B e f o r e :
LORD JUSTICE MOORE-BICK, VICE-PRESIDENT OF THE COURT OF APPEAL CIVIL DIVISION
LORD JUSTICE BEATSON
LORD JUSTICE UNDERHILL
|| (1) Globe Motors, Inc (a corporation incorporated in Delaware, USA)
(2) Globe Motors Portugal-Material Electrico Para A Industria Automovel LDA
(3) Safran USA Inc
||- and -
||TRW Lucas Varity Electric Steering Limited
- and -
Paul Downes QC and Emily Saunderson (instructed by Wragge Lawrence Graham & Co LLP) for the First Defendant/Appellant
Paul Lowenstein QC and Rajesh Pillai (instructed by Baker & McKenzie LLP) for the Claimants/Respondents
Hearing dates: 9 and 10 February 2016
HTML VERSION OF JUDGMENT
Crown Copyright ©
Lord Justice Beatson :
- This is an appeal against the order of HHJ Mackie QC dated 11 November 2014 following a 32 day trial between March and June 2014 in the London Mercantile Court. The appellant, TRW LucasVarity Electric Steering Ltd ("TRW Lucas") produces electric power-assisted steering ("EPAS") systems which sense drivers' input to the steering wheel and provide the necessary steering assistance by delivering power to the steering column through a gearbox. The first respondent, Globe Motors Inc. ("Globe"), designs and manufactures electric motors and leadframe assemblies which are a component part of a vehicle's EPAS system.
- The dispute concerns an exclusive supply agreement dated 1 June 2001 ("the Agreement"). Under the Agreement TRW Lucas agreed to purchase from Globe all its requirements of certain electric motors and leadframe assemblies identified or covered by it ("the Products"). Globe agreed to sell TRW Lucas all such quantities of the Products as TRW Lucas ordered from time to time and not to sell specified part numbers to a third party. The quantities sold and purchased under the Agreement were to depend upon the requirements of TRW Lucas's customers. The Agreement was of a long term nature, and it was common ground that in the car components industry there were regularly improvements to and development of products.
- In a full and carefully considered judgment ( EWHC 3718 (Comm)), HHJ Mackie QC found that TRW Lucas was in breach of the Agreement from about 2005 by purchasing motors (known as "Gen 2" motors) from DEAS Emerson ("Emerson"), a firm which TRW Lucas bought in 2006. The judge gave TRW Lucas permission to appeal against his order on six grounds which are summarised at  below. The judge subsequently assessed Globe's damages in the sum of 10,095,095 ( EWHC 553 (Comm)) but refused an application by TRW Lucas for permission to appeal against the damages order. This appeal is solely concerned with liability. At the end of the hearing we adjourned TRW Lucas's renewal of its application for permission to appeal against quantum pending our decision on liability.
- The factual background is more fully summarised in section III of this judgment. For present purposes it suffices to state that for a number of years, Globe supplied products (known as "Gen 1" motors) to TRW Lucas. The Agreement concerned three "platforms" for respectively, Nissan B/Renault P1, Fiat C192, and Renault P2. These proceedings only concern the Renault P1 platform, for which platform it appears that TRW Lucas did not get an order from Renault for a Gen 1 motor. Although it got orders for the platform from Nissan, the number of motors supplied was below the number estimated in the Agreement (see  below) so that a provision for TRW Lucas to pay Globe's amortised capital costs (see  below) was triggered. The breach found by the judge concerned the purchase by TRW Lucas from about 2005 of motors known as Gen 2 motors from Emerson. By 2014 TRW Lucas had purchased over 3 million Gen 2 motors from Emerson.
- The principal issue in the appeal is whether the judge erred in deciding that the Agreement covered not only the Products identified in it and the detailed specifications agreed, but also the motors bought from Emerson to the extent that they "could and would have been produced by Globe making 'Engineering Changes' to products within the exclusive purchase agreement". The determination of this overarching question is the subject of ground 1. It involved the judge deciding a number of other questions as to which TRW Lucas also submits that he erred. Those questions are the subject of grounds 2 to 5.
- There are two other respondents. The second respondent is Globe Motors Portugal-Material Electrico Para A Industria Automovel LDA ("Porto"), a subsidiary of Globe incorporated for the supply of electric motors to TRW Lucas under the Agreement. The judge found that Porto became a party to the Agreement. This finding is the subject of ground 6, which I summarise at  below. The third respondent is Safran USA Inc. ("Safran"), the assignee of the respective rights of Globe and Porto in the litigation.
- The judge dismissed a claim by Globe in negligent misstatement. He also dismissed a claim by Globe against TRW Limited, TRW Lucas's parent company. There is no appeal against either decision.
- In sections II V of this judgment I set out and summarise the Agreement, the facts, the judgment below, and the grounds of appeal. Section VI contains my discussion of the questions before the court. For the reasons given in section VI(b), at   below, I have concluded that the judge erred in finding that the term "Products" in the Agreement included not only the Products identified in it and the detailed specifications agreed, but also Gen 2 motors bought from Emerson to the extent that those motors "could and would have been produced by Globe making 'Engineering Changes'" to Products that were within the Agreement. Accordingly, I would allow the appeal on ground 1. It is therefore not necessary to decide the remainder of the grounds. I deal briefly with grounds 2 5 at  . Because ground 6 involves a question of principle on which there are substantially inconsistent decisions of this court and there was full argument before us, I address it at  .
II. The Agreement
- The Agreement consists of two "Premises", six Articles headed "Purchase and Sale", "Price", "Warranty and Quality", "Engineering Changes", "Term", and "Miscellaneous", and four Appendices. The provisions that are material to this appeal are set out below and others are summarised. The judge set out the entire Agreement at  of his judgment.
- The parties agreed that the two premises of the Agreement are to be construed and considered as terms. They are:
"A. Buyer [TRW Lucas] wants to purchase from Supplier [Globe] Brushless electric motor and leadframe assembly produced in accordance with the specifications attached as Appendix A ("Products") to be used in conjunction with EPS systems.
B. Supplier wants to sell Products to Buyer."
- Exclusivity: It is convenient to start with the provisions in which the parties set out the exclusivity. That is primarily in Article 1.2 which provides that:
"Buyer will purchase from Supplier all of Buyer's requirements of the Products and Supplier will sell to Buyer all such quantities of Products as Buyer [may] order from time to time pursuant to this Agreement."
Exclusivity is also addressed in the last sentence of Article 1.1 which states:
"Supplier shall not sell the part numbers referenced in this agreement to a third party".
- The Products: What is encompassed within the term "the Products" is to be seen from Article 1.1 which is headed "Products", Premise A and Article 4. Emphasising the words which formed the subject of submissions in these proceedings, the first two sentences of Article 1.1 state:
"The Products include, but are not limited to, (i) motors and leadframe assembly for 38Nm Nissan B/Renault P1. (ii) motors and leadframe assembly for 58Nm Fiat C192, and (iii) motors and leadframe assembly for 58Nm Renault P2. The parties may add additional products by mutual agreement."
- Although Premise A (set out at  above) stated that the Products were to be motors produced in accordance with the specifications attached as Appendix A, there were in fact no specifications attached. The parties, however, agreed the detailed specifications that are in a series of documents dated between 11 September and 27 November 2000.
- Engineering Changes: The crucial provision in this appeal is Article 4, which provides:
"4.1 General: Buyer reserves the right to propose, at any time, changes in the Specifications or other requirements relating to the Products (''Engineering Changes"). Supplier has to mutually agree. Buyer will advise Supplier of all Engineering Changes by giving Supplier prior written notice. If Supplier proposes to make an Engineering Change, Supplier will advise Buyer of such proposal. Before making such proposed Engineering Change, Supplier must obtain prior written approval from Buyer.
4.2 Effects of Change: Following notice of an Engineering Change by Buyer or of a proposed Engineering Change by Supplier, Supplier will use all reasonable efforts in cooperation with Buyer to minimize the effects of such Change and will submit to Buyer as soon as reasonably practicable a written statement of the anticipated effects of such Change on production costs, delivery schedules, and matters related thereto.
4.3 Cost: Buyer will reimburse Supplier for all reasonable costs associated with each Engineering Change made by Buyer within ninety (90) days following its receipt of Supplier's invoice for such costs, which such invoice will not be issued prior to the implementation of such Change. Such costs will include reasonable costs related to surplus inventory and obsolete Products, tooling, and equipment. Buyer and Supplier will negotiate, in good faith, the allocation of costs associated with each Engineering Change proposed by Supplier."
- It is common ground that, as the judge held (see judgment ), a motor or assembly which evolves through the process in Art 4 is a Product which is subject to the Agreement. The main issue between the parties concerns changes in the Specifications or other requirements relating to the Products which can be effected by "Engineering Changes", as opposed to changes which constitute a new Product. In a case where the resulting motor or assembly could and would be so effected, does it qualify as one of the "Products" under the Agreement even where the buyer (TRW Lucas) has not "proposed" the changes to the supplier (Globe)? Underlying this, although not formulated as such for reasons which I will explore, is the question whether Article 4 obliges the buyer (TRW Lucas) to "propose" such changes to the supplier (Globe).
- Quantities: The sub-heading to Article 1.2 is "Volume". After the exclusive purchase and supply obligations, which I have set out at  above, the second sentence states:
"The quantities will depend upon the requirements of Buyer's customers (currently Fiat, Nissan, Renault). At present, Buyer estimates that it will require the following
There is then a table setting out the estimated volumes for the Products referred to in Article 1.1 for years from the inception of the Agreement until 2011. In the case of the 38Nm Nissan B/Renault P1 platform, with which this appeal is concerned, the estimates are from 2002 2006 and the volumes are 225k, 475k, 743k, 1081k, and 1081k. It is stated that "variance is estimated at +/-15%." These estimates, together with Article 5 about the term of the Agreement (see  below), were relied on by Globe and the judge to show the long-term nature of the Agreement.
