NEC3 Contracts - Have you agreed a change to your Contract orally or by conduct or does it need to be in writing (Clause 12.3)?

 “...Courts will never construe words in a vacuum...”  Sir Thomas Bingham MR in Arbuthnot v Fagan  [1995] CLC 1396

 Charles Edwards, Head of Chambers and Barrister, reviews the recent Court of Appeal decision in Globe Motors, Inc & Ors v TRW Lucas Varity Electric Steering Ltd & Anor [2016] EWCA Civ 396, which provides useful guidance with regard to the effectiveness of anti-oral variation clauses in contracts.  This decision will have far reaching consequences as there are many commercial agreements including construction contracts which commonly contain clauses to restrict variations to the contract unless they are confirmed in writing.  An example of this is Clause 12.3 of the New Engineering Contract 2013 (“NEC3”) which states:

“No change to this contract, unless provided for by the conditions of contract, has effect unless it has been agreed, confirmed in writing and signed by the Parties.”

The intention of Clause 12.3 of the NEC3, it is submitted, is to restrict the way in which the contract can be varied. Clause 12.4 of NEC3 further states that:

“This contract is the entire agreement between the Parties.”

The matter in the Court of Appeal followed a 32 day trial in connection with a commercial dispute between the parties in which the High Court assessed damages in the sum of €10,095,095.  The High Court refused an application for permission to appeal against the damages order, however, permission was granted to appeal against liability only on six grounds.

Ground 6 of the appeal was on the basis that there was no variation of the Agreement and that the High Court had erred in finding that:

“Ground 6: There was no variation of the Agreement to include Porto as a party: The judge erred in finding that Porto became a party to the Agreement by means of an implied novation or variation by conduct because (a) the conduct relied on was not unequivocal, and (b) Article 6.3 of the Agreement precluded variation by parol: Issue 17.”

The agreement between the parties included Article 6.3 which stated that:

“6.3 Entire Agreement; Amendment: 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.”

The High Court rejected the submission that it was bound by the unreported decision of the Court of Appeal in United Bank Ltd v Asif (11 February 2000) to decide that the effect of Article 6.3 was that the Agreement could only be amended by a written document which specifically referred to its provisions and was signed by both parties. The High Court stated amongst other things that the decision in United Bank v Asif was not treated as binding in a later decision by the Court of Appeal in World Online Telecom v I-Way Ltd [2002] EWCA Civ 413.  The High Court after considering the two Court of Appeal decisions decided that the better approach was the Court of Appeal decision in World Online Telecom which decided amongst other things that it was possible for parties to agree to vary or waive a requirement such as that in Article 6.3 and to decide otherwise would be inconsistent with the principles of freedom of contract.  The High Court found that the Agreement, including Article 6.3, was in fact varied or waived by the parties’ conduct.

With regard to interpretation, the Court of Appeal considered the following two statements amongst other things:

“The first is the elegant, concise and unelaborate pre-ICS statement by Sir Thomas Bingham MR in Arbuthnot v Fagan  [1995] CLC 1396, at 1400:

“Courts will never construe words in a vacuum. To a greater or lesser extent, depending on the subject matter, they will wish to be informed of what may variously be described as the context, the background, the factual matrix or the mischief. To seek to construe any instrument in ignorance or disregard of the circumstances which gave rise to it or the situation in which it is expected to take effect is in my view pedantic, sterile and productive of error. But that is not to say that an initial judgment of what an instrument was or should reasonably have been intended to achieve should be permitted to override the clear language of the instrument, since what an author says is usually the surest guide to what he means. To my mind construction is a composite exercise, neither uncompromisingly literal nor unswervingly purposive: the instrument must speak for itself, but it must do so in situ and not be transported to the laboratory for microscopic analysis.”

The second is the summary of the current position by Lord Neuberger in Arnold v Britton [2015] UKSC 36, [2015] AC 1619 at [15]. He stated:

“When interpreting a written contract, the court is concerned to identify the intention of the parties by reference to "what a reasonable person having all the background knowledge which would have been available to the parties would have understood them to be using the language in the contract to mean", to quote Lord Hoffmann in Chartbrook Ltd v Persimmon Homes Ltd..., para 14. And it does so by focussing on the meaning of the relevant words, in this case clause 3(2) of each of the 25 leases, in their documentary, factual and commercial context. That meaning has to be assessed in the light of (i) the natural and ordinary meaning of the clause, (ii) any other relevant provisions of the [contract], (iii) the overall purpose of the clause and the [contract], (iv) the facts and circumstances known or assumed by the parties at the time that the document was executed, and (v) commercial common sense, but (vi) disregarding subjective evidence of any party’s intentions. …”

The Court of Appeal stated amongst things that:

“Absent statutory or common law restrictions, the general principle of the English law of contract is that to which I referred at [64] above. 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...

...It should be recalled that, even in the case of deeds, since the Judicature Acts it has been possible to vary a deed orally: see Chitty on Contracts (32nd ed.) paragraph 1-143. Chitty on Contracts also states (paragraph 22-045, note 196) that “the better view would appear to be that it is possible for parties to waive compliance” with such a clause; that is, that oral variation is possible notwithstanding the clause. There is, moreover, positive support for this proposition in World Online Telecom v I-Way Ltd [2002] EWCA Civ. 413...”

In summary, the Court of Appeal in Globe Motors, Inc & Ors v TRW Lucas Varity Electric Steering Ltd & Anor [2016] EWCA Civ 396 decided that Article 6.3 (i.e. the anti-oral variation clause) in the Agreement did not prevent the parties from varying the Agreement orally, by conduct or in any other informal manner and therefore, notwithstanding ‘no oral variation clauses’ in contracts, parties can vary their contract orally or by conduct or in some other informal manner.  This decision from the Court of Appeal that a contract can be varied notwithstanding provisions in the contract such as Article 6.3 will have far reaching consequences as there are many construction contracts with clauses which have a similar intention to Article 6.3, i.e. to restrict the manner in which the contract can varied, which may include requiring any amendments to the contract to be in writing and signed by both parties as stated in Clause 12.3 of NEC3.    

The above is for general information only and to encourage discussion and does not constitute legal advice. The author does not assume any responsibility for the accuracy of any statements made and appropriate legal advice should be taken and relied upon before taking or omitting to take any action in respect of any specific matter.

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Charles Edwin Edwards MSt(Cantab) MSc(Lond)

Head of Chambers I Barrister I TECBAR Adjudicator

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3 July 2016