Sometimes Contracts Quite Literally Do Not Mean What They Say

Written By Richard B. Swan, Jonathan G. Bell and Preet K. Bell

The English Court of Appeal recently held that an express clause in a contract requiring that any amendment be in writing and signed by the parties does not preclude oral or unsigned amendments to the contract. In holding that an oral amendment could be effective notwithstanding an “anti-oral amendment” clause, the Court of Appeal settled divergent English case law on the point, and provided persuasive authority for a similar result in Canada.

The result is important not only for alleged oral amendments in the face of clauses requiring amendments in writing signed by the parties, but also for the relatively common practice of contractual amendment by exchange of email. The implications of the decision may be of particular importance on summary judgment motions, where the responding party asserts an alleged oral amendment in the face of a contractual provision prohibiting such a form of amendment.

Background

Globe Motors, Inc. v. TRW Lucas Varity Electric Steering Limited, [2016] EWCA Civ 396 concerned a long-term supply contract for electric motors and leadframe assemblies between Globe and TRW Lucas, whereby TRW Lucas agreed to purchase the specified parts only from Globe, and Globe agreed to supply those parts only to TRW Lucas. TRW Lucas subsequently acquired parts slightly different from those under the contract from one of Globe’s competitors. A key issue before the Court was whether the new parts fell within the scope of the contract such that TRW Lucas was contractually obliged to obtain them from Globe. The lower court found that the new parts fell within the ambit of the contract, that TRW Lucas was therefore in breach of the contract, and that damages of £10,095,095 were appropriate. However, the Court of Appeal allowed the appeal and found that the new parts were materially different than those under the contract, and that TRW Lucas was therefore not in breach of the contract.

A secondary defence raised by TRW Lucas was that, even if it had breached the contract, the losses were minimal as Globe had transferred its manufacturing to a subsidiary, Globe Motors Portugal (referred to as “Porto” in the decision), which was not a party to the contract. Globe argued that Porto was a party to the contract through an oral amendment. Therefore, an important secondary issue in the proceeding was whether Porto became a party to the agreement, even though it was not a party to the written contract, based on a subsequent oral agreement or subsequent conduct. The contract contained an entire agreement, anti-oral amendment clause which provided that the contract “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.” Notwithstanding this clause, the lower court found that the contract was legally amended as the parties operated as if Porto were a party to the agreement.

As the Court of Appeal found that there was no breach of the contract, the issue of the oral amendment was not strictly necessary to decide. However, because the law in England on the point was unsettled (two recent Court of Appeal decisions had come to apparently divergent conclusions), and there was full argument on the issue before the Court, the Court elected to decide the issue and found that the contract could be orally amended, notwithstanding the subject clause.

The Court’s Decision

The Court of Appeal reviewed the prevailing position in England on the construction of disputed agreements, which has evolved in a similar manner as in Canada, and made note of this particularly elegant and concise formulation of the operative rule of contractual construction, as articulated by Bingham MR in Arbuthnot v. Fagan, [1995] CLC 1396:

"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 Court went on to then find that there had been no breach by TRW.

The Court then proceeded to tackle the "anti-oral amendment" clause issue, given its general importance and the lack of consistency in approaching the issue.

Counsel for TRW Lucas argued that anti-oral amendment clauses promote certainty and avoid false or frivolous claims of an oral agreement, and that parties should be held to their written bargain. However, the Court found that the governing principle of English law of contract is freedom of contract absent statutory or common law restrictions. While there is a restriction on, for example, penal damages clauses, there is no such restriction on oral agreements even where there is an anti-oral amendment clause. Parties have the freedom to agree to whatever terms they choose to undertake, and can do so by writing, orally or by conduct. Thus, they can agree to overcome the effect of the anti-oral amendment clause. While difficulties of proof may arise whenever claims of an oral agreement are made, it is a question of fact to be determined on the evidence before the court.

In reaching its conclusion, the Court of Appeal was faced with inconsistent case law, the first being an unreported decision of the Court of Appeal in United Bank Ltd v. Asif (2000) in which Sedley LJ for the Court found that the trial judge was correct in concluding that no oral variation of the written terms could have any legal effect in the face of an anti-oral amendment clause. The second case was World Online Telecom v. I-Way Ltd., [2002] EWCA Civ. 413 in which the same judge, Sedley LJ, refused summary judgment on the basis that the question whether parties could override a clause in an agreement excluding any unwritten variations of the contract was sufficiently unsettled and therefore unsuitable for summary judgment. In World Online Telecom, the Court stated that there was academic and judicial support for such a flexible approach, and that "parties have made their own law by contracting, and can in principle unmake or remake it".

The Court of Appeal in Globe Motors opined it was likely that Sedley LJ simply did not have in mind the United Bank case when he decided World Online Telecom, and his decision in World Online Telecom, unlike United Bank, reflected written and oral submissions on the point. In Globe Motors, the Court ultimately found it was not bound by either decision as they were inconsistent decisions, and the Court in World Online Telecom appeared to have acted in ignorance of the United Bank decision. When comparing the two cases, the Court in Globe Motors preferred the approach in World Online Telecom, which recognized in principle that a contract containing a clause that any variation of it be in writing can still be varied by an oral agreement or by conduct. As Moore-Bick LJ in a concurring set of reasons noted:

"The governing principle, in my view, is that of party autonomy. The principle of freedom of contract entitles parties to agree [upon] whatever terms they choose, subject to certain limits imposed by public policy of the kind to which Beatson LJ refers. The parties are therefore free to include terms regulating the manner in which the contract can be varied, but just as they can create obligations at will, so also can they discharge or vary them, at any rate where to do so would not affect the rights of third parties. If there is an analogy with the position of Parliament, it is in the principle that Parliament cannot bind its successors."

Impact in Canada

The English Court of Appeal’s approach to contractual construction is consistent with recent Canadian Supreme Court law, in particular Sattva Capital Corp. v. Creston Moly Corp., 2014 SCC 53, which held that the factual matrix or surrounding circumstances is important in interpreting a contract; the trend of courts in Canada and England is a flexible approach to interpreting a contract, looking at relevant evidence to determine the true intent of the parties, as so elegantly expressed in the English context by Bingham MR in Arbuthnot, above.

The leading case in Canada on “anti-oral amendment” clauses is the Ontario Court of Appeal’s decision in Shelanu Inc. v. Print Three Franchising Corp. (2003), 64 O.R. (3d) 533 (C.A.). The Court of Appeal found that in order for such a clause to apply, it must be clear and unambiguous, and it must have been intended specifically to apply to the situation that subsequently occurred between the parties. The Court in that case found that the clause could not apply to cover any and all future contractual relations and did not apply on the facts as the subsequent oral agreement was a surrender and termination of the contract; the case was also in the franchise context where there is an inherent imbalance of power which may have contributed to the Court’s conclusion. However, the English Court of Appeal’s decision in Globe Motors goes beyond this to suggest that an anti-oral amendment clause should have no effect where the facts support a finding of a subsequent oral agreement. The law in England appears to have moved even further than Shelanu on the issue, and given the compelling justifications set out in Globe Motors, we expect that Canadian courts are likely to follow the same approach when the issue next arises. To the extent this might be seen as an obstacle to the efficiency of summary judgment procedures, courts (in Ontario, at least) can address the issue by hearing limited viva voce evidence on the question, if thought necessary.