- Other Article 1 provisions: Articles 1.3 1.7 deal with delivery, invoices, delivery dates and locations, payment terms and a requirement that Globe maintain a consignment of inventory. Article 1.8 is headed "Manufacturing Location". It provides:
"The supplier has committed to produce the products at a European manufacturing location as soon as practicable - anticipated to be in 2002."
- Price and amortisation of Globe's capital costs: Article 2 deals with "Price". For present purposes, it is only necessary to set out Article 2.6 concerning "Under-recovery of supplied products". It provides:
"The parties acknowledge and agree that Supplier shall recover its costs of tooling and capital by amortizing such costs over the units to be sold over the first five (5) years of this Agreement (''Recovery Period"). During the Recovery Period, the volume of Buyer's purchases of each Product shall be reviewed the first month of each year following the initial year of the agreement. In the event that the aggregate volume of Buyer's purchases of each Product during the preceding years is less than that which is provided in Article 1.2 above and such variance is greater than fifteen percent (15%), then Supplier shall adjust its pricing so as to amortize the remainder of Supplier's tooling and capital costs over the forecasted units to be produced for the remainder of the Recovery Period. If, at the end of the Recovery Period, Supplier shall not have fully recovered its tooling and capital costs, then Supplier shall invoice Buyer for the remaining portion of such costs and Supplier shall pay on such invoice within ninety (90) days following its receipt of such invoice."
- Other material terms: Article 3 is headed "Warranty and Quality" and Article 5 "Term". Article 5.1 provides:
"The Term of this Agreement will begin on the Effective Date and shall continue for the lifetime of each of the platforms at a rate of 100% of the platform requirement as estimated in Article 1.2."
Articles 5.2 and 5.3 deal with termination on insolvency and material breach, and the rights of each party after termination.
- For present purposes, the only provision in Article 6 which it is necessary to set out is Article 6.3. This provides:
"6.3 Entire Agreement; Amendment: 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."
III. The facts
- TRW Lucas had dealings with Globe as a motor developer from early 1996: judgment, . In March 1999, they were working together to develop motors for a Fiat EPS system and the Renault P2 platform: judgment, . By the end of 1999, TRW Lucas became involved in developing business with Renault and Nissan, which were starting to develop a common platform: judgment, . In mid-December 1999 TRW Lucas had been chosen as supplier of EPAS systems for this platform (judgment, ), and in January 2000 TRW Lucas told Globe that it had received a contract for the P1 platforms from Renault: judgment, .
- It appears from an email dated 15 July 2000 that within TRW Lucas the strategy was to split volume on the P1 part of the common platform between Globe and Emerson, and that the United States part of TRW had decided that Emerson should be the supplier of motors for EPAS systems: judgment, . Notwithstanding this, in a letter from TRW Lucas dated 13 September 2000 Globe was nominated as the supplier of the "38Nm motor variant of the Nissan/Renault P1 platforms" subject to terms and conditions as set out in a preferred supplier agreement: judgment, .
- It appears that as a result of notice in the autumn of 2000 of projected price increases for the Gen 1 motor, Renault asked TRW to consider alternative design approaches to reduce cost, and that the impetus for a Gen 2 motor was connected with that: see memo dated 7 May 2001 from TRW Chassis Systems. On 10 October 2000 the Gen 2 programme was launched internally within TRW Lucas: judgment, . On 26 March 2001 TRW Lucas sent Globe a draft supplier agreement which had been discussed between the parties. The products at Article 1.2 of the draft agreement included the same products as were included in the agreement subsequently entered into, in particular the motors and assemblies for the 38Nm Nissan/Renault P1: judgment, . Further drafts of agreements were circulated on 30 March and 24 April 2001: judgment, . TRW Lucas was concerned that Globe was unwilling to commit to its new plant in Portugal until it had concluded a contract: judgment, .
- In May 2001, Globe sent TRW Lucas further quotes for the platforms. These quotes were higher than quotes given in October 2000, and this gave rise to what the judge described as "consternation" at TRW Lucas: judgment,  . After further correspondence, the final prices were revised downward and rates, which were those later contained in the Agreement, were agreed: judgment, .
- I have stated that the Agreement between TRW Lucas and Globe is dated 1 June 2001. From the time it was entered into, the United States part of TRW Lucas was concerned that the company might be locked in to taking all of the Gen 2 motors from Globe: judgment, . In late 2001, TRW Lucas began to consider what, in the light of its obligation under Article 2.6 of the Agreement, the cost would be to it if the Agreement ended before long: judgment, . In October 2001, it was estimated that TRW Lucas had a potential liability to Globe of $21 million: judgment, .
- On 10 April 2002 TRW Lucas emailed Globe a request for a quotation for an "updated Gen II 38/47Nm Spec" by the end of "next week", 19th April 2002. It stated that "due to cost reasons we need to have a Gen 2 system which has to be cheaper with same or even better performance" and that "you find attached the Specs for the new Gen 2 motor": judgment, . The complete specifications for a 38Nm motor in Gen 2 were never sent to Globe: judgment, . On 11 April 2002, TRW Lucas informed Globe that it expected Globe to give indicative pricing and cost indications for Gen 2 at a meeting which was scheduled for 19 April 2002: judgment, . Globe responded that this short time limit was "ridiculous as well as unfair".
- At a presentation to Renault on 13 May 2002, TRW Lucas set out the differences between Gen 1 and Gen 2. The motors were described as "no change same fundamental motor technology". The judge attached importance to this: judgment, , and see also . He identified the main differences between Gen 1 and Gen 2 as respectively, skewed (Gen 1) and segmented (Gen 2) stators, the high resolution encoder on Gen 2, and lower inductance values in Gen 1: judgment  . It was common ground that the Gen 2 motor was not one of the Products identified in the Agreement and the detailed specifications. As I have stated, the core of the dispute concerns whether the Agreement and its exclusivity applied not only to the Products identified in it but also to products that "could and would have been produced by Globe making 'Engineering Changes' to the Products identified in the Agreement and the detailed specification".
- Globe provided a Gen 2 quote on 24 May 2002: judgment, . At some later stage, Globe was informed that TRW Lucas was willing to let it re-quote for the Gen 2: judgment, . No quote was received until 9 July 2002, when a basic quote was sent after TRW Lucas chased Globe in an email dated 5 July 2002: judgment, . It appears from notes of a telephone conversation (judgment, ) that on 15 July 2002 Renault was still undecided as to whether it wanted a Gen 1 or a Gen 2 EPAS system for its part of the common platform.
- Emerson was informed by TRW Lucas on 26 August 2002 that the Gen 2 project would be awarded to it once it received the nomination from Renault. It appears that thereafter Globe was in contemplation only as a second source. When Globe wrote in December 2002 asking whether it should continue the quotation process for Gen 2, TRW Lucas did not reply: judgment, . At the end of January 2003, Globe was still pressing for up-to-date specifications for the Gen 2 motor: judgment, . No Gen 2 specifications other than those provided in April 2002 (see ) were shown to Globe until after these proceedings were commenced: judgment, .
- On 23 February 2003, TRW Lucas awarded the Gen 2 business to Emerson. It stated that Emerson would be appointed as the sole head supplier for the development, and that the start of production was November 2004. In November 2003, TRW Lucas issued a revised version of the Gen 2 motor specification but did not issue it to Globe. These proceedings were filed on 1 June 2011.
IV. The judgment
- The judge set out the 24 issues identified by the parties and addressed them systematically in his judgment which ran to 548 paragraphs. Before doing so, he gave a simplified outline of the disputes, set out the Agreement in full, dealt (judgment,  50]) with the technical background, platforms, models and motors and, (at  ), set out the background facts.
- The first four issues are construction issues and it is primarily with those and the consequences of the judge's decisions on those that this appeal is concerned. It is also necessary to summarise the judge's conclusions on the factual disputes (issues 5 9). Issue 12 was whether TRW Lucas was in breach of the Agreement by purchasing the Emerson Gen 2, and issue 17 was whether Porto had a right of action under the Agreement.
- The judge stated that the approach to construction was not in dispute. In part because of the claim in negligent misrepresentation, there was much evidence of the dealings between Globe and TRW Lucas in the period before the Agreement. There was thus material before the judge which was not relevant or admissible in construing the contract but he was (see  , and ) alive to this. One of TRW Lucas's criticisms of the judgment is that the judge was too alive to this and wrongly excluded material which did not offend the exclusionary rule as to pre-contractual negotiations, and the summary of the facts above includes the relevant parts of that material.
(a) Issues 1 3: The meaning of "Products" and "Engineering Changes"
- Although not formulated in this way in the list of issues, the first of the questions of construction (issue 1) was the meaning of the term "Engineering Changes". The judge held (judgment, ) that this is not a technical term. It does not have a single universal meaning in the motor industry but is a concept of relatively clear general meaning. He contrasted an alteration which is a change to the specification and no more with one which creates a new product and stated (judgment, ) that "the boundary between engineering change and new product is a question of fact and degree". He concluded (see   below) that the changes that Globe claimed it could and would have made to the Gen 1 motor and leadframe assemblies to manufacture its own Gen 2 motor and leadframe assemblies were "Engineering Changes": judgment,  . He also concluded that Globe would have made the changes within a timescale acceptable to TRW Lucas and Renault: judgment, .
- Issue 2, the second question of construction, was whether the term "Product" in the Agreement included motors required for a contractually specified platform (in this case the Renault P1 platform) which Globe "could and would" have produced by making "Engineering Changes" to the products which it was supplying to TRW Lucas under the Agreement. The judge stated (judgment, ) that the Agreement was intended to regulate dealings between sophisticated and substantial parties over a lengthy period and to cater for inevitable technical changes as the product was developed in an industry where product development was collaborative. He regarded the definition of "Products" to be primarily that at Premise A and recognised that where a contract has flaws there is a need for some caution in attributing particular significance to every word and phrase: judgment, . He, however, emphasised that Article 1.1 states that "Products" are not to be limited to the three platforms specified in the Agreement and stated that "the specifications in the Agreement are only the starting point".
