Canada: Do What You Say, Not Just What Your Write: Subsequent Oral Amendments To Written Contracts

Globe Motors, Inc. & Ors v. TRW Lucas Varity Electric Steering Ltd. & Anor, [2016] EWCA Civ. 396 is the latest statement of the England and Wales Court of Appeal with respect to whether parties can make an oral amendment to a contract, notwithstanding a clause requiring any amendment to be in writing (an "anti-oral amendment" clause).

In Globe the Court of Appeal concluded that such an oral amendment could be effective, and was not necessarily precluded by the anti-oral amendment clause. This is a significant decision that clarified a divergence in UK appellate law and, in Canada, will be persuasive authority to expand the role of such oral amendments to commercial contracts in general.

Background

Globe concerned a contractual dispute between TRW LucasVarity Electric Steering ("TRW"), a company which produces electric power-assisted steering systems, and Globe Motors Inc. ("Globe") which designs and manufactures electric motors.

Globe and TRW entered into a long term supply contract whereby TRW was to acquire certain motors only from Globe, and Globe was to provide those motors only to TRW. TRW's requirements changed, and it needed to acquire motors somewhat different to those listed in the supply agreement with Globe. A dispute arose as to whether the new motors fell under the supply agreement, and consequently whether TRW was obliged to acquire those motors only from Globe, or could go to one of Globe's competitors (as TRW actually did). The Court of Appeal sided with TRW and found that the new motors were materially different to those covered by the supply agreement. It therefore concluded that TRW had not breached the contract.

A secondary issue arose as to whether Globe Motors Portugal ("Porto"), a subsidiary of Globe, was a party to the Agreement. Porto was not a party to the written contract, but the trial judge found that the agreement was varied or waived by the parties' conduct because in their dealings under the agreement, over a long period, they operated as if Porto was a party. The supply agreement included an article which provided that it could only be amended by a written document, signed by both parties.

There was therefore a dispute as to whether Porto was a party, notwithstanding the anti-oral agreement clause. In light of the fact that it found there had been no breach of the contract by TRW, this issue was obiter, but the Court of Appeal nevertheless provided reasons on this point.

Analysis

The Court of Appeal was faced with two conflicting cases on the question of whether the anti-oral amendment clause was effective: United Bank v Asif (an unreported decision which held that such clauses were effective, and prevented subsequent amendments) and World Online Telecom v. I-Way Ltd, [2002] EWCA Civ. 413 (which held that oral amendments could be effective, notwithstanding such a limitation clause).

Counsel for TRW submitted that anti-oral amendment clauses promote certainty because they prevent a party from manufacturing an allegation of subsequent oral amendment to avoid summary judgment in a clear case. Notably, counsel did concede that the doctrine of estoppel could apply in appropriate cases, where detriment could be shown. The ability to make arguments on the basis of estoppel would likely have the same chilling effect on summary judgment, making this policy argument unconvincing.

The Court of Appeal addressed this concern by noting prior judgments have held that a court requires "strong evidence" before finding that there has been an oral variation, and that this resolves the concern with "manufactured" amendments. In Canada, the expanded scope of summary judgment motions following the Supreme Court of Canada's decision in Hryniak v. Mauldin, 2014 SCC 7 likely means that such "manufactured" claims could easily be disposed of on a summary judgment motion.

The Court of Appeal concluded that recognizing the ability of the parties to make a subsequent oral agreement, modifying a contract, was consistent with general principles of contract law. Indeed there is no reason why an anti-oral amendment clause itself should not be subject to modification:

[100] Absent statutory or common law restrictions, the general principle of the English law of contract is that to which I referred at [64] above. The parties have freedom to agree whatever terms they choose to undertake, and can do so in a document, by word of mouth, or by conduct. The consequence in this context is that in principle the fact that the parties' contract contains a clause such as Article 6.3 [the anti-oral amendment clause] does not prevent them from later making a new contract varying the contract by an oral agreement or by conduct.

Implications

The Globe decision enhances the ability of Canadian litigants to argue in favour of oral amendments to contracts, notwithstanding "entire agreement" clauses.

Notably, the leading Ontario case on this point Shelanu Inc. v. Print Three Franchising Corp. (2003), 64 O.R. (3d) 533 (CA) was decided in the context of a franchise agreement where it has been said that there is an imbalance of power between the franchisee and franchisor. In that context, the Ontario Court of Appeal was willing to overlook limitation clauses, which may have prevented oral modifications, and enforce a subsequent oral modification to a contract (as a collateral contract). The Ontario Court of Appeal also relied on the doctrine of contra proferentum to overlook the anti-oral agreement clause.

The Globe decision strengthens the argument to enforce subsequent oral variations to commercial contracts, even when there is no imbalance of power and the principle of contra proferentum does not apply.

The Globe decision should be persuasive to Canadian courts, particularly in light of the recent Supreme Court of Canada decisions Bhasin v. Hrynew, 2014 SCC 71 and Sattva Capital Corp. v. Creston Moly Corp., 2014 SCC 53. Bhasin recognized the duty of good faith in Canadian contract law and Sattva recognized the importance of the "factual matrix" or "surrounding circumstances" in interpreting a contract. Both of these principles are consistent with the analysis in Globe.

Both Bhasin and Sattva reflect a doctrine of contractual interpretation that looks at all of the surrounding circumstances, and considers how the parties would have understood their obligations, rather than slavishly following the text of the contract. The approach to anti-oral amendment clauses adopted in Globe fits neatly into that paradigm: the Court considers the surrounding circumstances to determine whether the parties intended to override the limitation clause by way of a subsequent agreement. In that way, it respects both the intent of the contracting parties and leads to the fairest result.

Case Information

Globe Motors, Inc. & Ors v. TRW Lucas Varity Electric Steering Ltd. & Anor, [2016] EWCA Civ. 396

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