Projects & Construction Law Update - June 2018

CASES

Changes in making changes

Rock Advertising Limited v MWB Business Exchange Centres Limited [2018] UKSC 24

The Supreme Court has surprised everyone by doing a u-turn on anti-oral variation clauses, reversing the relatively recent position formed by the courts in 2016, which had found that a contract with anti-oral variation clauses could still be amended by the parties orally or by conduct.

In 2016, three key judgments were handed down which encouraged us all to believe that the courts would be prepared to permit variation by conduct or oral variation arguments, even where the relevant contract contained a 'no oral variations' clause. This was particularly relevant to construction contracts, where it is not uncommon for variations to take place informally or not otherwise in accordance with the requirements of the contract and, of course, for disputes to ensue. Following the 2016 decisions, it was understood that parties would be able to argue that their contract had been varied orally or by conduct, despite the presence of a 'no oral variations' clause, if:

objectively, the parties could be seen to have reached the stage where they intended to vary the contract; and consideration had been provided. We have seen this argument put forward by contractors where they have been operating in slight variance to the terms of the original construction contract (on a regular basis and without objection from the employer) and the employer has subsequently sought to enforce the strict requirements of the contract to the contractor's detriment.

One of the three 2016 cases was the Court of Appeal decision in MWB Business Exchange Centres v Rock Advertising [2016] EWCA Civ 553. That decision has now been overturned by the Supreme Court.

Although not directly related to construction contracts, the case of Rock v MWB considered 'no oral variations' clauses in the context of commercial contracts. Rock Advertising occupied office space near Marble Arch under a licence from MWB. Rock had argued that the licence agreement had been varied by a telephone conversation between the parties and that such amendment had the effect of overriding the 'no oral variation' provision. The Court of Appeal accepted this, the rationale being the need to uphold party autonomy and the importance of contracting parties' freedom to agree terms. However, the Supreme Court rejected Rock Advertising's argument on the basis that "the law should and does give effect to a contractual provision requiring specified formalities to be observed for a variation". While Lord Sumption acknowledged the importance of party autonomy, he disagreed with the Court of Appeal's approach, taking the view that:

'Party autonomy operates up to the point when the contract is made, but thereafter only to the extent that the contract allows it. Nearly all contracts bind the parties to some course of action, and to that extent restrict their autonomy. The real offence against party autonomy is the suggestion that they cannot bind themselves as to the form of any variation, even if that is what they have agreed.'

It was found that (where a 'no oral variations' clause is present in a contract) any oral variation would not be effective unless and until it is reduced to writing, or the 'no oral variations' clause is itself removed or suspended by written agreement. The rationale being that this approach fully reflects the parties' autonomy to bind themselves as to their future conduct, whilst preserving their ability to release themselves from the inhibition.

The effect of this decision on construction contracts containing the standard 'no oral variations' clause will be that any amendment to the contract will have to be made in writing, in accordance with the variation procedures in the contract. Without this, it is unlikely that a party would be able to successfully argue that a construction contract has been varied simply because the parties have been doing something a particular way for a period of time, and they may therefore face financial consequences if they are not operating in accordance with the contractual terms. The Supreme Court's decision emphasises the importance of efficient and accurate contract management throughout the duration of a project.

Read the full judgment here.

Limiting design liability under NEC

SSE Generation Limited (SSE) v Hochtief Solutions AG [2018] CSIH 26

In this recent Scottish case considering NEC2 provisions, the Inner House found a contractor liable for remedial works required due to a tunnel collapse at a hydroelectric plant, despite the existence of a clause limiting the contractor's...