- After stating that the parties can add "additional Products" by mutual consent, the judge continued:
"I see no reason why a motor which evolves from a Gen 1 through the process in Article 4 is not as subject to the Agreement as any other given the wording of the Agreement and its long term and exclusive nature in an area of industry where regular improvement and development is obviously expected. This is not an agreement just for the Products in existence at the outset. There will be changes and these will be given effect to by Article 4 if they fall within its terms or otherwise by agreement, if that be forthcoming. I do not see this approach as requiring any implication of terms or doing violence to the language of the Agreement. Neither do I see it as sufficiently unclear to warrant investigation of whether the approach produces results that are very unreasonable or which flout business commonsense." (judgment, )
- As to motors which Globe "could and would" have produced by making "Engineering Changes", the judge concluded that they were "Products" within the Agreement although the words are not in the Agreement. He then stated (at ) that reasons why a long term exclusive agreement might be commercially unattractive to TRW Lucas were not reasons why the Agreement should not be interpreted in this way, and that his construction could equally have advantages for TRW Lucas.
- Issue 3 was whether "Products" for the Renault P1 platform were limited to a 38Nm EPAS system. In view of the lapse of time and differing recollections, the judge placed little reliance on the evidence of witnesses and considered that documents predating the Agreement by many months did not assist: judgment,  . Referring to Prenn v Simmonds  1 WLR 1381, he stated (judgment, ) that evidence of what the parties stated in pre-contractual discussions was inadmissible unless it was of the factual background known to them at the time of or before the contract.
- The judge concluded (judgment,  ) that, despite the explicit reference to 38Nm, for three reasons, the "Products" for the Renault P1 platform were not limited to a 38Nm EPAS system. First, the reference to "38Nm" was "not part of the definition of products but of what that description non-exhaustively included". Secondly, 38Nm referred to the torque of the system, not of the motors, and it could change as a result of an improvement in the system unrelated to the motor. It would have been odd to limit the motors in this long-term agreement so as effectively to terminate it in the case of such a change or one deliberately made to frustrate Globe. Thirdly, a number of provisions in the Agreement, including the broad definition of "Products" capable of permitting changes over the life of a platform and the references to the Renault P1 platform, would serve no purpose if the Agreement was limited to 38Nm motors.
(b) Issue 4: Was Globe obliged to implement proposed Engineering Changes, and was TRW Lucas obliged to ask Globe to implement Engineering Changes to a Product?
- It is to be observed that the ultimate question for decision was not whether Globe was obliged to implement "Engineering Changes" to a product in fact proposed by TRW Lucas under Article 4.1, but whether TRW Lucas was obliged to propose "Engineering Changes" to a product to Globe or whether consequences followed if it did not so propose. Although not explicitly identified in these terms as one of the construction issues, this in substance is the question raised by issue 2. The judge concluded (judgment, ) that "[i]f the proposed alteration is a change to the specification and no more the Buyer must offer and can impose it on the Seller", i.e. TRW Lucas was obliged to propose it to Globe.
- As to issue 4, the judge reiterated the reasons he had given when refusing to strike out aspects of the case in October 2012: see  EWHC 3134 (QB). He concluded that Globe was obliged to implement "Engineering Changes" proposed by TRW Lucas: judgment,   and . He rejected TRW Lucas's argument that Article 4.1, with its "right to propose", involves a consensual process and was the only way the clause could work in practice and that there were insufficient objective criteria for there to be an enforceable contract with the gaps filled by using the concept of objective reasonableness: judgment, ,  . In his strike out decision he had stated that although the words "to mutually agree" in Article 4.1 were "poorly chosen and ambiguous", when read in the context of a long-term agreement where "the volume estimates extend to 11 years overall and to six years on the platform in dispute", they "connote obligation, not merely an opportunity to discuss". He also stated (judgment, ) that "the obligation is clear", that "the existence of an enforceable obligation is consistent with a duty to collaborate", and, while the court cannot compel collaboration, it can deal with the situation which arises when collaboration breaks down.
(c) Issues 5 6: Differences between the Gen 1 and Gen 2 motors
- Issues 5 9 concerned the factual disputes about the Gen 1 and Gen 2 motors. The judge considered that Globe's expert, Dr Sidman, lacked the detailed direct experience of the issues possessed by TRW Lucas's expert, Professor Ackva (judgment,  ) and that his oral evidence was very unsatisfactory and not reliable. He described Professor Ackva (judgment, ) as an admirable expert witness who to some extent acted as a single joint expert.
- The judge's conclusions on the three main differences between Gen 2 and Gen 1 he identified (see  above) were as follows. The choice of stator was, despite TRW Lucas's preference, not critical or all that important: judgment, . There was (judgment, ) no sign that the presence or absence of a high resolution encoder was of concern to Renault. It was common ground that the Globe Gen 2 motor would not meet TRW Lucas's inductance parameters specification and would be lower than the Emerson Gen 2. The judge concluded that overall a higher level of inductance was more desirable. There was, however, (judgment, ) no evidence that Renault itself specified requirements relating to inductance and it was unclear how critical the specified parameters were. Had the issue arisen, "the parties would have resolved it without difficulty, as indeed TRW and Emerson appeared to have done on the real Gen 2": judgment, .
- After dealing with end-of-line testing and the significance of the fact that, in that process, specifications are amended or relaxed, the judge concluded that, in making a comparison between motors, regard had to be had to such testing as well as the original specifications: judgment, .
(d) Issues 7 -9: Were the changes Globe stated they could and would make to produce a Gen 2 motor "Engineering Changes", within what timeframe would Globe have made those changes, and would the Globe Gen 2 have been a direct substitute for the Emerson Gen 2 motor?
- I have stated that the judge considered (judgment, ) that the best guide in assessing whether Globe "could and would" build a direct substitute for Emerson's Gen 2 is a functional approach to the specifications of the Gen 1 and the Emerson Gen 2 motors. He described the determination of whether Globe could show on balance that it would have received the business to be a hypothetical and imperfect exercise but (judgment, ) considered this to be the best guide for the court in the absence of other evidence to explain what Renault's actual requirements were. The functional specification was (judgment, ) taken from a combination of the written specifications from TRW Lucas which Globe had assembled.
- The judge recognised that TRW Lucas was entitled to perform the contract in the least burdensome way it could within its contractual obligations. He concluded:
"[E]ven minimal compliance by TRW would have been likely to produce an acceptable result. TRW wanted Renault's business and had a contractual obligation to source the motor through Globe. TRW had in the past worked well with Globe and, it was clear from the evidence in this case, would have willingly worked with it again if required to do so." (judgment, )
He also stated:
"TRW had the right to impose its own requirements for the motors upon Globe. The agreement does not permit Globe simply to build what it likes as long as it meets the requirements that Renault can be persuaded to accept. A consequence of TRW entering into the Agreement, however, is its commitment to buy and Globe's obligation to sell products. A line has to be drawn somewhere, but not in this case, between two considerations. First, there are TRW's legitimate detailed requirements, including no doubt technical changes which might be seen as not essential but desirable as the way forward to future improvements. Secondly, there are changes which Globe could not accommodate at reasonable cost or at all with the result that it was not able to obtain its rights to supply under the agreement or could not be compelled to supply a Product which was commercially unattractive to it." (judgment, )
- The judge's assumption (judgment, ) was that TRW Lucas and Globe would have conducted themselves collaboratively in working on a Gen 2 motor, while recognising (judgment,  and ) that TRW had legitimate requirements concerning reliability, safety, ability to deliver on time and cost beyond those identified as functional and (judgment, ) that it was entitled to perform the contract in the least burdensome way it could consistent with its legal obligations. What Mr Downes characterised as the inferential application of a hypothetical counterfactual assumption that TRW Lucas had a duty to co-operate with Globe in developing the Gen 2 motor is one of the grounds of appeal.
- The word "requirements" did not (see judgment, ) permit TRW Lucas to impose what it wanted regardless of the real needs of Renault and the capacity of Globe, with which it had chosen to contract. The judge stated that the important requirements would have been those then imposed by Renault, plus those of TRW Lucas, and that in reality the motor would have evolved down TRW Lucas/Globe, not TRW Lucas/Emerson, tramlines.
- In his assessment of whether the changes Globe could and would have made to the Gen 1 motor and leadframe assemblies constituted "Engineering Changes", the judge stated that Mr Arwine, Globe's Vice-President (Engineering), "did not pretend that his Gen 2 was a direct substitute for Emerson Gen 2 or even that Globe would be able to reproduce the Emerson product": judgment, . He stated that he did not have to evaluate Mr Arwine's claim that he was over 95% certain what Globe could do beyond concluding that it was over 50% more probable than not that it would make feasible and workable engineering changes. He also stated (judgment, ) that although the Globe Gen 2 would not meet the relevant specifications of the DEAS Gen 2, it "would be a direct substitute". It appears that he considered (a) this conclusion followed from his functional approach; (b) the Globe Gen 2 would have met Renault's requirement for the Gen 2 EPAS system; and (c) TRW Lucas's focus on the detailed evidence as to the specifications obscured "the fundamental point that these two companies could and would have worked together to produce a suitable Gen 2 motor".
- I turn to the conclusions about the process of making "Engineering Changes". The judge (judgment,  ) considered this process can be less formal and more flexible than TRW Lucas's expert suggested. He accepted Mr Arwine's evidence that Globe could readily have made a series of simultaneous engineering changes to other products so as to produce the Globe Gen 2 motors, and rejected the submission that that evidence was inadmissible opinion evidence. He stated that in most technical disputes, factual witnesses familiar with the subject give opinion evidence, opinion and fact evidence overlap, and the point should have been taken earlier if it was to be taken: see judgment, . His conclusion was that the changes Globe alleged it could and would have made to the Gen 1 motor and leadframe assemblies to manufacture its own Gen 2 product constituted "Engineering Changes" under Article 4.1 of the Agreement. He also concluded (judgment, ) that Globe could and would have implemented those changes within a timescale acceptable to TRW Lucas and Renault.
(e) Issue 17: Did Porto have a right of action against TRW Lucas under the Agreement?
