Construction law solicitor, Sam Bawden, discusses the use of verbal contracts.
Thankfully, with the existence of so many different standard forms, written contracts are relatively prevalent in the construction industry. However, instances can still be found where contracting parties have only a verbal agreement.
Further, and more common, are situations where the main contract is in writing, but is then subject to one or more variations which are agreed verbally.
The difficulty with contracts that are formed (or varied) verbally is that, if there is any disagreement about the terms of the agreement, proving what was and what was not agreed can be difficult. It is therefore worth considering the impact of a couple of recent cases that were heard in the Technology and Construction Court (TCC).
The first, Dacy Building Services Limited v IDM Properties Limited, concerned an application for Summary Judgment to enforce an Adjudicator’s Decision. To obtain Summary Judgment, under Part 24 of the Civil Procedure Rules, Dacy would have had to have established that IDM did not have a reasonable prospect of successfully defending the claim and that there was no other compelling reason why the case should be disposed of at a trial.
In this case the court held that the factual dispute as to the alleged verbal contract was too complex to determine on an application under Part 24. It was not clear who, if anyone, Dacy had contracted with; the conduct of those involved did not make it clear because it “pointed at different times in different directions.”
Notwithstanding earlier authority (Penten Group Limited v Spartafield Limited) regarding the “latitude” that Adjudicators should be given when grappling with verbal contracts, the Court held that in this instance the question was whether there was in fact a verbal contract at all (rather than what its terms were). The case was therefore distinguished from Penten on this point.
The second case, ZVI Construction Co LLC v Notre Dame University (USA) in England concerned alleged verbal variations to a written contract (a Development Agreement), notwithstanding that clause 24 of the said contract required all variations to that contract to be “in writing and signed by or on behalf of the party against which the enforcement of such modification, alteration or waiver is sought.”
The contract contained terms providing for the resolution of disputes by expert determination. The case involved an argument as to whether the parties had agreed to vary those particular terms, notwithstanding that there was no signed written record of such variations in accordance with clause 24.
Relying on two earlier authorities (Globe Motors Inc v TRW Lucas Varity Electric Steering Limited and MWB Business Exchange Centres Limited v Rock Advertising Limited), the Court held that there was nothing to prevent parties from agreeing to vary a contract orally, notwithstanding the fact that they had previously agreed to an “in-writing only” clause. The question to be determined by the Court was “whether, by their actions, words or conduct they [the parties] must be taken to have intended to modify or alter or waive a term of the Development Agreement, bearing in mind that they agreed to the terms of Clause 24 in the first place.” In this case, the Court held that the parties could (and that ZVI did) agree to vary the terms of the contract otherwise than in accordance with its clause 24.
I envisage two likely trends that may well follow these recent decisions.
Firstly, in Adjudication enforcement proceedings, I suspect we may see a run of Defendants seeking to rely on Dacy to avoid Summary Judgment where the dispute relates to an alleged verbal contract. If an argument is advanced that there was in fact no contract at all, provided that argument is presented in such a way that it has at least a reasonable prospect of success, or if the facts relied on are sufficiently complex that it would be inappropriate to try to determine the dispute on an application under Part 24, this approach is likely to be quite rewarding for those Defendants which raise the argument. If nothing else, it is likely to significantly improve their negotiating position in any settlement discussions (on the basis that continuing the litigation will probably be more protracted, cumbersome and expensive than if the argument had not been raised).
Secondly, as we have had quite clear guidance from the Court that “in writing only” clauses do not necessarily prevent subsequent oral variations to written contracts, I think we may well see far more parties contending that the terms of the contract have been altered, in their favour, by actions, words or conduct, even if the contract is in writing and purports to prevent variations being made otherwise than in writing. Again, if nothing else, such arguments should at least improve the bargaining powers of the parties who raise them.
As a specialist construction solicitor, I regularly advise clients on the resolution of construction disputes. Those that involve alleged verbal contracts and/or verbal variations are invariably more difficult to resolve than those that are based entirely on written agreements. The reason is simple; if it is not there in black and white it is far more difficult to prove what was, or was not, agreed and/or how that might, or might not, have subsequently been varied.
All of this means that:
The simple answer to all of this is to insist on written contracts, continue to include clauses which purport to prohibit variations that are made otherwise than in writing and then comply, and insist on the other party complying, with such clauses. Parties should be extremely cautious about agreeing terms without recording them in writing and/or agreeing to anything, or acting in a way, which deviates from those agreed terms without also recording such variations in writing. If in doubt, parties should seek legal advice on the implications of any proposed course of action in advance.
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