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Case law: Court clarifies when an express variation of an agreement varies other terms by implication

Parties wishing to expressly vary existing agreements should consider whether their express variations vary other terms of the agreement by implication, taking into account recent Court of Appeal guidance.

July 2017

This update was published in Legal Alert - July 2017

Legal Alert is a monthly checklist from Atom Content Marketing highlighting new and pending laws, regulations, codes of practice and rulings that could have an impact on your business.

Please note: A newer article on this case was published in the August 2018 edition of Legal Alert following subsequent developments in the legal process.

A Turkish company agreed to act as distributor for a UK engine manufacturer. The agreement contained two clauses governing termination. The first clause said that the agreement would remain in force for an initial period of three years, following which either party could terminate by giving six months' written notice. Under the second clause, if the UK company was dissatisfied with the distributor's performance at any time during the agreement, it could request the distributor to remedy the situation within three months. If the UK company was not satisfied at the end of that three-month period it could give three months' written notice to terminate the agreement.

Once the agreement took effect, and about a year before the UK company terminated the agreement, the UK company asked a wholly-owned subsidiary of the distributor to join into the distributor agreement. It also asked the distributor to agree to a 'Multi Generation Project Plan', which would run until the end of 2015. The MGPP obliged the distributor to invest around €6.37m into its business.

The UK company became dissatisfied with the distributor's performance but, more than three years having passed, gave notice under the first clause. The Turkish company alleged that the UK company had wrongfully terminated the agreement, arguing that:

  • The agreement had been impliedly varied by the conduct of the parties, so it could not be terminated within the first three years
  • Giving notice under the first clause rather than the second was a breach by the UK company of an implied duty of good faith or fair dealing

It also argued that joining the subsidiary in, and the MGPP, were conduct that created necessary implied variations of the termination clauses. These implied variations were that the UK company was prohibited from terminating the agreement before 2015 or before the distributor had been able to recoup its investment (whichever was earlier).

The Court of Appeal ruled that an express variation of terms in an agreement did not impliedly vary other terms in the same agreement by conduct just because the express variations were consistent with the implied variations being argued for. Rather, it was necessary that the express variations were only consistent with those implied variations.

This is a difficult test to satisfy as an express variation will, in most cases, be consistent with more than one possible implied variation. But the test will only be satisfied if the express variation is consistent with just the one, single implied variation being argued for.

Unsurprisingly, therefore, the Court found that although the express variations were consistent with the implied variation that the agreement could not be terminated before 2015 (or when the distributor had recouped its loss), they were not only consistent with such a variation. Therefore, the variations did not stop the UK company from being able to terminate the agreement under either the first or second clauses.

Finally, the Court did not agree that specific implied terms of good faith or fair dealing could be implied. These would be unnecessary, 'hopelessly vague' or simply inconsistent with the proper construction of the contract.

Operative date

  • Now

Recommendation

  • Parties wishing to expressly vary agreements they have entered into should consider whether their express variations impliedly vary other terms of the agreement, taking into account the Court of Appeal's guidance in this case

Case ref: Ilkerler Otomotiv Sanayai v Ticaret Anonim v Perkins Engines Co Ltd [2017] EWCA Civ 183

Disclaimer: This article from Atom Content Marketing is for general guidance only, for businesses in the United Kingdom governed by the laws of England. Atom Content Marketing, expert contributors and ICAEW (as distributor) disclaim all liability for any errors or omissions.