- The judge rejected the submission that he was bound by the Court of Appeal's unreported decision in United Bank Ltd v Asif (11 February 2000) to decide that the effect of Article 6.3 was that the Agreement could only be amended by a written document which specifically referred to its provisions and was signed by both parties. He stated that United Bank v Asif was not treated as binding by a later Court of Appeal in World Online Telecom v I-Way Ltd  EWCA Civ 413. After referring to two first instance decisions which I consider at  below where the World Online Telecom approach was accepted, he decided that the better view is that it is possible for parties to agree to vary or waive a requirement such as that in Article 6.3, whether they have done so is fact-sensitive, and to decide otherwise would be inconsistent with the principles of freedom of contract.
- The judge found that the Agreement, including Article 6.3, was in fact varied or waived by the parties' conduct because in their dealings under the Agreement over a long period they operated as if Porto was a party: judgment,  . He summarised both parties' cases and the evidence (judgment,  ), recognised the ambiguities in some of the documents (judgment, ) but concluded (judgment, ) that it was "overwhelmingly clear" on the facts and material deployed by Globe that TRW Lucas treated Porto as a contracting party. In reaching his conclusion, he took into account: (a) Globe's reliance on TRW Lucas and TRW Limited (or their nominees) ordering products from Porto under the Agreement in accordance with the contractual specifications and prices from 8 January 2003; (b) the supply and invoicing of those products to TRW Lucas and TRW Limited (or their nominees) by Porto in accordance with the contractual specifications and prices; (c) the submission by TRW Lucas and TRW Limited of warranty claims under the Agreement to Porto rather than to Globe; and (d) TRW Lucas's continued submission to Porto of its volume forecasts of the products under the Agreement: judgment, .
V. The grounds of appeal
- The judge gave TRW Lucas permission to appeal against his order made on 11 November 2014 on six grounds:
(1) Ground 1: Erroneous extended definition of "Products": The judge erred in construing the Agreement as including within the definition of "Products": "motors and lead frame assemblies built to different specifications from the Globe Gen 1 specification, where [TRW Lucas] required those motors and leadframe assemblies for the platforms identified in the Agreement" where two conditions were satisfied. The first was that "those motors were comprised of motors and leadframe assemblies initially produced by [Globe] but with changes to their specifications or other requirements". The second was that Globe "could and would have produced those motors and leadframe assemblies by making Engineering Changes to the motors and leadframe assemblies that it initially supplied to [TRW Lucas] under the Agreement, under Article 4.1": Issue 2. Issues 10 and 12 are also relevant to the determination of this ground.
(2) Ground 2: "38 Nm" EPAS system: The judge erred in deciding that the phrase "38Nm" used in Articles 1.1 and 1.2 of the Agreement did not limit the scope of the motors to be covered by the Agreement to those which were to be used in a power steering system of that rating so far as the Renault P1 platform was concerned: Issue 3.
(3) Ground 3: "Engineering Changes": As formulated, this is that the judge erred in finding that the Globe Gen 2 power steering system could be derived from the Globe Gen 1 system by making only "Engineering Changes" to the latter: Issue 7. It was argued that the judge had failed to resolve the correct issue but had decided whether Globe was capable of implementing the changes necessary to derive the Globe Gen 2 from the Globe Gen 1.
(4) Ground 4: "Direct substitute": The judge erred in finding that the motors for the Globe Gen 2 power steering system were or would be a "direct substitute" for the motor for the Emerson Gen 2 power steering system given the differences in structure, design and function between the two motors that were common ground between the parties and/or were found by the judge: Issue 9.
(5) Ground 5: Erroneous "hypothetical counter factual" inquiry: The judge erred in finding that Globe "could and would" have been able to produce the Globe Gen 2 motor by inferentially applying a hypothetical counterfactual assumption in order to determine that TRW Lucas had a duty to co-operate with Globe in developing the Globe Gen 2 motor: Issue 8.
(6) Ground 6: There was no variation of the Agreement to include Porto as a party: The judge erred in finding that Porto became a party to the Agreement by means of an implied novation or variation by conduct because (a) the conduct relied on was not unequivocal, and (b) Article 6.3 of the Agreement precluded variation by parol: Issue 17.
- Grounds (3) (5) are advanced as alternatives to ground (1) and are framed on the assumption that the judge was right on grounds (1) and (2), the construction of "Products" and of the phrase "38Nm".
- I first consider the approach to the interpretation or construction the two terms are often used interchangeably - of a contract such as this. I then consider the individual grounds of appeal.
(a) The approach to interpretation
- The professed object of a common law court in interpreting or construing a written contract is to discover the mutual intention of the parties. It is now generally accepted that this is not to be done by a purely literal approach. The formulations by appellate judges have differed, but the differences have primarily been ones of emphasis rather than of principle. They relate to the extent to which the approach to construction should be contextual, the role of background material, and the relationship between the approach to construction and the approach to the implication of a term. The wealth of authority on the topic and the differences of formulation suggest that, as Sir Anthony Clarke MR stated in Pratt v Aigaion Insurance Company SA  EWCA Civ 1314,  1 Lloyd's Rep 225 at , care must be taken to avoid over-elaboration.
- Since 1997, the starting point has generally been the five principles distilled from the authorities by Lord Hoffmann in his seminal judgment in Investors Compensation Scheme v West Bromwich Building Society  1 WLR 896 at 912-913 ("the ICS case"). Those principles were refined by him in later decisions, in particular BCCI v Ali  UKHL 8,  1 AC 251, Chartbrook Ltd v Persimmon Homes Ltd  UKHL 38,  1 AC 1101, and Attorney General of Belize v Belize Telecom Ltd  UKPC 10,  1 WLR 1988. In the last of these he reappraised the process of implying terms and its relationship to the exercise of interpreting the express terms.
- The most recent adjustments of emphasis occurred in 2015 when, in Arnold v Britton  UKSC 36,  AC 169 and Marks and Spencer plc v BNP Paribas Securities Services Trust Co. (Jersey) Ltd  UKSC 72,  3 WLR 1843, the Supreme Court revisited Lord Hoffmann's statements of the principles. Both those cases involved leases. In the first, the change of emphasis was to give greater weight to the words used in the document. In the second it concerned the relationship between interpretation and implication. A majority of the Supreme Court stated (see ,  and ) that, while interpreting the words which the parties have used and implying words into the contract both involve determining the scope and meaning of the contract in the broad sense, "construing the words used and implying additional words are different processes governed by different rules".
- I consider that in the present case two statements of the general approach suffice. The first is the elegant, concise and unelaborate pre-ICS statement by Sir Thomas Bingham MR in Arbuthnot v Fagan  CLC 1396, at 1400:
"Courts will never construe words in a vacuum. To a greater or lesser extent, depending on the subject matter, they will wish to be informed of what may variously be described as the context, the background, the factual matrix or the mischief. To seek to construe any instrument in ignorance or disregard of the circumstances which gave rise to it or the situation in which it is expected to take effect is in my view pedantic, sterile and productive of error. But that is not to say that an initial judgment of what an instrument was or should reasonably have been intended to achieve should be permitted to override the clear language of the instrument, since what an author says is usually the surest guide to what he means. To my mind construction is a composite exercise, neither uncompromisingly literal nor unswervingly purposive: the instrument must speak for itself, but it must do so in situ and not be transported to the laboratory for microscopic analysis."
The second is the summary of the current position by Lord Neuberger in Arnold v Britton  UKSC 36,  AC 1619 at . He stated:
"When interpreting a written contract, the court is concerned to identify the intention of the parties by reference to "what a reasonable person having all the background knowledge which would have been available to the parties would have understood them to be using the language in the contract to mean", to quote Lord Hoffmann in Chartbrook Ltd v Persimmon Homes Ltd  UKHL 38,  1 AC 1101, para 14. And it does so by focussing on the meaning of the relevant words, in this case clause 3(2) of each of the 25 leases, in their documentary, factual and commercial context. That meaning has to be assessed in the light of (i) the natural and ordinary meaning of the clause, (ii) any other relevant provisions of the [contract], (iii) the overall purpose of the clause and the [contract], (iv) the facts and circumstances known or assumed by the parties at the time that the document was executed, and (v) commercial common sense, but (vi) disregarding subjective evidence of any party's intentions.
This substantially repeats what he stated in Marley v Rawlings  UKSC 2,  AC 129 at .
- In Arnold v Britton, Lord Neuberger also emphasised a number of factors. They include:
(a) "The less clear [the centrally relevant words] are
the more ready the court can properly be to depart from their natural meaning", but "the clearer the natural meaning, the more difficult it is to justify departing from it": see .
(b) "[W]hen interpreting a contractual provision, one can only take into account facts or circumstances which existed at the time the contract was made, and which were known or reasonably available to both parties": at .
(c) The reliance placed on commercial common sense "should not be invoked to undervalue the importance of the language of the provision which is to be construed" (see ) and, (at ) that "commercial common sense is not to be invoked retrospectively" so that the mere fact that a contractual arrangement, if interpreted according to its natural language, has worked out badly or even disastrously for one of the parties is not a reason for departing from the natural language.
On this last factor, see also Lord Hodge at  . I add that the commercially sensible meaning is often not obvious, and, where it is not, the court is less likely to be able to conclude that one of two or more alternatives is the commercially more sensible one: see e.g. Cottonex Anstalt v Patriot Spinning Mills Ltd  EWHC 236 (Comm),  1 Lloyd's Rep 615 at   per Hamblen J.
