The directors of well-run companies ensure that significant legal commitments are documented in writing and, where appropriate, entered into only after taking relevant legal advice. But there is nothing to prevent binding legal obligations being entered into or varied orally or by conduct, and two recent cases in the Court of Appeal illustrate the dangers of assuming that the written word is set in stone.
In the first case, there was a dispute about whether a binding contract had been created. Anotech International (UK) Ltd had been negotiating with Reveille Independent LLC to obtain a licence to use the "Masterchef" brand in marketing its cookware products in North America, and for its products to appear in three episodes of Masterchef. Reveille sent Anotech a deal memo proposing terms for the licence, which stated it would "not be binding on Reveille until executed by both Licensee and Reveille". Anotech returned a signed copy of the deal memo to Reveille, but the copy was marked with handwritten amendments and additions. Both parties intended the deal memo would be replaced by a detailed agreement and drafts were circulated, but the negotiations eventually broke down.
In the meantime however, the relevant episodes of Masterchef were recorded and broadcast, and Anotech used the Masterchef brand at the Chicago International Home and Housewares Show, and in its sales literature. It also participated in weekly conference calls between Reveille and Masterchef licensees. Reveille sent an invoice to Anotech for payments due under the licence. The invoice was not paid.
Eventually, Reveille sued for the payments due on the basis that there was a binding contract on the terms of the deal memo as marked up and signed by Anotech, notwithstanding that it had not itself signed the deal memo. Anotech argued no binding contract had been concluded.
The Court of Appeal held that Anotech's mark up constituted a counter-offer, which Reveille could accept. Anotech would be bound once Reveille's acceptance was communicated to it. The fact Reveille had not signed the deal memo was not conclusive, as it could demonstrate its acceptance by conduct, although it might make it more difficult to show that its acceptance had been communicated to Anotech.
It was clear that Reveille had carried out the work envisaged by the deal memo. But Anotech argued this was in anticipation of a binding contract being made, rather than acceptance of Anotech's marked up deal memo. The Court of Appeal disagreed. The recording of the Masterchef episodes, the Chicago show and the inclusion of Anotech in the licensee conference calls were conduct by Reveille accepting Anotech's amended deal memo. Its conduct thereafter was evidence the parties believed there was a binding contract in place.
The case is unusual in that Reveille was arguing for a binding contract having been created, notwithstanding the provision that it would not be bound without having signed. It shows the dangers for both parties in proceeding to act as though a contract were in place, when they do not wish to be bound by the proposed terms until contractual formalities have been completed.
The second case concerned an exclusive supply agreement, under which TRW Lucas Varity Electric Steering Ltd agreed to purchase all its requirements of certain products from Globe Motors Inc. TRW Lucas began to make purchases from a third party supplier. Globe and its Portuguese subsidiary (Porto), incorporated to supply electric motors to TRW Lucas under the agreement, sued for breach of contract. One of the issues was whether the agreement had been varied so as to include Porto as a party.
The agreement contained a provision that it could "only be amended by a written document which (i) specifically refers to the provision of this Agreement and (ii) is signed by both parties." TRW Lucas argued that the agreement had not have been varied to include Porto as a party, as there had been no such written document.
Prior to this case, there had been conflicting Court of Appeal decisions on whether such a provision meant the parties to an agreement were unable to amend it orally. The Court reviewed the cases and concluded that an agreement can be amended by oral agreement or by conduct, notwithstanding a provision requiring amendments to be made in writing. Although the principle of freedom of contract means the parties to a contract may agree whatever terms they choose, including terms regulating the manner in which the contract may be varied, the principle also means they can vary those provisions at will.
Such provisions do nonetheless have some practical effect. Where an agreement contains such a clause, a party hoping to rely on informal communications or conduct to modify its contractual obligations may have greater difficulty in showing that both parties intended the communications or conduct to alter their legal relations. In addition, the clause may make it clear that only certain people have authority to agree an amendment on behalf of a party.
These two cases illustrate the general principle that binding contracts, or contractual variations, can be made by word of mouth or by conduct and do not need to be set out in a formal document. This can be a particular issue for larger companies with separate procurement or legal teams negotiating formal agreements, whose efforts may be undermined by the conduct of personnel "on the ground".
Sign up to our email digest