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Your contract still means exactly what it says – unless the clause is one which requires contractual variations to be in writing

Back in February 2016, I posted an article about two recent Supreme Court decisions that represented a sea change in how Courts will interpret clauses in commercial contracts and leases going forward. In a nutshell, parties can no longer expect a Judge to save them from a bad bargain by interpreting a contract in such a way as to lead to a commercially sensible outcome. Nor will a judge imply a term to achieve such a result. Instead, you are stuck with whatever words are set out in the contract.

This trend continues, as illustrated by a recent Court of Appeal case (Globe Motors Inc v TRW Lucas Varity Electric Steering Ltd [2016] EWCA 396.

The issue in the case was essentially whether TRW Lucas was in breach of a long term exclusive supply agreement by purchasing motors from a third party. If it was, then TRW Lucas was on the hook for damages of just over €10million. The case turned on whether the agreement covered not only products specifically stated in the body of the contract but also motors that Globe could and would have produced by making engineering changes to existing products covered by the agreement.

The High Court judge had found that the contract should be interpreted in this way, thus extending the scope of the exclusive supply agreement to include modified products that Globe could have produced had it been asked to do so.

However, the Court of Appeal disagreed and overturned the High Court’s decision. It held that the agreement only covered the specific products as defined in the agreement because that is what the agreement actually said. The High Court judge had been wrong to stretch this definition to reach what he considered would have been a commercially sensible result. The starting point was instead to look at the words used in the contract, taking into account their documentary, factual and commercial contexts. Just because such language leads to a contract working out disastrously for one party is no reason to depart from the natural meaning of the actual words used.

TRW also sought to rely on a standard boilerplate provision that stated that no variation to the agreement would be valid unless it was in writing, stated to refer to the specific provision in the contract which was being amended and signed by both parties. One would therefore have thought that the Court would have held the parties to that bargain so that any purported variations which did not tick all of those boxes would not be valid.

This was not however the case. The Court of Appeal did not have to decide this point but given that there were two conflicting Court of Appeal decisions as to the effectiveness of such “non-variation” clauses, it used this opportunity to give a strong steer on the correct approach. It stated that such clauses do not preclude oral variations or other variations. Parties agreeing verbally to vary a substantive term in a contract are also agreeing to vary the boilerplate term that states that variations must be in writing. So, oral variations can be effective and binding, even if the contract expressly says that variations must be in writing.

Caution should therefore be exercised if indulgences or forbearances are made for a particular contractual obligation – these may inadvertently amount to a binding and enforceable change to the original terms of the contract. Good practice dictates that any oral variations should be confirmed in writing so that there is contemporaneous evidence of what was agreed and to enable anyone dealing with the contract to know what up to date terms bind the parties. Without this, oral variations pave the way for future disputes where it will be the case of one party’s word against the other’s as to what, if any, changes were agreed.

CONTACT CLARE

If you would like more information or advice relating to this article or a Commercial Litigation & Dispute Resolution law matter, please do not hesitate to contact Clare Mackay on 01727 798092.  

© SA LAW 2017

Every care is taken in the preparation of our articles. However, no responsibility can be accepted to any person who acts on the basis of information contained in them alone. You are recommended to obtain specific advice in respect of individual cases.