- The position of pre-contractual negotiations did not arise in Arnold v Britton but is of relevance in the present appeal. It is now clearly established by authority that the general rule is that the pre-contractual negotiations of the parties cannot be taken into account in interpreting its terms and determining what they mean. The exceptions are where a party seeks to establish that a fact which may be relevant as background was known to the parties or to support a claim for rectification or estoppel: see Investors Compensation Scheme v West Bromwich Building Society  1 WLR 896 at 913 (Lord Hoffmann's third principle) and Chartbrook Ltd v Persimmon Homes Ltd  UKHL 38,  1 AC 1101 at   per Lord Hoffmann. The rationale for the general rule is said to be practical policy and the public interest in economy and predictability in obtaining advice and adjudicating disputes. Lord Hoffmann recognised (at  ) that the general rule means that, in this respect, legal interpretation differs from the way language is interpreted in ordinary life. He referred to the criticisms of the rule by judges and scholars including Lord Nicholls (2005) 121 LQR 577 and McLauchlan  UQLJ 28. There are other critics, see for example McMeel (2003) 119 LQR 272, The Construction of Contracts (2nd ed.) 1.81 -1.82, and Burrows, A Restatement of the English Law of Contract (2016), 87 88, but the rule has its supporters, see for example Berg, (2006) 122 LQR 354 and Lewison, The Interpretation of Contracts (6th ed.) 106 111 and it has long been the settled position in English law.
- In summary (see Arnold v Britton at ), "the purpose of interpretation is to identify what the parties have agreed, not what the court thinks that they should have agreed". A court "should be very slow to reject the natural meaning of a provision as correct simply because it appears to be a very imprudent term for one of the parties to have agreed, even ignoring the benefit of wisdom of hindsight".
- In his judgment the judge mentioned that the Agreement in this case was a long-term contract on a number of occasions. The question is whether this affects or should affect the approach to interpretation, and, if so, how. I stated that Arnold v Britton involved leases, indeed very long leases, of 99 years. Lord Hodge stated (at ) that in interpreting the leases the court "should take into account the great difficulty in predicting economic circumstances in the distant future and ask itself whether the parties really intended to do so", but it is not suggested by him or Lord Neuberger that the court's basic approach to the construction of those leases was affected by that.
- The principled starting point in a system which, despite statutory control and inequality of bargaining power, rests on the assumption that parties to a contract are free to determine for themselves what obligations they will accept is that it is largely for the parties to a long-term contract to insert into it clauses which deal with the particular problems encountered by those who enter into such contracts. In 1995 Professor McKendrick suggested that the function of the court is the traditional one, "namely to enforce and give effect to the intention of the parties as expressed in the clauses in which their obligations are contained": see Beatson and Friedman (eds), Good Faith and Fault in Contract Law (1995) 305. He stated that "in particular, long-term contracts must often be phrased in broad, flexible terms to enable the parties to adjust their bargain to meet changing circumstances." His primary concern was that courts should adopt a flexible approach to the interpretation of such clauses and not be too astute to declare a long-term contract unenforceable on the ground of uncertainty or vagueness.
- That approach was approved in Total Gas Marketing Ltd v Arco British Ltd  2 Lloyd's Rep 209, a case involving the sale of 50% of Arco's interest in a gas field in the North Sea, the life of which was estimated to be about 14 years. Lord Steyn stated (at 218) that there are no special rules of interpretation applicable to long term contracts of a type that are sometimes called relational contracts. But in an appropriate case:
"a court may
take into account that, by reason of the changing conditions affecting such a contract, a flexible approach may best match the reasonable expectations of the parties. But, as in the case of all contracts, loyalty to the contractual text viewed against its relevant contextual background is the first principle of construction."
- More recently, in Excelsior Group v Yorkshire Television  EWHC 1751 (Comm) Flaux J took a similar approach. He was considering whether the phrase "all the transmitters of the IBA serving ITV" in a clause in an agreement made in July 1990 for the production and exploitation of television films in which it was contemplated that it would last for many years covered digital transmitters as well as the analogue transmitters which existed when the contracts were made. He accepted (at ) that "it may be that, even if a concept or entity did not exist at the time the contract was made, the contract, properly construed by reference to what words or phrases used meant at the time, may have used words of sufficient width to encompass that concept or entity when it comes into existence", but stated that the words had to be interpreted in accordance with what they meant objectively when the agreement was made. He concluded (see  -  and  ) that the words "all the transmitters" did not cover digital transmitters which did not exist and were not even contemplated in 1990. He stated (at ) that "it would be a complete distortion of the principles of construction to conclude that [the clause] should be given some wider meaning than
the words of the clause will bear, merely because the way that the television industry has developed, unanticipated at the time" of the agreements has turned out to be disadvantageous to Excelsior. By contrast, the phrase "any and all media now known or hereafter devised" in a later contract was flexible enough to encompass a concept or entity not in existence at the time of the agreement when it came into existence.
- One manifestation of the flexible approach referred to by McKendrick and Lord Steyn is that, in certain categories of long-term contract, the court may be more willing to imply a duty to co-operate or, in the language used by Leggatt J in Yam Seng PTE v International Trade Corp Ltd  EWHC 111 (QB) at ,  and , a duty of good faith. Leggatt J had in mind contracts between those whose relationship is characterised as a fiduciary one and those involving a longer-term relationship between parties who make a substantial commitment. The contracts in question involved a high degree of communication, co-operation and predictable performance based on mutual trust and confidence and expectations of loyalty "which are not legislated for in the express terms of the contract but are implicit in the parties' understanding and necessary to give business efficacy to the arrangements". He gave as examples franchise agreements and long-term distribution agreements. Even in the case of such agreements, however, the position will depend on the terms of the particular contract. Two examples of long-term contracts which did not qualify are the long-term franchising contracts considered by Henderson J in Carewatch Care Services Ltd v Focus Caring Services Ltd and Grace  EWHC 2313 (Ch) and the agreement between distributors of financial products and independent financial advisers considered by Elisabeth Laing J in Acer Investment Management Ltd and another v The Mansion Group Ltd  EWHC 3011 (QB) at .
- This is not the occasion to consider the potential for implied duties of good faith in English law because the question in this case is one of interpretation or construction, and not one of implication. It suffices to make two observations. The first is to reiterate Lord Neuberger's statement in Marks and Spencer PLC v BNP Paribas Security Services Trust Co (Jersey) Ltd (see  above) that, whatever the broad similarities between them, the two are "different processes governed by different rules". This is, see the statement of Lord Bingham in Philips Electronique Grand Public SA v British Sky Broadcasting Ltd  EMLR 472, at 481 cited by Lord Neuberger, because "the implication of contract terms involves a different and altogether more ambitious undertaking: the interpolation of terms to deal with matters for which, ex hypothesi, the parties themselves have made no provision". The second is that, as seen from the Carewatch Care Services case, an implication of a duty of good faith will only be possible where the language of the contract, viewed against its context, permits it. It is thus not a reflection of a special rule of interpretation for this category of contract.
- In the present case, where the Agreement was for exclusive supply and, absent insolvency or material breach, was for the lifetime of the platforms and a long term agreement, the flexibility of approach I have described might have given considerable force to a submission that there was an implied obligation on TRW Lucas to give Globe an opportunity to show that it could provide a Gen 2 motor. That submission was, however, not made by Globe, perhaps because (see  above) any breach of such an obligation would have occurred at the latest by 23 February 2003 when the contract was awarded to Emerson and by which time Globe had been excluded for a minimum of six months. Accordingly, by 2011, when proceedings were issued, a claim in respect of breach of that obligation would have been time-barred.
- Globe's case is that a change in the specifications of a "Product" within the Agreement that "could and would be effected by 'Engineering Changes'" means that the resulting motor or assembly qualifies as one of the "Products" under the Agreement even where the buyer (TRW Lucas) has not "proposed" the changes to the supplier (Globe) and the parties have not gone through the "Engineering Changes" process. If that is so, there would be a breach whenever TRW Lucas bought from anyone other than Globe and claims in respect of purchases after 1 June 2005 would not be time-barred.
- In the light of what the Supreme Court has stated about the difference between the process of implication and the process of interpretation, care must be taken not to seek to achieve that which might be achieved by implication by an inappropriate approach to interpretation.
(b) Ground 1: Does the Gen 2 motor which Globe "could and would have built" fall within the definition of "Products" in the Agreement?
- It was submitted on behalf of TRW Lucas that the process for determining whether a motor is one of the "Products" that are covered by the Agreement is straightforward and requires a positive answer to one of three questions. They are: was the motor specified under the Agreement; was the motor added by mutual consent; and was the motor developed under the Engineering Changes process in Article 4.1? Unless the answer to one of these questions is "yes", TRW Lucas was free to obtain the motor from whomsoever it wanted. It is common ground that the answer to these questions was "no" and that the motor had not in fact been developed by the Engineering Changes process. The judge's approach (see  and  above) was that a motor which had not actually undergone the Engineering Changes process fell within the definition of "Products" if it hypothetically could have done so. TRW Lucas's case is that the judge erred in giving the word "Products" an extended meaning. It argued that this was wholly contrived. It used words which do not appear in the Agreement, there are no other words in the Agreement which could be given that meaning, and that there is no basis for implying them into it.
- Globe's case is that "Products" has to include motors that would meet Renault's Gen 2 requirements which could be produced by Engineering Changes to the Gen 1 motors whether or not the parties actually went through the Engineering Changes process. This is because otherwise TRW Lucas could walk away from the Agreement and its exclusivity by changing the specifications of the motor required. Globe maintains that TRW Lucas's position directly contradicts the express definition of "Products" in Article 1.1 as "includ[ing] but not limited to
motor and leadframe assembly for 38Nm Renault/P1" (emphasis added). It also relied on what Mr Lowenstein called "the life of platform commitment" reflected by Article 5.1, which provides that the term of the Agreement "shall continue for the lifetime of each of the platforms at a rate of 100% of the platform requirement as estimated in Article 1.2".
- Before turning to the construction of the Agreement, I record my agreement with the judge's conclusion (judgment, 206, referred to at  above) that the boundary between engineering change and new product is "a question of fact and degree". As observed by Underhill LJ during the hearing, the concepts "new product", and "new generation of the same product" produced by Engineering Changes are woolly labels and matters of degree.
