Globe Motors, Inc & Ors v TRW Lucas Varity Electric Steering Ltd & Anor

A court must construe a written contract by reference to its language in its documentary, factual and commercial context. It cannot use interpretation to introduce an obligation which the parties did not express and which would require implication of a new term.

Under an exclusive supply agreement, a product outside the agreed specifications becomes covered only through the contractual mechanisms for adding products or making engineering changes. A buyer's power to impose an engineering change did not oblige it to propose changes, nor did it make a hypothetical product one covered by the agreement.

Although obiter, the court held that a clause requiring variations to be written does not prevent the parties from varying their contract orally or by conduct.

TRW Lucas and Globe were parties to a long-term exclusive supply agreement for electric motors and leadframe assemblies for specified vehicle platforms. The agreement gave TRW Lucas a right to propose engineering changes to the specified products. TRW Lucas later bought Gen 2 motors for the Renault P1 platform from another supplier.

Following a 32-day trial, HHJ Mackie QC held that TRW Lucas had breached the agreement because Globe could and would have produced a suitable Gen 2 motor by engineering changes to the agreed products: [2014] EWHC 3718 (Comm). He also held that Globe's Portuguese subsidiary, Porto, had become a party to the agreement by variation or waiver through conduct.

TRW Lucas appealed on liability. The principal issue was whether a motor that had not actually gone through the contractual engineering-change process nevertheless fell within the defined Products because Globe could hypothetically have produced it by such changes.

1. Appeal allowed on ground 1. The judge had impermissibly extended the contractual definition of “Products”. The agreement covered products within the agreed specifications, additional products added by mutual agreement, and products resulting from the engineering-change mechanism actually provided for in article 4. It did not cover a motor which Globe could and would hypothetically have produced through engineering changes that TRW Lucas had never proposed.

2. Construction remains an objective exercise. The court must give proper weight to the contractual words in their factual, documentary and commercial context. The agreement's long-term and exclusive character justified a flexible reading where its language permitted one, but did not permit the court to depart from the contractual text or introduce an unexpressed obligation to co-operate.

3. Article 4 was asymmetrical. TRW Lucas could impose a change that was an engineering change rather than a new product, whereas Globe could only propose a change and required TRW Lucas's prior written approval. The boundary between an engineering change and a new product was a question of fact and degree. However, article 4 contemplated an actual process of notice, co-operation and allocation of costs. It did not oblige TRW Lucas to initiate that process whenever a change could have been made.

4. The court would have rejected the contention that the reference to a 38Nm system confined the agreement to that torque rating. That conclusion was unnecessary to the disposal of the appeal. Grounds 3 to 5 likewise did not require determination.

5. Obiter on variation. The court preferred World Online Telecom Ltd v I-Way Ltd to United Bank Ltd v Asif. Subject to statutory or common-law restrictions, party autonomy permits parties to vary a contract orally or by conduct despite a clause requiring written variation. Such a clause remains practically important because clear and strong evidence will generally be needed to establish an informal variation. On the facts, the judge had been entitled to find that Porto was treated as a party to the agreement through open, obvious and consistent dealings.

• Court of Appeal (Civil Division): Allowed TRW Lucas's appeal on the construction of the agreement: [2016] EWCA Civ 396.

• High Court, Queen's Bench Division, London Mercantile Court: HHJ Mackie QC held TRW Lucas liable for breach of the exclusive supply agreement and held that Porto had become a party to it: [2014] EWHC 3718 (Comm).