Informally Amending a Contract
Can commercial contracts be informally amended – even if its terms state such amendments must be in writing? The Court of Appeal has said “yes”, in an important ruling that could have significant implications for all parties to commercial contracts.
Can commercial contracts be informally amended – even if its terms state such amendments must be in writing? The Court of Appeal has said “yes”, in an important ruling that could have significant implications for all parties to commercial contracts.
What’s the background?
In a recent case1, the Court of Appeal disagreed with an earlier ruling in respect of the wording of an exclusive Supply Agreement that required one party to purchase all of its required products from the other party.
The terms allowed new items to be added to the class of ‘Products’ to be supplied, as well as further terms covering products going through engineering changes that would become a ‘Product’. The defendant bought a component (a motor) from a competitor, leading to a dispute in which the claimant sued for breach of contract. The claimant argued that although that component was not specified within the Supply Agreement or added to the class of Products, it was still a Product the defendant was obliged to buy only from the claimant company.
The Court of Appeal found in favour of the defendant and decided that the component was not a ‘Product’ within the meaning of the Supply Agreement: unless and until that motor had been through the engineering changes process under the Supply Agreement, the defendant was free to purchase it elsewhere.
Variation
As for the issue of express/informal variation of the terms, the Supply Agreement expressly required any amendments to be in writing and signed by both parties. Although not specifically at issue in this case, the Court of Appeal nevertheless considered it sufficiently important to express its view on the question of whether a clause stating that amendments will not be effective unless in writing and signed by both parties would prevent it being amended orally or by conduct.
It was the Court’s unanimous view that a contract containing such a clause may still be varied informally, for instance verbally or by way of conduct. There was no principled reason under English law why an oral variation or agreement by conduct could not be formed. Such express provisions are not entrenched; and the governing principle is “party autonomy”.
Giving his view, Lord Justice Moore-Bick said: “The parties are therefore free to include terms regulating the manner in which the contract can be varied, but just as they can create obligations at will, so also can they discharge or vary them, at any rate where to do so would not affect the rights of third parties.”
What does this mean?
Parties to commercial contracts should not rely exclusively on contractual terms expressly requiring amendments to the contract to be made in writing, because they may not be able to rely on them – particularly if one party varies the contract by informal means. That said, the Court made it clear that such express terms have an important practical effect in demonstrating the parties’ intentions.
How can we help?
The issue of interpreting contractual terms continues to exercise the courts. How terms should be construed in the event of a dispute is not always clear. If you have any concerns about your commercial contracts, contact the experienced commercial law team at Herrington Carmichael solicitors for expert advice.
Please contact Mark Chapman on 01276 686222
Publication Date: 19.05.16
1Globe Motors Inc & ors v TRW Lucas Varity Electric Steering Ltd & ors [2016] EWCA Civ 396.