Some of the most common comments we receive during the deliveries of our Foundations in Commercial Awareness Training Course when addressing verbal contracts are related to the contractual validity of the requests and instructions by owners, employees and engineers during engineering review meetings like 3D model review and HAZOP.

Indeed, claims relating to preferential engineering and disruption are often based or linked with verbal exchanges without any paper trail to determine the origin of a change or alteration made to a design (i.e. the cause of a change). The usual answer when we ask an engineer why he altered a drawing that did not contain any error is: “Because the owner’s engineer told me to and he/she would not approve it unless the request was fulfilled?”

The question often raised by our attendees is: If a contract can be verbal, then why do the verbal instructions given by owners during engineering reviews not constitute amendments to the contract?

The answer might appear to be obvious and the initial response is typically: only authorised representatives can make changes (verbal or written) to a contract. However, if considering legal concepts like course of dealing the answer is not so clear-cut; indeed, contracts may be changed by the parties’ behaviour.

The reading of the Judgment on Rock Advertising Limited (Respondent) v MWB Business Exchange Centres Limited (Appellant) illustrates well why this is not as simple as it seems even when a No Oral Variation clause exists in the contract.

In this dispute, MWB terminated the contract due to lack of payment by Rock Advertising in compliance with the contract’s payment terms. Rock Advertising took the case to court and contested MWB’s right to terminate the contract which it considered to be unlawful.

Rock Advertising argued that new terms for the payment of a debt had been agreed in a phone call and therefore, the termination by the MWB for lack of payment was not admissible. A key point of the argument was that the parties were free to agree new contract terms, including the dismissal of the No Oral Variation clause which in Rock Advertising’s opinion had occurred.

The decision in the first instance was favourable to Rock Advertising and based on that “…Those who make a contract, may unmake it. The clause which forbids a change, may be changed like any other. The prohibition of oral waiver, may itself be waived … What is excluded by one act, is restored by another. You may put it out by the door, it is back through the window. Whenever two men contract, no limitation self-imposed can destroy their power to contract again…”

For me this decision was quite surprising and to some extent disturbing as it asserts contract terms may be changed even without the knowledge of the parties’ representatives and without formalisation. All based on a fundamental right of the parties’ freedom to contract!

Fortunately for my peace of mind, ultimately in the appeal, common sense (at least from my perspective) prevailed. Reason was given to MWB based on the argument that the parties’ independence and governance exists only to the extent that the contract allows and as long as one party wishes to maintain the contract as originally drafted, then it will remain so until both parties agree to alter it.

The fact it took an appeal (with all the associated time and cost) to ascertain what I believed to be a given truth (i.e. the contract can only be changed when expressly and formally agreed by the parties) is to me a good reminder of the importance of paying attention to what we say/do and what we are told in projects as the legal implications may be quite surprising if contracts are not adhered to.

Have you been involved or know of similar cases/situations? I would love to hear them?

Andre Martins – Managing Consultant, Kingsfield Consulting