Loose talk

Construction contracts often contain clauses that are intended to stop the parties orally agreeing changes to the provisions of their contract (anti-oral variation clauses). Such clauses typically stipulate that changes must be recorded in writing and formally signed off by two specified individuals, such as company directors. The idea is to prevent informal alterations to the contract without careful consideration.

In April, a judgment was handed down by the Court of Appeal ruling that such clauses are ineffective - Globe Motors, Inc & Ors v TRW Lucas Varity Electric Steering Ltd & Anor [2016]). The case is not only relevant where parties seek to agree changes to the conditions of contract. This principle is also applicable to situations where the parties have orally agreed changes to the scope of works without a formal variation instruction being issued by the contract administrator. This is because informal oral agreements to change the scope of works constitute changes to the terms of a contract.

Let’s suppose you hire a builder to refurbish your kitchen at home and, through an abundance of caution, you and the builder formalise the agreement by using a standard form contract, such as a JCT. On the day the works start, you have second thoughts about the kitchen worktops. Rather than the cheap plastic worktops originally specified, you decide you want to upgrade to more expensive wooden worktops. This is orally agreed in discussions with the builder.

Even though the formal conditions of contract require all variations to the scope of works to be instructed in writing (as, of course, is normal practice under standard terms, such as JCT), you cannot refuse to pay the builder for the extra costs. This is because you and the builder, as the two parties to the contract, have agreed to alter one element of your original agreement. You could have issued a written instruction , exercising your right to insist on a change under the contract mechanism. But if instead, the change is informally agreed, then this amounts to a consensual alteration to the terms of your contract since the contract variations mechanism has not been operated.

This is where the Globe Motors case comes in.

Most standard form construction contracts will also contain a clause that says that all variations to the contract must be in writing and formally signed off by company directors - an anti-oral variation clause. It has therefore often been argued that such a clause means that informal changes to the scope, which amount to agreed changes to the terms of the parties’ contract, cannot be agreed orally.

Over the course of the last 10 years there have been contradictory court decisions on the enforceability of such anti-oral variation clauses. The Court of Appeal judgment in Globe Motors comprehensively reviews those cases and can be treated as a definitive ruling on the point, concluding that such clauses are ineffective. The judgment concludes that parties have freedom of contract to alter their agreement and this cannot be constrained by the terms of the original agreement.

While the case concerned a contract for the supply of equipment for cars it is equally applicable to construction contracts. Indeed the court discussed a number of long standing construction authorities in this area, such as Molloy vs Liebe [1906] which involved the construction of a hotel. On that occasion, while the parties had orally agreed variations, the employer subsequently refused to pay because there was no formal order. The contractor was successful, with the court deciding that the employer had nevertheless informally agreed to pay and that this overrode the need for a formal instruction.

However, before any contractor reading this column gets too carried away, thinking this is an easy way to side step the drudgery of getting formal variation orders, it needs to be emphasised that this principle is subject to a couple of important limitations.

Firstly, only the employer itself has the power to agree an alteration of the contract terms. This is not something the employer’s consultant can do on its behalf without express authority. A contract administrator can only vary the scope because there is a variations clause in the contract giving him this right. The contract administrator’s authority to vary the scope therefore depends on the power being exercised in accordance with the provisions of the contract mechanism, which typically means a formal written order.

Secondly, the party relying on the oral agreement to vary the contract, has to establish as a matter of evidence, that this occurred. Theoretically, this will give the contractor a valid route to payment even though no formal change order is issued. But proving to the adjudicator or court who said what to whom may still be a significant challenge.

Michael Sergeant is a partner in the construction team at Holman Fenwick Willan and the co-author of Construction Contract Variations