Construction contracts have long been drafted in terms which prevent the parties from making informal variations to the contract. However, the reality is that many variations are issued informally, usually orally. That, fundamentally, breaches the terms of the contract.
In World Online Telecom Ltd v I-Way Ltd [2002], the Court of Appeal held that the parties were free to agree to vary a contract orally notwithstanding the provision of the contract which required all variations to be in writing. That, Moore-Bick LJ found, was the parties’ prerogative as autonomous persons.
Of course, one of the fundamental purposes of a contract is that it affords the contracting parties clarity as to their obligations and duties, and to the consequences in the event of a default.
Unsurprisingly therefore, the issue came before the court again.
Facts
Rock leased a number of office premises from MWB. Rock eventually fell behind in paying its rent and this troubled MWB.
Rock alleged that it had orally agreed with MWB a repayment plan for the arrears. MWB acknowledged that discussions had occurred but denied that any arrangement had been agreed and evicted Rock from its premises. It then set about suing Rock for the rent arrears.
The lease required the parties to agree variations to the contract in writing. Plainly the alleged verbal agreement fell foul of that clause. At first instance, Rock was successful and the alleged oral agreement was found to have varied the terms of the lease.
MWB appealed. The Court of Appeal again found favour with Rock and concurred with Moore-Bick LJ, that parties are autonomous creatures with the freedom to agree terms as they please (subject always to legalities and public policy).
MWB appealed again. The Supreme Court overturned the decision. It agreed that parties have autonomy to agree terms as they wish, but it went further; it found that the parties’ autonomy ceased at the point the terms of a contract were agreed. Thereafter, the terms of the contract prevailed and the law could and would enforce a contractual obligation to observe formalities.
Comment
This is arguably not new law but it certainly clarifies the position for the time being. In any event, the decision applies a degree of common sense. So why has it caused quite a stir?
In the construction industry it is not uncommon for contracts to prevent informal variations. However, almost all projects evolve. They are organic. Employers often have clear ideas of budget and timetables at the start but their minds often turn to artistic integrity and the ‘once in a lifetime’ opportunity to create something new, something brilliant, something unique come the construction phase. That invariably costs money and time and so instructions are issued and variations are made.
Projects move swiftly and whilst the nature of the variation is often documented, there is typically no agreement to vary the underlying contract such that the oral variation becomes a valid instruction. When the Final Account is eventually concluded the employer’s mind inevitably reverts back to the project brief, the budget and the programme.
Consultants are particularly vulnerable to falling foul of this decision and, when they do, it seems they may be criticised both by the employer and now the court.
It is, therefore, critical for consultants to retain a business head throughout the course of their appointment. What does the contract say? Most standard form contracts do not permit informal variations. Accordingly, if the contract requires you to document a variation to the contract (distinct from the variation itself) in writing, then it needs to be done. The courts are now much more likely to give effect to the true meaning of the ‘no oral modification’ clause and a failure to do so may leave the consultant in a position of not being able to recover its additional costs.
Whilst we are unlikely to see any movement on this decision for the foreseeable future, it inevitably raises questions, such as: if a variation is issued and the employer is aware, are they taken to have ratified the instruction?; does the employer’s failure to object to any informal variation create an estoppel?; and is the question not whether the original contract has been breached but whether a new contract has been created?
The answers to these questions will always be fact specific. For that reason, its best to dot all the i’s and cross all the t’s.
Read other items in the Construction and Engineering Brief - August 2018
