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Are oral variations worth the paper they aren’t written on?

The recent decision in Zvi Construction Co LLC v Notre Dame University (USA) in England has been commented on in terms of its decision on expert determination. However, there is more to that case. A key issue turned on the reliance that could be placed on a clause that prevented any variation (or waiver) of the terms of the agreement from being effective unless:

“it is in writing and signed by or on behalf of the party against which the enforcement of such modification, alteration or waiver is sought.”

I will refer to such a clause here as an “in writing” clause. The provision for expert determination was said to have been orally agreed and not recorded as required by that clause.

ZVI Construction Co LLC v University of Notre Dame (USA) in England

Mr Recorder Stephen Furst QC held that, on the facts, the parties had entered into an oral agreement (and/or waiver) and that such agreement (or waiver) did not have to be compliant with the “in writing” clause to have effect. He did so in reliance on two 2016 Court of Appeal decisions:

Neither was a decision involving a construction case:

  • Globe Motors concerned a supply agreement in the car manufacturing business and an alleged agreement by conduct through which one of the defendants was said to have been become a party to the contract. The Court of Appeal did not have to decide the issue but indicated that, on the grounds of a party’s freedom to contract, parties may vary the terms of a contract orally or by conduct, despite the existence of a clause prohibiting variations unless made in writing.
  • In MWB, the issue was not obiter and turned on a licence for the use of commercial premises that contained an “in writing” clause. One of the parties sought to terminate the lease for non-payment but the other party alleged and relied upon an oral agreement to re-schedule the licence fee payments due under the agreement over a given period. The Court of Appeal held, applying the same logic as in Globe Motors, that party autonomy means that such an oral variation can be binding, even in the face of an “in writing” provision.

Therefore, we now have three 2016 cases to the effect that an “in writing” clause does not prevent parties from varying the terms of their contract orally or by conduct.

What does this mean for the construction industry?

The first implication for dispute resolution practitioners is that “in writing” clauses may not remove the headaches that oral variations may cause when it comes to adjudicating disputes.

Back in the early days of adjudication under the Construction Act 1996, all the material terms of a “construction contracthad to be in writing for the statutory right of adjudication to arise. If a material oral variation was alleged to have been made, that was enough reason for the dispute not to be one that could be adjudicated under the Act, as the court held in Carillion Construction Ltd v Devonport Royal Dockyard Ltd [2003] BLR 79.

This could lead to arguments about whether the “variation” in issue was in fact a variation to the scope of work under the contract, an important distinction that could result in the adjudicator still retaining jurisdiction (as reflected in a case such as Naylor Construction Services Ltd v Acoustafoam Ltd [2010] BLR 183).

Now that oral contracts can be adjudicated under the Construction Act 1996, “in writing” clauses might have been a way to ensure there would be no doubt what the parties could argue about in adjudication proceedings. The decision in Zvi Construction rules out that possibility.

The second implication concerns the merits of the underlying disputes themselves.

Construction professionals will recall that, in cases concerning payment applications and payee notices under sections 110A and 110B of the Construction Act 1996, the courts have emphasised the need for strict compliance with the contractual requirements before the benefits of the Act can be obtained. Oral variations and waiver arguments can become critical in those situations (as they did in Leeds City Council v Waco UK Ltd).

Moreover, the issue of agreeing to the jurisdiction of an expert (or indeed an adjudicator) is often in contention, a point before the court in Zvi Construction.

The effect of the decisions in Zvi Construction, Globe Motors and MWB is that one cannot head off reliance on an oral variation to key terms simply by inserting a clause which seeks to have that effect. It also means that one might expect to see more oral hearings in adjudications or, at least, close regard to witness evidence as adjudicators are required to consider whether or not such a variation was agreed.

39 Essex Chambers John Denis-Smith

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