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"No variation" clauses weakened by Court of Appeal

 

17 May 2016

​When is a change not a change? One answer to that paradox is: when it is an attempted contractual variation. Such variations can fail for a number of reasons: lack of consideration, lack of clarity in what is agreed and an absence of sufficient intention.  In Globe Motors Inc v TRW Lucasvarity Electric Steering Ltd [2016] EWCA Civ 396 the Court of Appeal considered a further potential issue that arises frequently in practice but has only infrequently been considered by the courts: the effect of so called "no variation" clauses. 

TRW made power assisted steering units for various car makers. Globe supplied TRW with components used in the production of those units, in particular with certain types of motor (referred to as Gen 1 motors). The supply agreement (the Agreement) was exclusive and long term. Globe Motors Portugal, the second claimant, was not a named party to the Agreement but in practice was the entity that supplied the Gen 1 motors to TRW. TRW had started purchasing Gen 2 motors from DEAS Emerson (a company that TRW acquired after the supply arrangement with DEAS Emerson commenced).

Six issues were raised on appeal, of which two are significant:

  • As a matter of contractual interpretation, did the Agreement extend to catch Gen 2 motors, such that TRW was in breach by purchasing them from DEAS Emerson rather than Globe?
  • Had the parties varied the Agreement by conduct to make Globe Motors Portugal a party in circumstances where the Agreement expressly required any variation to be in writing and signed by the parties?

The interpretation issue

The Court of Appeal decided that the Gen 2 motors did not fall within the scope of the Agreement, such that TRW's purchase of them from DEAS Emerson was not a breach of contract. This, obviously, disposed of the parties' dispute (and was the reason that the Court of

Appeal did not consider in any detail the majority of the six issues before it). From a precedent perspective, however, the ultimate destination reached by the Court of Appeal is less interesting than the route it took. In an eloquent and well reasoned judgment, Beatson LJ, with whom Underhill and Moore-Bick LJJ agreed, drew together a number of threads and possible areas of future tension coming out of recent Supreme Court judgments on the interpretation of contracts and the implication of terms. He highlighted the following:

  • There is no special approach to the interpretation of long term contracts – it is a question of ascertaining the presumed intention of the parties in the usual way. However, in doing so the court may take into account that a flexible approach may best match the reasonable expectations of the parties in the context of a long term agreement. If the wording is wide enough, it may catch a concept or entity that did not exist when the contract was made.
  • That flexibility of approach may also manifest itself in an increased willingness on the part of the court to imply into the contract a duty to co-operate or act in good faith, as contemplated in Yam Seng.
  • At the same time, the two processes – interpretation and implication – are different and should not be confused. In particular, where (as here) implication of an obligation to co-operate was not possible, it was illegitimate to stretch the interpretation of the express terms to fill some perceived gap.
  • Implication of a term will only be possible where the language of the contract, viewed against its context, permits it.

This reflects the two-stage approach to contractual analysis emphasised by Lord Neuberger in Marks & Spencer Plc v BNP Paribas last year. The starting point is to ascertain what the express terms mean; only then does one look to see if anything should be added. It highlights the distinct nature of those two steps and the peril for a party in not addressing issues clearly up-front: even in long term contracts where there is greater flexibility in the approach to interpretation, it will not go as far as to add terms by the back door.

The variation issue

Having decided that there was no breach, the question of whether Globe Portugal was a party to the Agreement became irrelevant; even if it had been, it could have no claim. However, it was recognised that this was an issue of broader importance and was addressed by all three judges, with the leading judgment again being given by Beatson LJ.

The Agreement contained the following clause:

"6.3 Entire Agreement; Amendment: This Agreement, which includes the Appendices hereto, is the only agreement between the parties relating to the subject matter hereof. It can only be amended by a written document which (i) specifically refers to the provision of this Agreement to be amended and (ii) is signed by both Parties."

It was common ground that no such written document existed adding Globe Portugal as a party. However, HHJ Mackie QC had found that the parties' conduct over a prolonged period demonstrated all the factual elements necessary for a variation to that effect. Did clause 6.3 nevertheless preclude Globe Portugal from being a party?

The question is one of conflicting agreements between the parties. On the one hand the parties have agreed that any changes have to be in a certain form. On the other hand, they have agreed that the contract should be altered without following that form. Which agreement prevails? The position is further complicated because the Court of Appeal has considered this issue on two previous occasions. On the first, in United Bank v Asif (unreported, 11 February 2000), it concluded that the earlier agreement prevailed; on the second, in World Online Telecom Ltd v I-Way Ltd [2002] EWCA Civ 413, it concluded that it was the latter that did so.

The Court of Appeal in Globe Motors preferred the reasoning in World Online: informal variation was possible, despite the express wording of clause 6.3 to the contrary. Beatson LJ reasoned that it was always open to parties to make and unmake their agreements and to waive compliance with particular provisions of them. If any other clause in a contract could be waived or amended, why not this one? However, the fact that an informal variation was legally possible did not mean that it was probable: "the court would be likely to require 'strong evidence' before finding there has been an oral variation of such a clause". 

Whilst the result is a logical one and has considerable appeal as a matter of legal principle, the Court of Appeal recognised that it could create issues in practice: there is the risk of uncertainty or of false or frivolous claims of oral variation that cannot be dealt with summarily. Moreover, whilst the decision is technically obiter – a point noted by each of the judges – it is clear and well reasoned, and will obviously be highly persuasive. Following on from C&S Associates UK Ltd v Enterprise Insurance Co plc [2015] EWHC 3757 (Comm) it therefore represents a further weakening of no variation provisions.

How, then, can a party control variations to its contracts? As the Court of Appeal noted, no variation provisions remain of some value because they raise the bar in terms of showing that the oral discussion was intended to constitute a variation. Moreover, whilst this was not addressed by the Court of Appeal, other routes remain open to the parties. To take a straightforward example, corporate parties could limit the identity of those individuals who have the power to agree a variation. In such a case, anyone not identified in the clause would not have actual authority to negotiate a variation on the company's behalf. Provided the company does nothing to grant them apparent authority, its contract will remain unaltered. That, in itself, requires on-going vigilance, but it gives the company some shelter against the winds of change.

Further information  

This case summary is part of the Allen & Overy Litigation and Dispute Resolution Review, a monthly publication.  For more information please contact Sarah Garvey sarah.garvey@allenovery.com, or tel +44 20 3088 3710.

 

 

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