- The Agreement was poorly drafted and was of a long term nature. It is understandable that the judge wished to interpret it in a way which reflected what he considered to be its commercial matrix. I accept that, particularly because of its long term nature, the court should seek to construe it to enable flexibility to meet changing circumstances. In Lord Steyn's words in Total Gas Marketing Ltd v Arco British (set out at  above) a flexible approach may best match the reasonable expectations of the parties. This factor, together with the language of the Agreement, has led me to reject TRW Lucas's ground 2, its argument that Article 1.1 expressly limited the scope of the Agreement to motors for the EPAS system for the Renault/P1 which had a torque rating of 38Nm. I deal with that briefly at  below.
- In Total Gas Marketing Ltd v Arco British Lord Steyn also stated that the first principle of construction is loyalty to the contractual text viewed against its relevant contextual background. I have referred (at  and  above) to the emphasis Lord Neuberger placed in Arnold v Britton on the need to focus on the meaning of the relevant words in their documentary, factual and commercial contexts and his statement that the fact that a contractual arrangement has worked out badly or disastrously for one of the parties is not a reason for departing from the natural language: see also Lord Hodge at  . The starting point must therefore be the language of Articles 1 and 4 of the Agreement.
- It is to be recalled (see  above) that TRW Lucas and Globe agreed the detailed specifications that applied although these were not attached to an Appendix to the Agreement. There are two ways in which the words of the Agreement enable a motor or an assembly not within the detailed specifications to qualify as "Products" within the Agreement. The first is where the motor or assembly is added by mutual agreement pursuant to the express terms of Article 1.1 and is "an additional product". The second is where the motor or assembly is the result of "Engineering Changes" made pursuant to Article 4 to a Product within the detailed specification. Since it is common ground that there was no "mutual agreement" within Article 1.1, I turn to Article 4.
- Article 4 provides that the buyer (TRW Lucas) reserves "the right to propose" changes in the specifications or other requirements relating to the Products, which are termed ''Engineering Changes". The supplier (Globe) "has to mutually agree". The use of the terms "propose" and "mutually agree" are strong indications favouring TRW Lucas's submission that for a changed motor or assembly to qualify as one of the "Products" subject to the exclusivity provisions and obligations in the Agreement as a result of Article 4 it is necessary for the parties to agree the Engineering Changes proposed and for the process described in Articles 4.2 and 4.3 to have been undertaken. Mr Downes did not accept that Article 4 gave TRW Lucas the right to require an "Engineering Change" (Day 1, p 49 ll. 9-12). I have, however, concluded that the language of Articles 4.1 4.3 and the asymmetry between the position of the buyer and the seller in relation to Engineering Changes mean that is not correct and it is not necessary in all cases for both parties to agree the Engineering Changes proposed. The position is more nuanced than that.
- The asymmetry is seen in the fact that Article 4.1 provides that the buyer (TRW Lucas) reserves the "right to propose an engineering change and has to "advise Supplier" (Globe) by "prior written notice", but the supplier "has" to agree. By contrast, where the supplier proposes to make an engineering change, it "must obtain prior written approval from Buyer". In Article 4.2 the asymmetry is seen because whereas the buyer can give "notice of an Engineering Change", the supplier can only give notice of "a proposed Engineering Change". The provision in Article 4.3 for reimbursement of reasonable costs associated with engineering changes only applies to those "made by Buyer".
- For these reasons, I agree with the judge (judgment,  summarised at  above) that if the proposed alteration is a change to the specification and no more the buyer (TRW Lucas) can impose it on the supplier (Globe). I have stated ( above) that I also agree with him that whether a change to the specification is an "Engineering Change" or whether it creates a new product "is a question of fact and degree". It is in my judgment clear that the express words of the Agreement provide that the buyer is able to impose engineering changes but the supplier is only entitled to propose such changes. This conclusion is consistent with TRW Lucas's position that for a change of specifications to a motor or assembly to qualify as a Product within the Agreement TRW Lucas must agree to it, either as an "additional product" or as an Engineering Change within Article 4.
- The crucial question then becomes whether the judge was also correct to state (judgment, ) that, in the case of a proposed alteration which is a change to the specification and no more, the buyer, TRW Lucas, is obliged to offer it to the supplier, Globe, and that if it did not, what could and would be achieved by the supplier by Engineering Changes becomes one of the Products within the Agreement. Globe did not argue that there is a basis for implying a term to this effect into the Agreement, so the issue is the meaning and scope of the express terms. The judge (judgment, ) held that in the context of the Agreement its terms obliged TRW Lucas to propose to Globe those Engineering Changes which did not result in there being a new Product although he recognised (judgment, ) that this conclusion is based on words which are not in the Agreement. The effect of the judge's conclusion is to impose such an obligation on TRW Lucas, and to do so by construing the terms of the Agreement rather than by implying a term to that effect.
- There are undoubted attractions in achieving a result which prevents the buyer from walking away from the agreement where the car manufacturer changes the specifications in a way that can be achieved by engineering changes rather than by a new product or where such a change to the specifications is made by the buyer for other reasons. The question is whether it is possible to do this by interpreting the terms of the Agreement and the word "Products" in it and thus the scope of the exclusivity so that the result of such hypothetical engineering changes falls within the definition of "Products" in the Agreement where the buyer has not proposed "Engineering Changes", or agreed to such changes. The answer depends on whether there is a basis for this meaning in the words of the Agreement and its factual matrix.
- I have summarised and set out the judge's reasoning at   at   above. The judge's approach moved from the uncontroversial proposition that, if a change to a motor had gone through the "Engineering Changes" process it would become one of the "Products" subject to the Agreement, to the proposition that even if it had not gone through the process it would be a Product and would be within the Agreement if it "could and would" have gone through the process. Save for stating (see  above) that Article 1.1 provided that "the Products" "include but are not limited to" the motors and assemblies for the three platforms, he did so without explaining why the language of the Agreement permitted this. The judge considered that his construction was a reasonable one, but recognised that it was not based on words in the agreement or how his meaning could be derived from the words of the Agreement.
- In my judgment the move to the second proposition involved an error. The structure of the Agreement is that changes to the Product governed by it and the exclusivity provisions are to be by agreement between the parties (Article 1.1 and, in relation to Engineering Changes proposed by the supplier, Article 4.1) or by Engineering Changes notified by the buyer (Article 4.1). I have stated that the use of the terms "propose" and "mutually agree" are strong indications of the need for an actual agreement to changes and the Agreement, particularly Article 4, envisages an actual process, rather than a hypothetical one.
- It is, in my judgment, significant that the dominant role in the Engineering Change process is given to the buyer (TRW Lucas) and that the Agreement does not give the supplier (Globe) power to impose Engineering Changes on the buyer to reflect changes in the specifications as a result of Renault's requirements or in the position of TRW Lucas. In those circumstances, I do not consider that it is possible to construe the words of the Agreement as imposing an obligation on TRW Lucas to propose Engineering Changes. To do that would in substance be the same as giving power to Globe to require such Engineering Changes to bring the resulting motor or assembly within the umbrella of the "Products" in the Agreement. A construction which did this would thus be inconsistent with the asymmetry in Article 4 about the position of the parties in relation to Engineering Changes. For these reasons, I have concluded that, adapting Lord Hodge's words in Arnold v Britton at , there is no basis for the judge's construction in the words used in the Agreement.
- Another point, although of lesser significance, is that the allocation of risks in the Agreement made some provision to protect the position of the supplier. Article 2.6 guaranteed the estimated volumes up to the amount of the supplier's amortised costs over the first five years. TRW Lucas thus guaranteed Globe's capital expenditure to that level and for that period, and to that extent TRW Lucas took the risk of lower than anticipated volumes, Globe was not left wholly exposed by changes of specifications by Renault or TRW Lucas.
- The reality is that Globe is seeking to achieve by interpretation what it might possibly have achieved in a contract such as this by an implied obligation to co-operate or act in good faith in giving Globe the opportunity to produce a Gen 2 motor to meet Renault's changed specifications. In the particular circumstances of this case and the date on which proceedings were instituted that alternative would not have enabled Globe to prevail because (see   above) breach of such an obligation would have been time-barred. Whether or not that was the reason Globe made it clear that it was not relying on an implied term, once an implied term is excluded and the question is what the language of the Agreement permits, I consider that it was not open to the judge to interpret the terms of the Agreement in the way he did.
- Having reached my conclusion for the reasons given above, I note that this is not a case where the change is de minimis. I have summarised the differences between the Gen 1 and Gen 2 motors at  above and the judge's conclusions at  above. The new specification was for a motor which had a number of design differences and which would need new validation.
(c) Grounds 2 5
- In view of my conclusion on ground 1, it is not necessary to decide whether TRW Lucas also succeeds on grounds 2 to 5. There would also be some artificiality in dealing with the rival submissions on grounds 2 5 because TRW Lucas's case on those grounds and Globe's response proceeded on the basis that the judge was right on the questions of construction. For those reasons, although there was full argument on those grounds, I only summarise why, had I concluded that the judge's interpretation of the meaning of the word "Products" was correct, I would have dismissed the appeals on grounds 2 to 5.
- (i) Ground 2: "38Nm" EPAS system: It was common ground that the references to "38Nm" are to the torque rating of the system and not the motors, and thus to a factor over which Globe had no control whatsoever and which could be varied by TRW Lucas without Globe's knowledge. Moreover, the same motor might be used in EPAS systems with different torque ratings. Secondly, the construction advanced on behalf of TRW Lucas is directly inconsistent with the express words of Article 1.1 which states that "Products" are "not limited to" motors for a 38 Nm EPAS system or the other two EPAS systems identified. The construction advanced on behalf of TRW Lucas also does not explain why, given the fact that it was common for there to be changes to the system Nm in the evolution of a product, Article 5.1 provides that the term of the Agreement "shall continue for the lifetime of each of the platforms".
- (ii) Ground 3, "Engineering Changes": The judge did resolve the issue (see judgment,  ) and concluded (judgment,  ) that the changes Globe could and would have made were "Engineering Changes". The judge was entitled to find (judgment, ) that the term "Engineering Changes" had no special industry meaning, and to reject Professor Ackva's view, which he stated was more rigid and formalistic. In those circumstances, the judge was entitled to give the term its natural and ordinary meaning.
