Court of Appeal considers effectiveness of "in writing" variation clause

In this case, the Court of Appeal was asked to consider the correct contractual interpretation of a long-term supply agreement. In its judgment, the Court of Appeal indicated, obiter, that including an 'in-writing only' variation clause in a contract would not prevent subsequent variation of the contract orally or by conduct in certain circumstances.

The dispute (Globe Motors Inc v TRW Lucas Variety Electric Steering Ltd) concerned an exclusive supply agreement under which TRW LucasVarity Electric Steering Ltd (TRW) made an agreement to purchase all product requirements for certain electric motors from Globe Motors Inc (Globe). It was a long-term agreement and it was commonly understood between the parties that there would be regular improvements to and development of the products. As such, under the agreement TRW had the right to propose engineering changes to the products and Globe was obliged to make them.

From 2005 to 2015 TRW purchased improved second generation motors from DEAS Emerson (Emerson). Globe argued that this was in breach of its agreement with TRW as the second generation motors fell within the scope of the definition of "Products" under the exclusive agreement. Globe argued that it "could and would" have made the necessary engineering changes to its first generation motors in order to provide second generation motors to TRW. TRW insisted that Globe would never have been able to do so within a reasonable time frame. At first instance, the Court decided against TRW and stated that they were indeed in breach of the agreement as Globe alleged. TRW appealed the judge's interpretation of the definition of "Products" in the agreement.

The principal issue to be decided by the Court of Appeal was whether the judge at first instance had been incorrect in deciding that the agreement's definition of "Products" encompassed those second generation motors purchased from Emerson on the basis that Globe "could and would" have made the necessary engineering changes to produce them had it been asked to do so.

The Court of Appeal

The Court of Appeal judge placed emphasis on its long term nature of the agreement. He considered that it was understandable that the judge at first instance wished to interpret the contract in a way which reflected what he considered to be the "commercial matrix" underlying it.  However, particularly because of the agreement's long term nature, the Court of Appeal considered it necessary to construe it in such a way to enable flexibility to meet changing circumstances. The judge made reference to Total Gas Marketing Ltd v Arco British on this point which suggested that a flexible approach to interpretation may best reflect the reasonable expectations of the parties. It was for the parties to a long-term contract to ensure that they inserted clauses which dealt with the particular problems encountered by those that entered into such contracts.

The agreement specified that TRW had either to agree the addition of a new product or, at its volition, propose Engineering Changes to existing products in order to enable a motor or assembly not within the detailed specifications to qualify as "Products" under the agreement.

The judge pointed to the so called "asymmetry" of the agreement's Article 4.1 which provided that TRW reserved the right to propose an engineering change and Globe had to agree. By contrast, if Globe proposed an engineering change it had to obtain the written approval of TRW. As such, the judge considered that the agreement should not be interpreted as compelling TRW to go through the Engineering Changes so as to give Globe the opportunity to create second generation motor engines. Indeed, this would be the same as giving power to Globe to require Engineering Changes to bring the resulting motor or assembly within the definition of the "Products" in the agreement. To do so would be inconsistent with the tenor of Article 4 which made clear the intended asymmetrical nature of the relationship between Globe and TRW in this respect.

As the agreement was for exclusive, long-term supply the judge stated that there might exist an argument that there was an implied obligation on TRW to give the Globe an opportunity to show that it could provide an improved second generation motor. However, the judge cautioned that parties to such contracts should not seek to achieve by implication that which might be achieved by an inappropriate approach to interpretation. It followed that, since "Products" did not include the improved second generation motors, TRW was not in breach of the agreement by buying such motors from a third party.

The Court of Appeal's decision on the interpretation of "Products" rendered obsolete the question on the effectiveness of variation clauses.  Nevertheless, the Court of Appeal made obiter comments on this subject. Reference was made to two key recent cases:

United Bank v Asif which goes in support of the effectiveness of 'in-writing only' variation clauses; and

World Online Telecom which suggests that oral variation and variation by conduct is possible despite the existence of an 'in-writing only' clause in a contract.

TRW argued that there were reasons of principle and policy which went in favour of recognising 'in writing only' variation clauses and preventing variations of contracts which did not comply with them. TRW argued that such clauses provided certainty and avoided false or frivolous claims that oral agreements had been reached. The Court of Appeal rejected these arguments asserting that such a clause "does not prevent [the parties] from later making a new contract varying the contract by an oral agreement or by conduct". In the present case it was held to be open to the Court to find variation based on evidence of "open, obvious and consistent dealings over a long period" which evidenced the parties' intention to include Globe Motors Portugal as a party to the agreement. The Court emphasised that this was a matter of discretion in each case and that a variation should only be found where the evidence (on the balance of probabilities) established such variation was indeed concluded.

Comment

This case clearly underlines the need to take extra care to have an eye to the future when drafting long-term contracts.  If the definition of "Products" had been broader, the decision of the judge at first instance might have been upheld.  Further, the judgment demonstrates the ways in which a Court might find the long-term nature of a contract relevant to interpretation in circumstances where the issues in dispute might not been adequately covered by express drafting.

The judge's obiter comments on variation clauses give some clarification in this area of the law in light of the most recent conflicting Court of Appeal decisions. The case notes the practical advantage of attempting to limit the manner in which parties are able to vary contracts, but nevertheless concludes that this is insufficient to completely override the principle of party autonomy. Nonetheless, there remains practical value in such 'in-writing only' variation clauses: at the very least they encourage the parties to ensure that any agreed variation is recorded in writing so helping to avoid future dispute about what was or was not agreed and they set the bar higher for those arguing in favour of a variation which does not fall within the scope of the clause.