In a recent decision, the Court of Appeal has ruled that contracts may be amended orally, even when their terms require the use of writing – we explore what this means for construction contracts in particular
Trouble in the boilerplates?
The latter sections of commercial contracts are often described as the “boilerplate clauses”, meaning those provisions that are usually not heavily negotiated by the principals and are mostly only of interest to their lawyers. For English law contracts, these include notice provisions and amendment and waiver clauses.
A standard boilerplate clause is the so-called “no amendment” clause, which provides that amendments or variations to the contract are not permitted unless they are in writing and signed by each of the parties. In a judicial development that will be of particular relevance to construction contracts, the Court of Appeal recently ruled that such drafting will not necessarily preclude the parties from making subsequent variations which do not conform with the prescribed procedure.
The court’s decision
The case concerned is that of Globe Motors Inc v TRW Lucas Varity Electric Steering Limited: Globe Motors is a supplier of components which form part of the electric power-assisted steering systems developed by TRW for the automotive industry. In 2001, the parties had entered into an exclusive agreement for Globe’s supply of such components to TRW, clause 6.3 of which stipulated that “This Agreement (…) 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”.
Part of the dispute centred around whether Globe and TRW had, despite the requirement for amendments to be in writing and signed by both parties, made a binding oral agreement to novate or vary the contract to include a third party (one of Globe’s subsidiaries). The Court of Appeal ruled that, despite having set out clear provisions on how amendments to the contract should be governed, the parties could not “tie their hands so as to remove from themselves the power to vary the contract informally”. Effectively, the court held that the requirement of clause 6.3 of the supply agreement for amendments to be in writing was overridden by the later oral agreement between the parties to include Globe’s subsidiary as a party.
What implications might this decision have? Large-scale construction projects often involve significant communication between representatives of the employer and the contractor. The Court of Appeal’s ruling potentially opens the door to site personnel agreeing informal amendments to a construction contract, overriding contractual requirements to have such amendments in writing and signed by authorised representatives.
Limited impact in project finance?
Although the consequences of this decision may appear concerning at first sight, a number of factors mitigate against this decision having wide-ranging ramifications in limited recourse financings. The complex nature of construction contracts (and, in a project finance scenario, the inter-relationship between the various project and financing agreements) means that numerous individuals (on the contractor, developer and financier side, as well as their respective advisors) will usually be involved in discussing and negotiating proposed amendments, frequently using email. In practice, written agreements are almost invariably used in project-financed construction contracts because parties are well-versed in best practice and do not rely on informal decisions made on-site but rather reduce copious correspondence to a single document to focus the various stakeholders on what is actually to be amended. The financing agreements also give the lenders certain reserved discretions and approval rights in respect of any amendments to the project contracts, which may prevent contractors and subcontractors making decisions without formal consent. The extensive obligations on project sponsors to disclose pertinent information to their lenders (and the severe consequences that failure to keep lenders informed can have for a project) should guard against informal amendments being agreed by sole operatives.
Nevertheless, it is still considered advisable for the “no agreement” clauses to remain in contracts, as they will be persuasive in any dispute as to whether a particular communication or course of conduct was a variation of the contract. The clause of the contract that deals with the amendment process should also explicitly state that any informal amendments agreed upon will not take effect unless and until a written amendment agreement is signed by the parties. A well-drafted clause should specify that any written amendments must be signed by duly authorised representatives of each of the parties that have the formal authority to bind the parties.
As regards good contract management, it would be prudent for parties to take more steps than might previously have been the case to reduce the likelihood that informal correspondence between them could be interpreted as a formal amendment of the written contract. One such step would be to ensure that any written correspondence (whether by email, text message or letter) regarding proposed amendments should be stated as being “subject to contract” by way of a note to that effect in the body of any email, or at the start of any letter.