Updates

The English Court of Appeal last week handed down an important judgment. In Globe Motors, Inc and others v TRW Lucas Varity Electric Steering Limited and another [2016] EWCA Civ 396, the Court of Appeal said that parties are able to modify the terms of their contract orally, or by conduct, even though a clause in the contract requires all variations to be in writing.

This may be viewed by some as having implications for the commercial certainty provided by a written contract. However, where there is a dispute over a purportedly varied term, a party will need to demonstrate to the court or arbitral tribunals applying English law that both parties agreed to the variation of the contract, orally or by conduct, for it to be effective.

The governing principle underpinning the decision is that of party autonomy. Parties cannot tie their hands to remove from themselves the power to vary their contract informally, if only because they can agree to dispense with the original restriction itself.

The Court of Appeal did not formally have to decide the point, so its conclusion was expressed ‘obiter’. All three judges, however, expressly stated their considered views having heard full argument on what was regarded to be an important issue of principle. The Court of Appeal’s conclusion is likely, therefore, to be followed by the English courts in the future and arbitral tribunals applying English law.

In short:

  • Parties may agree that they cannot vary their contract. However, parties are always free to change their minds and, if parties subsequently agree to vary their contract, the variation will be effective.
  • Parties may agree to barriers to variation such as requirements of form, e.g. that a variation must be in writing and/or signed by both parties. However, if parties thereafter expressly agree to vary their contract contrary to any contractual requirements of form, that agreement will be effective. A ‘variation only in writing’ clause will not bind them.
  • There is still value in including a ‘variation only in writing and when signed’ clause in a contract because, as a practical matter, it heightens the burden of proving that a variation by other means has occurred. Parties intending to rely on informal communications and/or a course of conduct to modify their contractual obligations may encounter evidential difficulties in showing that both parties actually intended that what was said or done should alter their legal relations. If parties have agreed to a provision requiring formal/written variation, those difficulties may be significantly greater.
  • It will generally still be prudent for parties to comply with any specific contractual requirements for amending contracts, in order to avoid disputes as to whether a contract has been validly changed. If oral variations are made, steps should be taken to document that variation in writing and in detail.