08 June 2016

Contract requiring variations to be in writing could be varied orally or by conduct

Commercial customers buying goods under a continuing contract, whether or not it requires variations to be in writing, should ensure they are alert to variations of the contract by one party (including any change in the party supplying the goods), or risk being deemed to have agreed to the variation orally and/or by their conduct.

A company supplied goods to another company ('the customer') under an exclusive, long-term contract. The contract included a provision requiring that amendments be made in writing, signed by all the parties.

During the contract another company in the same group - a subsidiary of the signatory to the contract - started manufacturing and supplying the goods instead. There was day-to-day interaction between its staff and the customer's staff, and the subsidiary invoiced the customer for goods supplied, and was paid direct by the customer. This continued for many years.

The customer then started buying goods from a third party, so the signatory company claimed damages for breach of the contract.

The customer argued that the signatory company had not suffered any losses, and therefore could not claim damages, because it had not been supplying the goods. The subsidiary had been supplying the goods but it could not claim damages for breach of contract because it did not have a contract with the customer. The customer said that had it been expressly asked whether it would accept the subsidiary as a new supplier, it would have said 'no', as the subsidiary was far less financially stable than the signatory company.

The signatory company argued the agreement had been varied both orally and by conduct of the parties, therefore, the subsidiary had become a party to the contract and could claim damages. It said that the provision in the contract requiring variations to be in writing had been overridden by what the parties had said, and by their conduct.

The Court of Appeal agreed with the signatory company. It ruled that a provision in a contract requiring variations to be in writing did not usually stop the parties from varying the contract by other means - provided there was sufficient evidence they had agreed to do so.  There was sufficient evidence in this case that they had agreed to vary the contract, both orally and by their conduct, because there had been 'open, obvious and consistent dealing' between the parties.

Recommendation

Customers buying goods under a continuing contract should ensure they are alert to any change in the party supplying the goods, even if that new supplier is associated with the supplier named in the contract, or any other variation of the contract - or risk being treated as having agreed to the variation.

Case ref:

Globe Motors Inc v TRW Lucas Varity Electric Steering Limited [2016] EWCA Civ 396

For any further information about the above, please contact Jennifer Chambers on 0113 297 8945 or at jchambers@shulmans.co.uk.