Contracts, custom and practice

Verbal changes to contracts can happen despite clauses to prevent them, so beware

Building contracts often contain clauses which seek to limit the ways in which their terms can be amended.  For example, a building contract might state that amendments to its terms will only be binding if they are set out in writing and signed by both parties.  This is to avoid the uncertainty which can result from one party being able to allege that the contractual terms have been amended orally or by conduct.      

However, the Court of Appeal’s decision in Globe Motors Inc v TRW Lucas Variety Electric Steering Ltd makes it clear that such clauses do not usually achieve their objective.    

This case involved a contract for the supply of power assisted steering systems for certain models of car.  The relevant clause said: ‘…This Agreement, which includes the Appendices hereto, is the only agreement between the Parties relating to the subject matter hereof.  It can only be amended by a written document which (i) specifically refers to the provision of this Agreement to be amended and (ii) is signed by both Parties.’  

Despite this clear wording, the Court of Appeal decided it was open to the parties to change their minds and agree amendments to the contract orally or by conduct.

Therefore, architects (including contract administrators) may be taken to have varied or waived the employer’s rights under a building contract by taking action or making statements which are inconsistent with its terms even if it contains a clause which seeks to prevent this from happening.

There are different ways in which a contract administrator might be taken to have varied the terms of a contract or waived the employer’s rights under it.

One is to accept payment applications which are not in the format and/or do not provide the information required by the building contract – or which are submitted later than it allows. For example, in Leeds City Council v Waco UK Ltd,  the court decided that payment applications could be made three or four days later than the building contract stated as a result of the administrator consistently having permitted it.

Another example is the granting of an application for an extension of time or for loss and expense where the building contract states that such an application should only be granted if the contractor submits its application within a particular timeframe and the contractor has submitted its application late.

Contract administrators may face claims from employers who suffer losses due to their contractual rights being inadvertently varied or waived.

In order to avoid inadvertently doing any of these things, contract administrators should familiarise themselves with the terms of the building contract at the outset of a project and comply with them.  

However, it is not uncommon for employers to instruct contract administrators not to apply the strict terms of the building contract.  For example, an employer may decide to instruct the contract administrator to consider a particular extension of time application despite it having been submitted late by the contractor. 

In those circumstances, the contract administrator should require the employer to confirm the instruction to vary or waive its rights in writing before taking any action; and ensure that the precise scope of the variation or waiver is communicated to the contractor in writing.  For example, it might be appropriate to make it clear that the decision to consider an extension of time application submitted late does not constitute an amendment to the building contract or an agreement that future extension of time applications which are submitted late will be considered.

Doug Wass is a partner Macfarlanes LLP

IN PLAIN ENGLISH: parent company guarantee

A parent company guarantee is a document in which a parent company guarantees the performance of its subsidiary contractor.  The guarantor usually agrees to be liable for losses incurred as a result of the contractor’s breach of the building contract and/or insolvency.  The guarantor may also agree to step in and perform any outstanding obligations under the building contract – or procure that another member of the corporate group does so.  Historically, the courts have been sympathetic to guarantors and so a guarantee needs to be carefully drafted to ensure that there are only limited circumstances in which the guarantor will be released from liability.  A guarantor’s liability is ‘co-extensive’ with that of the contractor which means that the guarantor can rely on the same defences as the contractor could have done to defend a claim.