- The submission that the judge was not entitled to rely on the evidence of Mr Arwine in order to reject Professor Ackva's evidence because Mr Arwine was a witness of fact and not an expert glosses over the fact that questions of construction are a matter for the court and that, particularly absent a specific industry meaning, the judge was entitled to reach the conclusion that he did. Mr Downes did not submit that the evidence was inadmissible simply because CPR 35 had not been complied with. The judge was entitled to regard Mr Arwine's evidence, properly characterised, as essentially factual, because what he was doing was explaining how Globe would have gone about manufacturing a Gen 2 motor to meet the functional specifications of the Emerson Gen 2. After hearing his evidence as to the simulations, the judge concluded (judgment, ) that Globe would have been able to deliver the Globe Gen 2 motor. The subject-matter of the evidence on the "could and would" issue is highly technical. In the light of the decision of Jackson J in Multiplex Constructions (UK) Ltd v Cleveland Bridge UK Ltd  EWHC 2220 (TCC) at , the judge did not err in regarding Mr Arwine's evidence as admissible. I consider that approach cannot be confined to TCC cases, and must apply by analogy to cases such as the present.
- (iii) Ground 4: "direct substitute": This concerns the position if, as the judge found, the hypothetical Globe Gen 2 qualified as one of the "Products" within the Agreement. In the circumstances of this case, I consider that the functional specifications test adopted by the judge was an adequate primary tool when taken together with considerations of safety, timing and cost, which the judge also took into account, for determining whether the Globe Gen 2 was or would be a direct substitute. Some of Mr Downes's submissions on this point were, in substance, challenges to detailed findings of fact, matters of opinion and technical analysis, for which there was no permission to appeal. There is, in any event, force in the submissions on behalf of Globe in Appendix C(3) to its skeleton argument that the remaining differences between the motors were either not critical, of no apparent concern to Renault, or ones which the parties would have resolved as TRW Lucas and Emerson in fact did when agreeing for Emerson Gen 2 motors which differed from the written specifications.
- (iv) Ground 5, a "hypothetical counter-factual" inquiry: proceeds on the basis that there was no pleaded case that TRW Lucas was in breach of contract or other legal duty in failing to co-operate with Globe, and that in any event any claim for breach of the Agreement by failing to co-operate would be statute-barred: see ,  and  above. Neither Globe nor the judge, however, relied on a contractual duty to co-operate. The question of co-operation only arose on the assumption that TRW Lucas's purchase of Gen 2 motors from Emerson was a breach of the Agreement. The judge then used the history of co-operation between the parties to evaluate what TRW Lucas would have done had it operated the Article 4 "Engineering Changes" process.
(d) Ground 6: There was no variation of the Agreement to include Porto as a party:
- Mr Downes submitted that the requirement in Article 6.3 that any amendment be in writing and be signed by both parties meant that it was not open to the parties to amend the Agreement orally. He maintained that the judge and this court are bound by the Court of Appeal's decision in United Bank Ltd v Asif (11 February 2000) that a contract containing an anti-oral variation clause can only be amended by a written document complying with that clause. He also argued that the cases relied on by Globe and the judge are of limited assistance and, irrespective of authority, that there are sound reasons for recognising the efficacy of a clause such as Article 6.3. Mr Downes also argued that, on the evidence, the judge erred in finding that Porto became a party to the Agreement because the conduct relied on was not unequivocal and consistent only with so treating Porto.
- My decision on ground 1 means that it is not necessary to decide this ground. While conscious of the disadvantages of adding to the obiter statements on the topic, I have concluded that I should deal with it because there are two Court of Appeal cases on what is an issue of principle, the second World Online Telecom Ltd v I-Way Ltd  EWCA Civ 413, is (see at  -  below) in substance inconsistent with United Bank Ltd v Asif, and there was full argument before us.
- (i) Principle and policy: I shall first deal with the reasons of principle or policy relied on by Mr Downes to support the recognition of the efficacy of a clause such as Article 6.3 as preventing variations which do not comply with it. He submitted that "anti-oral variation" clauses promote certainty and avoid false or frivolous claims of an oral agreement. This is in part because, while such claims may be disproved after a full trial, they might carry the day when the party making the claim resists summary judgment. He also stated that such clauses can usefully prevent a person in a large organisation producing a document which unwittingly and unintentionally is inconsistent with a provision in a contract between the organisation and a counterparty. They thus set an evidential threshold. Mr Downes also pointed to the statutory requirements of writing in agreements for the disposition of an interest in land, guarantees and other transactions. He did not suggest that any legislation applied to the Agreement in this case. His argument was an analogical one. He submitted that since contract is based on consent, if Parliament can stipulate for formality despite the potential injustices and hard cases that can result, "how much more should the parties themselves, by consent, be able to adopt such a regime": Day 2, p.39.
- At one stage (Day 2, pp.27 28) Mr Downes appeared to accept that a clear oral agreement to vary has effect notwithstanding such a clause. However, his ultimate position was that the tension between facilitating certainty and avoiding a trap for those who forget the clause and have varied the agreement orally can be resolved by allowing hard cases to be dealt with by the doctrine of estoppel. Estoppel, he argued, provides a safety net where detriment is shown.
- Mr Downes's argument based on the analogy with statutory requirements of writing in contracts is, in my judgment, misconceived. There are common law restrictions on the freedom of contracting parties to agree the terms of a contract. One is the rule prohibiting clauses providing for the damages to be paid for a breach of contract which are penal because they impose a detriment on the contract-breaker out of all proportion to any legitimate interest of the innocent party in the enforcement of the contract's primary obligations. Another is the doctrine of restraint of trade which protects the rights of individuals to work and prohibits contractual provisions which unreasonably prohibit or restrain their right to do so. Mr Downes was not, however, able to point to a common law principle precluding an oral agreement where its subject is another agreement which contains a clause such as Article 6.3.
- Absent statutory or common law restrictions, the general principle of the English law of contract is that to which I referred at  above. The parties have freedom to agree whatever terms they choose to undertake, and can do so in a document, by word of mouth, or by conduct. The consequence in this context is that in principle the fact that the parties' contract contains a clause such as Article 6.3 does not prevent them from later making a new contract varying the contract by an oral agreement or by conduct.
- (ii) Authority: It should be recalled that, even in the case of deeds, since the Judicature Acts it has been possible to vary a deed orally: see Chitty on Contracts (32nd ed.) paragraph 1-143. Chitty on Contracts also states (paragraph 22-045, note 196) that "the better view would appear to be that it is possible for parties to waive compliance" with such a clause; that is, that oral variation is possible notwithstanding the clause. There is, moreover, positive support for this proposition in World Online Telecom v I-Way Ltd  EWCA Civ 413, in the statements in the recent first instance decisions relied on by the judge, and in other decisions.
- United Bank Ltd v Asif and World Online Telecom v I-Way Ltd were both appeals from decisions about summary judgment. In the United Bank case Thorpe and Mantell LJJ dismissed an appeal from the order of Wright J who had upheld the decision of a Master giving the bank summary judgment against the guarantors of a company's debts to the bank. The deed of guarantee provided that "no variation
shall be valid or effective unless made by one or more instruments in writing signed by the parties
". The guarantors' defence was that there had been fraud by a Mr Lateef, the Bank's Chief of Special Assets Management who had orally agreed to vary the terms of the guarantee by extending the time for payment of a sum which was an agreed compromise in discharge of the debt. Wright J held that the allegations of fraud at the centre of the defence were clearly unsubstantiated, the alleged oral discussions could not amount to a valid variation, and Mr Lateef had no authority to bind the bank.
- On the "no oral variation" clause, Wright J stated only that he simply could not accept the submission that it was open to an officer of the bank to effectively disregard the express provision requiring writing and to vary the deeds orally. When refusing permission to appeal on the papers, Sedley LJ stated:
"Wright J was incontestably right in concluding
(a) that no oral variation of the written terms could have any legal effect, and
(b) that in any event Mr Lateef had no authority, either actual or ostensible, to bind the Bank.
This being so, nothing in the arguments advanced below or now advanced can afford a defence."
Permission to appeal was subsequently given by Potter LJ. In his judgment dismissing the appeal, Thorpe LJ, with whom Mantell LJ agreed, adopted the reasons given by Sedley LJ.
- In the World Online Telecom case the appeal was against the refusal of Mitting J to give summary judgment to World Online Telecom. Dismissing the appeal, Sedley LJ stated (at  ) that the question whether parties could override a clause in an agreement in writing excluding any unwritten variations of the contract was, as a matter of English law, sufficiently unsettled to be unsuitable for summary determination, and that the successful respondent's skeleton argument deployed textbook and judicial support for a flexible approach. He also stated (at ) that "[i]n a case like the present the parties have made their own law by contracting, and can in principle unmake or remake it". Mr Downes noted that the United Bank case was not referred to. The World Online Telecom case is nevertheless positive support for the effectiveness of an oral variation or one by conduct despite such a clause, and with fuller reasoning than that in the United Bank case. Moreover, as a result of the Court of Appeal's decision in the World Online Telecom case there was a trial in the Commercial Court. At the conclusion of that trial, Steel J held that, notwithstanding the clause, the conditions in the contract in that case had been varied by the oral agreement: see  EWHC 244 (Comm).
- It is possible that in a case such as the United Bank case involving banking guarantees there is a case for less flexibility because the Statute of Frauds 1677 provides that the guarantee itself must be in writing, but that was not the reason given in that case. At the hearing of the appeal in the present case, it was suggested that the difference between Sedley LJ's reasons for refusing permission to appeal in the United Bank case and his approach in World Online Telecom v I-Way Ltd. showed he had changed his mind. It is more likely that he did not have in mind a decision made two years earlier on an application considered on the papers and that his conclusion in the World Online case reflected the written and oral submissions he had on the point.
