In this analysis of a recent case with far-reaching implications for the construction industry, Sharpe Pritchard warns that a variation clause purporting to exclude variations other than those in writing, is not automatically enforceable and will be looked at on a case by case basis.
Although this is not a construction case, it could have far-reaching implications for the construction industry. The factual background is not strictly relevant – the material point to note is that Globe Motors Inc (Globe) had entered into a long-term exclusive supply agreement with TRW Lucas Varity Electric Steering Limited (TRW). The agreement included Article 6.3, which stated:
“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”.
In other words, the agreement prohibited variations which were not captured in writing. Notwithstanding this, there was in fact a change to the contractual arrangements which was not agreed in writing.
The Court of Appeal, although not obliged to, considered it important to deal with the issue of variation clauses and their effectiveness in principle, given two conflicting Court of Appeal decisions on variation clauses:
- United Bank v Asif (2000), which supported the effectiveness of ‘in writing only’ variation clauses; and
- World Online Telecom (2002), which suggested that oral variations and variations by conduct can possibly vary a contract that has an ‘in writing only’ clause in existence.
Variation clauses in construction contracts which require any amendments to be captured in writing are commonplace. They serve an important function, as they seek to exclude informal and/or unintended variations. Perhaps most importantly, they seek to prevent oral variations being made to an agreement. This is particularly relevant to employers, whose professional team (such as the architect and project manager) may agree items on site with a contractor but fail to record such agreement in writing. This is often the source of disputes further down the road.
As TRW argued, ““anti-oral variation” clauses promote certainty and avoid false or frivolous claims of an oral agreement”. However, Lord Justice Beaston stated that:
“The parties have freedom to agree whatever terms they choose to undertake, and can do so in a document, by word of mouth, or by conduct. The consequence in this context is that in principle the fact that the parties’ contract contains a clause such as Article 6.3 does not prevent them from later making a new contract varying the contract by an oral agreement or by conduct”.
Although the comments were made obiter, the ramifications for the construction industry could be profound.
This case provides a very important reminder to all employers who enter into building contracts (and professional team appointments) that if they want variations only to be effective if made in writing, then simply including such a clause in the agreement will not be sufficient. That is, even if the contract includes an express provision which says that oral variations are not permitted, if such variations in fact occur and are acted upon, they may be effective. Simply put, a variation clause that purports to exclude variations other than those in writing, is not automatically enforceable and will be looked at on a case by case basis.