Beware ‘collateral contract’ varying agreement terms
HUGHES v PENDRAGON (CA)/C&S v ENTERPRISE INSURANCE [2016]
The Hughes case involved a collateral contract which sidestepped a provision in the seller's terms and conditions which said that no amendment to the sale contract was effective unless signed by the seller. Although there were no details agreed regarding the exact price, specification or delivery date, a contract was still found to exist.
HUGHES v PENDRAGON (CA)
Facts:
- Mr Hughes (“H”) wanted a limited edition Porsche. He signed a contract with Pendragon (“P”), a Porsche dealer, under which a deposit was paid. The agreement stated that P was not obliged to fulfil orders in the sequence in which they were placed even though this was H’s understanding. The order was stated to be “Subject to Price + Spec” and was conditional upon P’s dealership being allocated one of the cars but with no specified delivery date.
- The contract said, “…no variation or modification of these terms and conditions shall be in any way effective unless in writing and signed on behalf of the Seller”.
- Five days later, P’s salesman sent H an e-mail saying, “I can confirm that you will get the first one from Porsche Centre Bolton if we get one”.
- P then supplied the car in question to another customer and H made a claim against P for breach of contract as P had failed to deliver the vehicle to him.
- The County Court (“CC”) decided that there was no binding contract to sell a vehicle but simply an ‘agreement to agree’, since the price, specification and delivery date had not been agreed. In any event, P was excused from fulfilling orders in the sequence in which they were placed. The e-mail from P’s salesman had no effect since it was an invalid variation, having been sent after the date of the contract.
- H appealed to the Court of Appeal (“CA”).
Decision:
- The CA overruled the CC’s decision and found in favour of H. It said it was “as plain as a pikestaff ” that H had entered into some sort of agreement with P. It found that there was a collateral contract that if Porsche supplied a vehicle to P, it would be allocated to H.
- The judge said the Courts may treat a statement intended to have contractual effect as a collateral contract (which is a subsidiary or parallel contract which induces a person to enter into a main contract or which depends upon the main contract for its existence). H ordered the Porsche from P and paid the deposit because he was assured that he would be first in the queue if Porsche allocated one to the dealership. This was endorsed by the salesman’s subsequent e-mail which, in the judge’s view, was intended to have contractual effect.
- He went on to say that the collateral contract was contrary to the terms of the main agreement which gave P a discretion not to fulfil orders in the order they were received. The effect of the collateral contract was to validly vary the terms of the main agreement.
- As to the variation clause, the CA was, “not persuaded that the language, on its face, would catch a collateral contract”. It is well-established that a collateral contract can override an exemption clause framed in general terms, such as P’s provision regarding the sequence of fulfilling orders.
C&S v ENTERPRISE INSURANCE
Facts:
- C&S handled motor insurance claims for Enterprise Insurance (“E”). C&S brought an action for wrongful termination of its contractual relationship with E, and one of the issues which arose was whether the contract had been varied so as to amend the duration of the contract.
- The clause in question stated: “Any variation of this Agreement shall not be effective unless made in writing and signed by or on behalf of each of the Parties to this Agreement”.
Decision:
- The judge said that the clause was sufficient to introduce a degree of formality into the requirements for a contractual variation and meant that the parties would not be bound by oral agreements or by informal, unsigned written documents.
- However, it was decided that the provision in question did not require handwritten signatures, paper documents or both parties’ signatures to be on the same document. The judge found that the requirement for a signature was satisfied by an e-mail ‘signature’ block.
- An exchange of e-mails therefore qualified as a valid amendment to the contract provided other requirements of contract formation and variation (such as intention to be bound) were also present.
Points to note:
- These cases demonstrate the flexibility the Courts have when they feel it necessary to achieve what they regard as a fair outcome. Sellers and suppliers have to be wary not to give some kind of representation or assurance which a customer then relies upon even if, on the face of the contract, it would appear that its terms prohibit the customer placing reliance on the representation/assurance.
- The decisions also illustrate that the Courts will often bend over backwards to find that a valid contract of sorts does exist even if many of the key terms have not actually been finalised, particularly where the parties seem to have acted as though or placed reliance upon a contract being in existence.
- It is important to be aware that despite a contractual written variation clause, an exchange of e-mails may still satisfy the requirement for a signed written variation. Parties should take care when drafting to clearly exclude the possibility of variation of their contracts by e-mail unless this is what is intended. Traditional standard wording may not go far enough. It may be wise for a variation or amendment clause to explicitly provide that an e-mail may only operate as a variation if it explicitly says that it is “intended by itself to constitute a binding variation to the Agreement”.