BEWARE - A CONTRACT CAN BE VARIED ORALLY OR BY CONDUCT EVEN IF THE CONTRACT SAYS OTHERWISE!
- James Gordon
Although obiter, the Court of Appeal has provided some very helpful guidance on the law relating to contract variations. In Globe Motors Inc & others v TRW Lucas Varity Electric Steering Limited & another, the Court of Appeal clarified that even if an agreement contains a clause which provides that it can only be varied if the variation is in writing and is signed by all parties, the agreement can in fact be varied orally or by conduct.
Background
Globe Motors Inc (Globe) entered into a long term exclusive supply agreement with TRW Lucas Varity Electric Steering Limited (TRW) in June 2001 (the Agreement). TRW produces electric power-assisted steering (EPAS) systems and, under the Agreement, TRW agreed to purchase from Globe electric motors to be used in the production of those systems ('Products').
For a number of years Globe supplied products known as 'Gen 1' motors to TRW under the Agreement. Those Gen 1 motors were included in the EPAS systems supplied to TRW's manufacturing customers. Subsequently a second generation, 'Gen 2', motor was developed but TRW purchased those 'Gen 2' motors from a third party, rather than from Globe.
Globe claimed damages for breach of contract from TRW, asserting that TRW was contractually obliged to purchase the Gen 2 motors from Globe under the Agreement. TRW argued that it was not required to source Gen 2 motors from Globe, but even if it was, Globe had only suffered minimal losses - it had transferred manufacturing to its subsidiary, Globe Motors Portugal (Globe Porto), so that any losses sat with Globe Porto, with whom TRW did not have any contractual relationship. Globe claimed that the Agreement had been varied by conduct and that Globe Porto became a party to the Agreement as a result. TRW argued there had been no variation - the Agreement contained a clause which provided that it could only be amended in a written document that was signed by all parties (Article 6.3).
First Instance Decision
At first instance, the Judge held that TRW was in breach of the Agreement by purchasing Gen 2 motors from a third party. The Agreement included Products and any other items that could and would have been developed as a result of Globe making 'Engineering Changes' to Products. A motor that had not actually undergone an 'Engineering Change' would also fall under the Products umbrella if it hypothetically could have done so. The Judge also found on the basis of the 'overwhelming' evidence before him that the Agreement had been varied by the conduct of the parties, such that Globe Porto was a party. Products had been supplied by Globe Porto, there were many day-to-day dealings between TRW and Globe Porto, and Globe Porto had invoiced and been paid by TRW.
TRW was therefore held to be in a contractual relationship with a much less financially stable subsidiary of its parent company. TRW had argued that it would never have agreed to such a variation, and that doing so took away all the