The contract law lifecycle: the impact of case law on everything from contract formation to interpretation

Tom Cox: Hello. My name is Tom Cox. I am a Senior Associate at Gowling WLG and I co-chair ThinkHouse Foundations, a network for in-house lawyers at the start of their careers where we provide tailored training, development and resources exclusively for paralegals, trainees and lawyers of up to five years PQE. I am joined this afternoon by Alex Wrixon, an Associate in the Commercial Litigation team.  Alex has just delivered a contract law update to our audience and has now kindly agreed to sit down with me to cover some of the key points discussed. Good afternoon Alex.

Alex Wrixon: Afternoon Tom. 

Tom: So one of the key things that seemed to come out of your talk today is the approach currently been adopted by the Courts in relation to contract law. Would you care to share that with our audience?

Alex: So, when I was going through trying to organise the cases that we were going to look at, I ended up putting them into an order - rather than chronological - of looking at the life of a contract. So, from formation through to determining which terms we were interpreting. But actually, looking at the exercise in the round, there was certainly a picture [that] appeared to emerge. One of the earliest cases I was looking at was Wood and Capita, which I think people will be familiar with. This was with the Supreme Court last year, where the Supreme Court took this opportunity to essentially make its mark on… what the Supreme Court says, is there was not a dichotomy between so called textualism and contextualism, strict words on the page and the wider context. However, notwithstanding what the Supreme Court said, I think a lot of people had felt that there was divergent law and the Supreme Court, whilst on the one hand saying this is a balance and it is a process that requires both, it was the flavour of the judgment really that was a victory for so called textualism. Really looking at the words on the page and strict application of what parties had in fact contracted to. That theme actually seems to be happening across the other cases that I looked at as well.

Tom: Well indeed, and I think one of the key cases and the most recent cases which you talked about this morning was the case of Rock Advertising Limited and MWB Business Exchange Centres which relates to contract variation. What were the key messages to come out of that case?

Alex: Yes, this was a really good case, a really interesting one about the variation of a contract. The contract which was a licence for business premises… and the contract contained a clause which on its face very clearly said that this contract cannot be varied except in writing. And the previous law on that very point has been again somewhat changeable and unclear and this managed to make its way up to the Supreme Court. This was a very recent judgment in May, and the Supreme Court came out very, very much in favour that strict words on the page, in this case saying that there was no variation except in writing, should be taken as read. And so the wider implication is that the words the parties use when contracting are very important, and will be construed as they are written. More particularly, this is a real victory for so called NOMs, no oral modification clauses, which previously had been found to be essentially toothless. This is quite a big switch. They are now definitely enforceable, which throws up all sorts of implications for in-house lawyers.

Tom: So as regards those implications, what are they following the Rock case?

Alex: Well, they are twofold really. So now the judgment was great and that it went through and really emphasised the commercial reasons why people might want no oral modification clauses, which are numerous… and is really to give businesses certainty about what variations have taken place, the terms of the variations, who has carried out the variations. So I think this is great news and good news for in-house lawyers to have that additional certainty. But because NOMs are now going to be strictly construed, it is really important for people to go and check their contracts and check if they have one of these provisions because any variations are going to need to be done properly, and you are not going to be able to circumvent that clause with oral variation any more. So it's creating more work for in-house lawyers, but I think they need to be careful that there are not people on the ground still operating under the old system where they can essentially override a NOM orally because that is now bad law.

Tom: Of a piece with this you also referred to the Stevensdrake Limited case of last year which related to the implication of terms. And what is the implication for in-house lawyers on that case?

Alex: The implication for in-house lawyers is if you want a term in a contract, you had better put it in there in the first place. Again, in years gone by there have been some perhaps slackening of the previously stringent rule around implying terms into a contract. That was brought back into line perhaps by the Marks & Spencer case which reiterated the strict steps that need to be followed for a term to be implied. And the Stevensdrake case overturned the previous decision which had implied a term and said absolutely not. The contract in question, which was a CFA between a solicitor and his client, was clear on its face and therefore should be strictly construed. And the Court was not interested in implying in the term, which in fact in this instance was contrary to one of the express terms. So the bar remains very high, implied terms are going to be in the rarest situations. So if you want it in, put it in.

Tom: If you want it in, put it in. Very wise advice. The final case I would like to discuss with you today related to use of the phrase "subject to contract" when trying to form a contract.  I think the recent case of Global Asset Capital has clarified the Court's position has it not?

Alex: It has, yes. So this again causes various shudders at the thought of formation of a contract, to take everybody back to Law School, but actually for practical implications for in-house lawyers, this is good news in that the Courts have affirmed that the phrase "subject to contract" on correspondence - be it in an email subject or on this case, on top of an offer letter - will be a powerful safeguard against any inadvertent intention to create legal relations. So negotiating parties can go back and forth between themselves as part of the negotiation process without being concerned that at any moment suddenly the shutters come down when a contract has been formed. So I think on the one hand, that is great news, on the other hand you also need to be careful that when you do intend to create legal relations, you had better remove any sort of language like subject to contract or subject to anything else, in order to make absolutely clear that you are ready to contract.

Tom: So, check those email headers and make sure that if you want to say something you say it. Alex, thank you very much for your time. This was a ThinkHouse Foundations Podcast. If you are interested in ThinkHouse Foundations, please get in touch via the website or you can contact Alex at alexander.wrixon@gowlingwlg.com about anything raised in this podcast.