Many commercial contracts contain a clause which expressly provides that the contract can only be varied if the variation is in writing and is signed by all parties (a variation clause). The aim of a variation clause is to exclude the possibility of informal or even inadvertent variations being binding. Despite such wording, an agreement can in fact be varied orally or by conduct as was recently confirmed by the Court of Appeal in Globe Motors Inc & others v TRW Lucas Varity Electric Steering Limited & another.
Globe Motors Inc (Globe) entered into a long term exclusive supply agreement (the Agreement) with TRW Lucas Varity Electric Steering Limited (TRW) (for whom Gowling WLG acted) for the supply of electric motors. Globe subsequently claimed damages from TRW for breach of contract, asserting that TRW had acquired motors from another supplier. TRW argued that it was not in breach of the Agreement and even if it was, Globe had only suffered minimal losses as it had transferred manufacturing to its subsidiary, Globe Motors Portugal (Porto), and any losses sat with Porto with whom TRW did not have any contractual relationship.
Globe claimed that the Agreement had been varied by conduct and that Porto had become a party to the Agreement as a result. TRW argued there had been no variation and relied on the variation clause in the Agreement which provided that it could only be amended in a written document that was signed by all parties. There was no such document.
Court of Appeal decision
The Court of Appeal held that TRW had not been in breach of the Agreement. It was not, therefore, strictly necessary for the court to address the variation clause point. However, given there were two competing Court of Appeal decisions on the point, the Court of Appeal took the opportunity to do so in an obiter judgment.
The Court of Appeal confirmed the general principle in English contract law that parties have freedom to agree whatever terms they choose, whether in a document, by word of mouth or by conduct. This is subject to certain common law restrictions in relation to, for example, penalty clauses and restraint of trade clauses. There was no common law restriction in relation to the clause in question. The fact that an agreement may include a variation clause will not prevent parties from making a new contract varying that contract by an oral agreement or by conduct.
Here, there was overwhelming evidence that the Agreement had been varied orally and by conduct. Products had been supplied by Porto, there had been many day–to-day dealings between TRW and Porto and Porto had invoiced TRW who had paid those invoices. The parties had clearly intended to add Porto as a party to the Agreement.
Variation clauses do have a value in promoting commercial certainty and avoiding false or frivolous claims of an oral agreement. However, if there is clear evidence on the facts of the particular case that a variation has occurred and the parties have agreed to it, the court should uphold that variation. Freedom of contract may mean one party becomes unwittingly contractually bound to a party or term that was never intended.
This article was originally published on Motor Finance in May 2016.