally agreeing to vary the contract.

Postscript

This case was recently followed by the (non-construction) case of  MWB Business Exchange Centre Ltd v Rock Advertising Ltd [2016]. Rock occupied premises managed by MWB under a licence agreement which provided that it could only be varied by the parties in writing. Rock ran into arrears. MWB terminated the licence agreement and launched a claim against Rock for the outstanding amount plus associated costs and damages. Rock claimed that it orally agreed with MWB to re-schedule the outstanding licence fees. At first instance, the judge found that the licence had been varied orally so that payment of service charges could be made in instalments. MWB’s subsequent appeal, on the grounds that there had been no consideration since the service changes were payable in any event, failed. The Court of Appeal held that the consideration was the benefit to MWB of the Rock staying at the property, rather than having a void. The key point for the purposes of this casenote being that the Court chose to follow theGlobe case in holding that a clause that stated variations must be in writing did not preclude the parties from making a new contract orally or by conduct.