- As to the other cases relied on by Globe and the judge, it is true they are not decisions in which it was held that an oral agreement can override an "anti-oral variation" clause in a contract. As Mr Downes observed, although Gloster LJ in Energy Venture Partners Ltd v Malabou Oil & Gas Ltd  EWHC 2118 (Comm) at   stated she inclined to the view that there can be an oral variation notwithstanding such a clause, she found there was in fact no oral agreement to vary the minimum fee clause in the contract in that case and that the implied agreement she found that a reasonable fee be paid did not offend the clause. Similarly, Stuart-Smith J's statement in Virulite LLC v Virulite Distribution  EWHC 366 (QB) at  that the correct view on the authorities was that an anti-variation clause does not preclude a variation from taking effect was made without the benefit of argument because the point had been conceded in that case. These factors, however, do not detract from the recognition by these experienced judges that in principle an oral variation can be effective notwithstanding such a clause. There is also the decision of Steel J to this effect in the World Online Telecom case: see  above.
- There are, moreover, other decisions which support the approach taken by Sedley LJ in the World Online Telecom case and favoured by Gloster LJ and Stuart-Smith J in Energy Venture and Virulite. For example, in Liebe v Molloy (1906) 4 CLR 347 the High Court of Australia considered a building contract containing a clause that extra items should not be paid for unless ordered in writing. Griffith CJ, delivering the judgment of the Court, stated (at 354) that notwithstanding the clause, the conduct of the parties may mean that an implied contract to pay for the extra items is to be inferred. This is a question of fact. Thus, an oral agreement or the conduct of the parties to a contract containing such a clause may give rise to a separate and independent contract which, in substance, has the effect of varying the written contract
- (iii) Questions of proof: What of Mr Downes's concern about manufactured allegations of oral agreements? In the World Online case, Schiemann LJ recognised this argument had force, but agreed with Sedley LJ as to the outcome. Moreover, it appears from Schiemann LJ's summary of the submissions on behalf of the unsuccessful respondent in that case (at ) that counsel had accepted that the purpose of an "anti-oral variation" clause "is not to prevent the recognition of oral variations" but only to prevent "casual and unfounded allegations" of variation.
- Difficulties of proof may arise whenever it is claimed that a contract has been made orally or by the conduct of the parties, and the facts have to be determined by the trial judge from the evidence given by the parties and their witnesses. In the Energy Venture Partners and Virulite cases referred to at  above Gloster LJ and Stuart-Smith J considered the statements of HHJ Mackie QC in Spring Finance Ltd v HS Real Company LLC  EWHC 57 (Comm) at  and in the summary judgment decision in this case ( EWHC 3134 (QB) at ) that the court would be likely to require "strong evidence" before finding there has been an oral variation of such a clause. In the first of these cases, Gloster LJ's inclination to regard an oral variation as effective notwithstanding such a clause was stated to be "where the evidence on the balance of probabilities established such variation was indeed concluded". Stuart-Smith J was of the same view in the second case: see  EWHC 366 (QB) at . See also McKay v Centurion Credit Resources LLC  EWHC 3198 (QB) at . I respectfully agree with them.
- (iv) Precedent: Notwithstanding the arguments of principle and the statements in the cases to which I have referred, is this Court bound by United Bank Ltd v Asif and was the World Online Telecom case per incuriam the earlier decision? There are two potential reasons for not regarding this court as bound by the United Bank case. The first, which was canvassed at the hearing, is the exception identified by Buxton LJ in R (Kadhim) v Brent LBC Housing Benefit Review Board  QB 955 and applied in Rawlinson and Hunter Trustees SA and Tchenguiz v Director of the Serious Fraud Office  EWCA Civ 1129 at   and Rayner v Lord Chancellor  EWCA Civ 1124 at . I do not consider that the Kadhim exception applies to the United Bank case. Buxton LJ stated (at 965) that it applies only where the point had not been the subject of argument before, or consideration by, the court. He also stated (at 966) that the exception "must only be applied in the most obvious of cases, and limited with great care". Although it is difficult to see from either the first instance or the Court of Appeal decisions in the United Bank case how the guarantors had put the argument that the oral agreement was effective, the point must have been the subject of argument.
- The second reason for not regarding this court as bound by a previous decision is where there are inconsistent decisions of this court. In such a case the first exception to the rule in Young v Bristol Aeroplane Co  KB 718 applies. This Court is not bound by either decision, and is entitled to decide which to follow. In my judgment the United Bank case and the World Online Telecom case are inconsistent.
- There is a further reason that this Court is not bound by either decision. This is that the Court in the World Online Telecom case appears to have acted in ignorance of the United Bank case. In Young's case the Court also stated (at 729) that cases in which the court has acted in ignorance of a previous decision of its own are one of two classes of decisions per incuriam which fell outside the scope of its inquiry, and that "a subsequent court must decide which of the two decisions it ought to follow". There is the additional curiosity in this case that in the United Bank case the Court simply adopted the approach of Sedley LJ when refusing permission to appeal on the papers.
- As between the approaches in the two cases, the considerations of principle to which I have referred lead me to prefer the approach in the World Online Telecom case which recognised that in principle a contract containing a clause that any variation of it be in writing can be varied by an oral agreement or by conduct. I also observe that, as Buxton LJ stated in R (Kadhim) v Brent LBC Housing Benefit Review Board  QB 955 at 965, it is the reasons and not the outcome that determine the status of a decision. In the United Bank case Thorpe LJ's judgment on this point effectively consisted of an a priori proposition. Neither he nor Wright J appear to have considered any authority on the effectiveness of an oral variation of a contract containing a "no oral variation" clause, the position of oral variations of deeds, or the applicable principles of contract. By contrast, (see  above) in the World Online Telecom case the Court had the benefit of both textbook and judicial support for the approach of the successful respondent.
- (v) Was it open to the judge to find that the conduct of the parties means that the Agreement was varied by making Porto a party? I have summarised the judge's approach at  above. In my judgment there was ample evidence to justify his conclusion. This included the fact that TRW Lucas's position meant that Porto would have been entitled to ignore warranty claims on the ground there was no contract (which it had not). I do not consider that the ambiguities in some of the documents and the evidence, which the judge recognised, precluded him from making the finding that Porto was treated as a party to the Agreement. In my judgment he was entitled to conclude that, on the basis of "open, obvious and consistent" dealings over a long period, there was no other explanation but that the parties intended to add Porto as a party to the Agreement. Accordingly, Porto has a right of action against TRW Lucas.
- For the reasons I have given, if my Lords agree, the appeal will be allowed on ground 1.
Lord Justice Underhill:
- I agree with Beatson LJ's conclusion and reasoning on ground 1 and thus that the appeal should be allowed. As regards the other issues, I agree that we ought to express a considered view on the issue of law raised by ground 6, even though it is formally unnecessary to do so, in view of the conflict of authority. Although in the end I am persuaded that the decision of this Court in World Online was correct and should be followed, for the reasons given by Beatson LJ, I must confess to having felt some hesitation in reaching that conclusion (which it appears that I share with Schiemann LJ in that case: see his judgment at ). It seems to me entirely legitimate that the parties to a formal written agreement should wish to insist that any subsequent variation should be agreed in writing (and perhaps also, as here, in some specific form), as a protection against the raising of subsequent ill-founded allegations that its terms have been varied by oral agreement or by conduct: even though ill-founded, such allegations may make the obligations under the contract more difficult to enforce, most obviously by making it more difficult to obtain summary judgment. But the arguments in favour of a flexible approach are also strong; and in the end, even if it were desirable to treat provisions of this kind as entrenched, I cannot see a doctrinally satisfactory way of achieving that result. I have considered whether there might be some kind of half-way house, which made it formally more difficult for a party to establish a "non-conforming" variation; but none was suggested in argument and I cannot see any that would be of realistic value.
- It does not follow that clauses like the second sentence of Article 6.3 have no value at all. In many cases parties intending to rely on informal communications and/or a course of conduct to modify their obligations under a formally agreed contract will encounter difficulties in showing that both parties intended that what was said or done should alter their legal relations; and there may also be problems about authority. Those difficulties may be significantly greater if they have agreed to a provision requiring formal variation.
Lord Justice Moore-Bick:
- I also agree that the appeal should be allowed for the reasons given by Beatson LJ. It is, perhaps, a pity that the only question of general importance that arises in this case, namely, whether it was open to the parties to vary the Agreement orally or by conduct, should be one that it is unnecessary for us to decide. However, the matter was fully argued and, given the differing views that have been expressed in previous decisions of this court, I agree that we should state our own conclusions on it.
- For the reasons he gives, I agree with Beatson LJ that Article 6.3 does not prevent the parties from varying the Agreement orally or in any other informal manner. The governing principle, in my view, is that of party autonomy. The principle of freedom of contract entitles parties to agree whatever terms they choose, subject to certain limits imposed by public policy of the kind to which Beatson LJ refers. The parties are therefore free to include terms regulating the manner in which the contract can be varied, but just as they can create obligations at will, so also can they discharge or vary them, at any rate where to do so would not affect the rights of third parties. If there is an analogy with the position of Parliament, it is in the principle that Parliament cannot bind its successors.
- I can see the force of the suggestion that there might well be practical benefits in being able to restrict the manner or form in which an agreement can be varied, but like Underhill LJ I do not think that there is a principled basis on which that can be achieved. A clause such as Article 6.3 in this case may have considerable practical utility, if only because it is likely to raise in an acute form the question whether parties who are said to have varied the contract otherwise than in the prescribed manner really intended to do so. As a matter of principle, however, I do not think that they can effectively tie their hands so as to remove from themselves the power to vary the contract informally, if only because they can agree to dispense with the restriction itself. Nor do I think this need be a matter of concern, given that nothing can be done without the agreement of both parties; and if the parties are in agreement, there is no reason why that agreement should not be effective.
- I need say nothing more about the existing state of the authorities, which has been fully expounded by Beatson LJ in his judgment. I agree that the decisions in United Bank Ltd v Asif and World Online Telecom Ltd v I-Way Ltd  EWCA Civ 413 are inconsistent and that this court must decide which of them it should follow. I agree that the decision in World Online is to be preferred for all the reasons he gives.