Non-Oral Variation Clauses - How Reliable Are They?
Obiter comments in a recent English Court of Appeal decision: Globe Motors Inc. v TRW Lucas Verity Electric Steering Limited and Another [2016] EWCA CIV 396 regarding the enforceability of non-oral variation clauses could significantly impact commercial contracts in Ireland if cited by the courts in this jurisdiction. The clause at issue in this English case prohibited the variation of the contract without specific reference to the provision to be amended and being signed by both parties.
The circumstances surrounding the decision were, in summary, that Globe Motors had an arrangement for the supply of products known as "Gen 1" Motors to TRW Lucas pursuant to a contract between the parties. The Court, at first instance, found that the defendant was in breach of contract by purchasing motors known as "Gen 2" motors from a third party company. The defendant denied an obligation to purchase “Gen 2” motors from Globe Motors however, argued that even if it was, the Plaintiff had transferred its manufacturing to a subsidiary company Globe Motors Portugal (Globe Porto), and this subsidiary was not party to the contract. TRW Lucas also argued that no amendment had been made to the contract pursuant to the non-variation clause to include Globe Porto as a party.
In considering the issue the court referred to two conflicting English Court of Appeal decisions - United Bank Ltd v Asif (11 February 2000) in which a non-oral variation clause was upheld and World Online Telecom v I-Way Ltd [2002] EWCA Civ 413 where the court commented that parties are entitled to contract and in effect make their own law which they “can in principle unmake or remake”. The court decided that the better view was that it is possible for parties to agree to vary or waive a clause in a contract and whether they have done so is fact sensitive. It was held that the agremeent was, in fact, varied by the parties' conduct and their dealings with Globe Porto over a long period of time.
The decision was appealed by TRW Lucas on a number of grounds and the English Court of Appeal overturned the decision. It should be noted that the Court of Appeal overturned the decision on the basis that the “Gen 2” motors did not form part of the definition of “product” within the contract and therefore its comments in relation to the non-oral variation clause were obiter.
Due to the conflicting decisions in the area however, the Court proceeded to give its view in relation to the enforceability of non- oral variation clauses. The Court noted that the World Online Telecom case was “positive support” for the effectiveness of an oral variation or one by conduct despite the existence of a non-oral variation clause. The Court also commented that it is possible that in a case such as United Bank, involving a bank guarantee that there is less room for flexibility due to the Statute of Frauds Act 1677. Also cited was an Australian High Court decision, Liebe v Molloy (1906) 4 CLR 347 which suggested that an oral agreement or conduct of the parties to a contract containing a non-oral variation clause may give rise to a separate and independent contract which in substance has the effect of varying the written contract.
The court could not point to any particular statutory or common law restrictions preventing the making of a new contract by word of mouth or conduct, which would, in effect vary the contents of a previous contract. However the court pointed out that difficulties of proof may arise where it is claimed that a contract has been made orally or by conduct in variation of an existing contract including a non-oral variation clause.
These comments are interesting in light of the position in Irish law where such clauses are widely used and relied upon. The English Court of Appeal held that the trial judge was entitled to conclude on the basis of the parties “open, obvious and consistent” dealings over a long period that the parties had intended to include Globe Porto as a party to the agreement (despite the non-oral variation clause) and Irish Courts may follow suit if it is argued that a parties’ communications dealings or conduct of contractual relations constituted contractual relations.
For further information on this topic please contact Bríd McCoy (Partner), or your usual AMOSS contact.
