Oral agreement: Power of the spoken word

In the recent judgment of Globe Motors Inc & Others vs TRW Lucas Varity Electrical Steering Limited & Anor (20 April 2016) the Court of Appeal considered the effect of an “anti-oral variation” clause. The subject matter of the dispute was a long-term contract between parties for the supply of car components. Where a contract insists that all changes to a contract have to be in writing, what effect, if any, should be given where the changes were introduced following an oral agreement?

The court concluded, on the facts, that there was sufficient evidence to establish that the contract in this instance, had been varied by making “Porto”, a subsidiary company of Globe Motors, a party to it. Furthermore this variation was valid and enforceable notwithstanding, and despite an anti-oral variation clause in the contract.

It is a question of fact to determine what the parties have agreed during the course of the project. It is for the parties to ultimately make or change the bargain. Anti-oral variation clauses do have a commercial logic. They establish a protocol which, if adhered to, can prevent casual and unfounded allegations that changes to the contract have been made. However, it should not prevent the recognition of genuine changes, albeit communicated orally.

There is clearly an evidential requirement to be overcome but, essentially, the parties can agree to change their contractual arrangements in whatever way suits them, either by oral agreement or by conduct. Thus, notwithstanding the existence of an anti-variation clause, the parties are at liberty to vary the original written contract or create a separate and independent contract.

The judgment clearly has implications for the construction sector. It underlines the fundamental principle that the parties are free to agree whatever terms they wish, which may be subsequent to that originally agreed. It could apply to an alleged change to any pre-determined mechanism for claiming additional time or money. This is a re-occurring theme of construction claims. A change may relate not only to the manner in which instructions are issued, but also to how the payment of additional money is to be assessed. If there are numerous variations within a project, for example, it may be difficult or impracticable for each of them to be individually assessed. Another example may be where the parties agree to accelerate the works, which can only be introduced by increasing the resource and the duration of the working day. The parties would need to agree the manner in which the acceleration is to be assessed, and valued, giving rise to additional payment and the manner in which it would impact on previously agreed terms.

An alleged change to a pre-determined mechanism for claiming additional time and money has even greater significance where there are strict notification procedures. If a compensation event is to be claimed pursuant to the NEC Standard Form, clause 61.3 imposes a strict timescale upon the contractor of eight weeks to provide a notice unless the claim arises from a certificate or a notice already given on behalf of the employer.

The Globe Motors case reaffirms the principle that the parties are free to change the rules. This could include a contractor’s claim for compensation events, notwithstanding a failure to comply with clause 61.3, if the clear evidence demonstrates that the parties elected not to operate the NEC compensation event procedure. Since both parties need to be pro-active when assessing potential delays and increased payments, they may have departed from the pre-determined procedure. However, as always, the challenge is to present the evidence to convince the court or an adjudicator that this is what the parties have agreed to do.

However, there is an additional consideration if a claimant pursues its claims by adjudication. Globe Motors referred to the possibility of the parties reaching a new “mutual agreement” as well as varying the original agreement. It is of course no longer a prerequisite to show that a contract was made in writing. However, a claim for payment for additional work may be met with a defence that it arises pursuant to a separate oral agreement. The claimant must be wary and understand the basis of its claims from the outset.

Jeffrey Brown is a partner in the London office of Veale Wasbrough Vizards